Management Reports of Dutch Companies: Their Availability and Compliance with Legal Disclosure Requirements

Abstract

Unlike the vast majority of the EU member states, the Netherlands incorporated an option provided by the EU Accounting Directive that exempt companies from the obligation to file the management report with the trade register when a copy of it can be obtained from the company upon request. About 60% of the companies use this filing exemption option, but the availability of the management reports of these companies appears to be poor, because they are (very) reluctant to fulfill a request, rejecting it or do not respond to it at all. Therefore, it is interesting to examine whether the choice of how the management report is published, is associated with the level of compliance with disclosure obligations. In order to do that, we create a disclosure score based on the legal disclosure requirements. Multivariate analysis shows that disclosure compliance of management reports that are filed with the trade register is significantly higher than of those not filed but made available by the company. We also find a significant positive relationship between disclosure compliance and the length of management reports. Compliance levels appear not to be significantly associated with the timeliness of publication, company size and the size of the external auditor’s firm. Based on our research findings we advocate the removal of the filing exemption option on management reports.

Keywords:

• management report
• corporate reporting
• EU Accounting Directive
• the Netherlands

Acknowledgements

We wish to acknowledge the useful suggestions and comments of Kees Camfferman (Vrije Universiteit Amsterdam), Martin Hoogendoorn (Erasmus University Rotterdam) and Leo van der Tas (Tilburg University) in earlier stages of our study. We also thank Roberto Flören and Ivo de Loo, two of our colleagues at Nyenrode Business Universiteit, for their help. Finally, we thank the editor and the two anonymous reviewers for their constructive comments on draft versions of this paper.

Disclosure Statement

No potential conflict of interest was reported by the authors.

Notes

1 See article 395a, 396 and 397 of Book 2 of the Dutch Civil Code (Burgerlijk Wetboek, Boek 2) which are based on article 3 of Directive 2013/34/EU of the European Parliament and of the Council.

2 In the past decade, there have been only a few court rulings imposing a (low) fine for not publishing the annual financial statements on time; https://thuispartners.nl/nieuws/artikelen/de-risicos-van-het-te-laat-publiceren-van-de-jaarrekening-verwaarloosbaar-of-reëel (28 January 2020).

3 The size categories used in the study of Flören et al. (2010) differ slightly from those used in our study.

4 See note 2.

5 In order to conduct a representative study, the sample size should be at least 370, based on a total population of 10,000, a confidence level of 95% and a confidence interval of 5% (see for sample size calculator e.g. https://www.surveysystem.com/sscalc.htm).

6 Article 391.1-3 BW 2 runs as follows:

1. The management report shall provide a true and fair view of the situation on the balance sheet date, of the development during the financial year and of the results of the company and of the group companies of which the financial data are included in its annual accounts. The management report shall contain, in accordance with the size and complexity of the company and group companies, a balanced and complete analysis of the situation on the balance sheet date, the development during the financial year and the results. If necessary for a good understanding of such development, of the results or of the situation of the company and group companies, the analysis comprises both, financial and non-financial performance indicators, including environmental and employee matters. The management report shall provide also a description of the main risks and uncertainties with which the company is faced. […]2. The management report shall make mention of the course of events to be expected; in doing this, attention shall be paid especially, insofar as important interests do not oppose to this, to investment, financing and staffing and to circumstances on which the development of turnover and profitability depends. Mention shall be made of the activities on research and development. Indicated shall be how special events, which do not have to be taken into account in the annual accounts, have affected the expectations. [… ]3. Where it concerns the use of financial instruments by the company and to the extent that this is of significance for the assessment of its assets, liabilities, financial condition and results, the management report shall mention the objectives of the company and its policy regarding risk control. In doing so, attention shall be paid to the policy of hedging risks related to each major type of transaction. Furthermore, attention shall be paid to the company’s exposure to price risks, credit risks, liquidity risks and cash flow risks.

7 See article 397.8 BW 2.

8 We tried to contact all companies in our sample that did not file the management report with the trade register, i.e. including the 28 companies that did not mention in their filed annual documents the availability of their management report at the premises of the company. However, for 18 companies (5 large and 13 medium-sized companies) we could not find a suitable e-mail address to send our request for inspection of the management report to, which explains the difference between 319 (291 + 28) in Table 3, column ‘Total’ and 301 in Table 4, column ‘Total’.

9 We have also run a regression using ordinal logit because the dependent variable (disclosure compliance) actually is discrete and not continuous (it can only take 18 values). However, the results of the regression using ordinal logit does not lead to other research findings (not tabulated).