What is it about?
This study examines the reporting of voluntary accounting ratio by Malaysian companies in corporate annual reports. Drawing on agency and signaling theories, this paper explores whether associations exist between company performance and voluntary disclosure of accounting ratios. In particular, associations are tested between the extent of ratio disclosure and company performance (namely profitability, liquidity, leverage, and company efficiency), size and industry. Six hypotheses are tested using data collected from 2003 annual reports of 100 Malaysian listed companies. This paper provides evidence that the extent of voluntary ratio disclosure is low; and size, industry as well as liquidity significantly influence the reporting of ratios in corporate annual reports. The implications of these findings are discussed.
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Why is it important?
It is observed that there is a lack of effort taken by Malaysian companies in using financial ratios to explain their financial results in their corporate annual reports. Analysts and other users of annual reports may not gain much because effective comparison could not be made due to the variation and lack of reporting among firms. In order to make the most of voluntary ratio disclosure, there should be a standardization of disclosure practice. Regulators should encourage companies to disclose more accounting ratios and at the same time standardise the reporting and method of calculating accounting ratios. This would help users of financial information compare the financial performance of companies with greater ease and confidence. However, in comparing companies within the same country as well as across countries, ratios should be treated with caution due to the difference in accounting methods and estimates made by companies. One may argue that since countries around the globe are moving towards a standardised set of accounting standards, the problem of using ratios in comparing companies’ performance may be greatly reduced, if not eliminated. On the other hand, one may believe that the convergence of global accounting standards will not solve the problem because companies are still allowed to use alternative accounting treatments in some cases, and estimates are still at their discretion. Given the conflict of opinions, the next question that should be addressed is: How useful would the published accounting ratios be to the users of financial statements in comparing firms within a country and across countries in an environment where the accounting standards are converged? Perhaps, future research on ratio disclosure could be directed towards this issue.
Perspectives
Accounting ratios are widely used for many purposes. Generally, they are used to assess the ability of a firm to pay it debts, and to evaluate a business and its managerial success. According to Thomas and Evanson (1987), the information from ratio analysis, especially in the form of trend analysis, can be used to forecast the efficiency and profitability of a company as well as to determine their financial position, and possibly, to avoid business failures. Whittington (1980) classified accounting ratios into normative and positive uses. From the normative point of view, a firm’s accounting ratio is typically compared with its standard (usually the industry’s benchmark) while under the positive accounting theory, an accounting ratio is used in estimating empirical relationships (usually for predictive purposes). Although ratios can be a powerful tool in analysing companies, they must be used with discretion and caution, particularly in making comparison among companies and across countries. This is due to the difference in accounting methods and estimates made by companies as well as the existence of non-recurring items. The use of different definitions of a particular ratio by different companies may also affect ratio analysis. Therefore, to be able to act as a useful tool in assessing and comparing company performances, and not to mislead users, standardization of guidelines is important.
Dr. Azrul Abdullah, Ph.D, C.A.(M), NCE
Universiti Teknologi MARA
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This page is a summary of: Disclosure of Voluntary Accounting Ratios by Malaysian Listed Companies, Journal of Financial Reporting and Accounting, January 2008, Emerald,
DOI: 10.1108/19852510880000632.
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