The Future of Corporate Reporting

This Special Issue originates from the Symposium titled: ‘Challenges in Corporate Reporting: The Role for the Academic Community in “Non-Financial” Reporting’, which took place at the 42nd European Accounting Association (EAA) Annual Congress in May 2019 in Paphos, Cyprus, and was attended by one of the guest editors as a panelist.¹ The Call for Papers was open and public, hence inviting any researcher interested in the subject to submit a manuscript. It aimed to provide a high-quality outlet for presenting research insights and findings from various perspectives on corporate reporting.

It is important to highlight that the COVID-19 pandemic (which began even before the Special Issue’s deadline) has made the editorial process more difficult for everyone involved – particularly the authors and the reviewers whom we sincerely thank for their perseverance and support in the editorial process, respectively. Thanks to them, we have finally been able to complete the Special Issue in December 2021, with seven papers passing the thorough and rigorous peer review process, and eventually accepted for publication.

In the Call for Papers, we had stated that the Special Issue was particularly interested in ‘stimulating the debate about the status quo and future directions of corporate reporting’ and we invited ‘papers dealing with the broad area of narrative reports, both financial and nonfinancial (e.g. IFRS management commentary, management reporting, nonfinancial reporting, reporting on climate change, integrated reporting)’. This collection of seven papers provides a solid response to this call.

Literature Reviews

The lead paper of the Special Issue by Giovanna Michelon, Grzegorz Trojanowski and Ruth Sealy (Michelon et al., 2022) provides an excellent and very well-organized state of the art in narrative reporting (of both financial and non-financial information). This literature review is divided in three parts to which they associate their questions: (1) quality of narrative reporting (how has it been defined?); (2) users of information (what narrative information is required and used by them?); and (3) real effects (what are they?). Among the insights documented in their paper, we highlight two important findings. First, a ‘mismatch’ between user needs and reporting/disclosure contents, especially for corporate social responsibility (CSR)- or sustainability-related information, ‘which reveals extensive impression management and gaps in performance portrayal’. Second, and relatedly, the lack of clarity about whether the real effects of reporting are aligned with its objectives – particularly in light of the growing attention to social and environmental issues, albeit having the risk to potentially embrace reporting practices with a (narrow) focus on investors.

Another literature review in this Special Issue focuses on the relation between corporate governance and CSR reporting. The paper co-authored by Giovanna Afeltra, Alireza Alerasoul and Berto Usman presents a comprehensive review of the prior literature in this field. The authors use the Systematic Literature Network Analysis (SLNA) developed by Colicchia and Strozzi (2012) to identify critical papers and the flow of knowledge. Based on the co-occurrence of keywords, they elaborate five clusters in the extant literature highlighting the main topics: determinants, assurance, integrated reporting, intellectual capital disclosure, and relevant theories. Afeltra et al. (2022) suggest various avenues for future research – for example, on integrated reporting, gender diversity and its impact on CSR reporting or longitudinal on the development of non-financial reporting over time.

Regulation of Non-Financial Reporting

Two papers investigate the European regulation of non-financial reporting introduced in 2014. The article by Marisa Agostini, Ericka Costa and Blerita Korca explores whether the EU Directive on non-financial and diversity information (Directive 2014/95/EU) affects non-financial disclosure (NFD) of listed companies. Agostini et al. (2022) examine whether the quantity and quality of NFD provided in a sample of Italian companies’ annual and sustainability reports vary based on a shift from a voluntary to a mandatory context (the latter being the adoption of the Italian law established in accordance with Directive 2014/95/EU). They find that the quantity of non-financial disclosure increased after the introduction of this regulation. However, such regulation does not seem to improve the quality of the NFD, which also does not show a significant relation with corporate financial performance. Overall, the results suggest that Directive 2014/95/EU has not been able to enhance NFD, at least to the extent expected.

Looking at Directive 2014/95/EU in a specific and relatively unique setting – that is, state-owned enterprises (SOEs) in Romania which was under a communist regime for several decades (see Albu et al., 2021 for more on this context and history), Voicu-Dan Dragomir, Madalina Dumitru and Liliana Feleaga investigate the relation between influencing factors and the quality of non-financial reporting by conducting a manual content analysis on a sample of 63 SOEs for the financial year 2018. Based on agency and stakeholder theories, Dragomir et al. (2022) find that ownership concentration by the state is negatively associated with non-financial reporting quality. However, the results also show that the quality of corporate governance in SOEs mediates this relation and has a positive influence on the quality of non-financial reporting. Overall, this study provides valuable insights into the role of corporate governance in ensuring high-quality corporate reporting.

Reporting on Specific Topics – SDGs and Risk

In addition to reporting regulations, three papers focus on the reporting of specific topics by European firms. In their study, Katrin Hummel and Manuel Szekely show that institutional enforcement is associated with the quality of Sustainable Development Goals (SDGs) disclosure. Based on a sample of European firms listed in the STOXX Europe-600 index in annual reports, Hummel and Szekely (2022) highlight that SDG disclosure quality is positively associated with public pressure related to environmental sensitivity of the industry and the presence of investors who are members of the Dow Jones Sustainability Index (i.e. socially responsible investors). Further, SDG disclosure is also positively associated with a firm belonging to a customer-facing industry and the number of analysts following the firm. These results indicate that companies use SDG disclosure to address both financial and non-financial stakeholders. However, the quality of SDG disclosure is found to be low. While the authors wonder whether SDG disclosure might improve over time – particularly in response to the mandatory adoption of regulation on non-financial disclosure, Agostini et al. (2022) and Panfilo and Krasodomska (2022), provide evidence suggesting that the impacts produced by the adoption of Directive 2014/95/EU are relatively low.

The final two papers of this Special Issue deal with risk disclosures – a specific area of corporate reporting that is inherently tricky and has been criticized continuously for its overall low quality. Véronique Weber and Anke Müßig investigate how far a firm’s business strategy determines the amount, the type and how risk information is disclosed in annual reports. The authors analyze a large sample of listed firms from 30 European countries covering the period 2005–2017 and employ contemporary methods of automated text analysis. They find that business strategy, as defined by Miles and Snow (1978), influences risk disclosure. Specifically, they show that firms adopting a prospector strategy provide more risk information in their annual reports than firms pursuing a defender strategy, and they explain this finding by the differences in the firm’s business model, with prospectors being characterized by more uncertainty and riskier projects. In addition, Weber and Müßig (2022) show that prospectors are less likely than defenders to report risk information in a balanced way and use more complex language when describing their risk exposure. Overall, this study provides insights on the determinants of risk reporting practice. It derives implications for regulators in that more nuanced guidance and regulation seem necessary given the complex nature of risk reporting. This might be particularly relevant in the current debate on regulating climate risk disclosures.

In the last paper, Silvia Panfilo and Joanna Krasodomska contribute to our understanding of the regulatory context effect on corporate disclosure of non-financial information. Specifically, Panfilo and Krasodomska (2022) draw on a sample of 653 European companies to explore the impact of a regulatory initiative on the quality of non-financial disclosure. While their analysis helps demonstrate the influence of the new regulation on disclosure, they also find that other firm-level and market-level characteristics are relevant – both substantial engagement with sustainability issues and environmental sensitivity of the industry are found to influence the quality of non-financial information. These findings suggest that if companies are not urged to actively engage with sustainability issues, regulatory intervention may not have a significant and positive impact on disclosure quality. In line with recent research on reporting regulation in Europe (La Torre et al., 2018; Rossignoli et al., forthcoming), these results warrant policymakers, standard setters and regulators to strengthen the institutional enforcement of sustainability disclosure.

Discussion

Overall, the seven articles of the Special Issue nicely and effectively complement each other by providing a state of the art of narrative reporting, a literature review on corporate governance, and CSR reporting and empirical studies focusing on non-financial reporting regulation and reporting practices of specific topics. Given that Accounting in Europe aims to contribute to policy debate, we believe this collection to make a meaningful and timely contribution, not only to the academic literature on corporate reporting, but also to reporting practices and policies – particularly at a time where the contemporary reporting landscape is undergoing significant developments and changes.

We highlight (and remind) our readers about the recent establishment of the International Sustainability Standards Board (ISSB) by the International Financial Reporting Standards (IFRS) Foundation. The creation of this board was justified by a ‘growing and urgent demand’ and ‘need for consistency in reporting and comparable information’ in its Consultation Paper.² But while this was largely welcome by the private sector and professional associations, other stakeholders such as academics and non-governmental organizations (but also some other members of the private sector) have raised significant concerns about the fundamentals and understanding (or lack thereof) of concepts and definitions such as sustainability, ‘ESG’, stakeholders, (double) materiality as well as misleading claims primarily due to completely ignoring prior peer-reviewed academic research of the last half-century (ASG, 2020; Cho, 2020a; EAA SRC, 2020; Professors of Accounting, 2020).³ Specifically, and in line with Michelon et al. (2022), the IFRS Foundation – via its new ISSB – seems to not only keep, but also amplify the focus of corporate reporting in general to remain shareholder-centric ‘to fulfill the information needs of investors’ (Michelon et al., 2022). In fact, despite the abundant. rigorous and well-established research⁴ documenting that effective sustainability reporting cannot – and should not – be focused on investors, the very first views and feedback shared by the Foundation about its ‘strategic direction’ after the ‘consultation’ were: ‘investor focus on enterprise value’ and ‘meeting the needs of investors’.⁵

In the current context of other reporting regulations such as Directive 2014/95/EU that seem to lack strength and enforcement, hence effectiveness (see Agostini et al., 2022; Panfilo & Krasodomska, 2022), the future of corporate reporting raises substantial concerns, yet provides opportunities to further research – and advocate – an accountability and wider stakeholder approach. Like other fast evolving fields and topics within the accounting discipline such as information technology or blockchain (see Pimentel & Boulianne, 2020 for a comprehensive review) and the accounting research field overall (see Alawattage et al., 2021 for a collective Manifesto to open accounting), we also believe that better and wider accounting education practices are necessary to drive large-scale changes (Cho et al., 2020, forthcoming).

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Notes

1 The importance of this topic was highlighted by a follow-up Symposium – one dedicated for Accounting in Europe – named after the Special Issue at the 1st EAA Virtual Annual Congress in May 2021 at which all guest editors and one of the authors were panelists.

2 https://www.ifrs.org/content/dam/ifrs/project/sustainability-reporting/consultation-paper-on-sustainability-reporting.pdf.

3 Adams and Abhayawansab (forthcoming) also argue that such call for ‘harmonisation’ of sustainability reporting frameworks and standards are ‘underpinned by myths’ which are based on ‘deception, misunderstandings, and disregard for both academic research and the views of sustainability practitioners’. Cho (2020b) raises the same concerns for some members of the academic community (i.e. ‘new wave’ researchers).

4 A fair representation of references supporting such academic research can be found here: https://arc.eaa-online.org/blog/references-supporting-academic-research-stated-open-letter-ifrs-foundation.

5 https://www.ifrs.org/content/dam/ifrs/project/sustainability-reporting/sustainability-consultation-paper-feedback-statement.pdf. We also note that the Trustees recognized the significant ‘public interest’ in developing reporting standards that address ‘investors’ information needs’ on enterprise value – and struggle to see how addressing the needs of one type of stakeholders (investors) supports the ‘public interest’.