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Information Quality of Interim Financial Statements

Author

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  • Karen Lightstone
  • Nicola M. Young
  • Tyra Mcfadden

Abstract

Expressing concern about the Canadian capital market environment, Boritz (2006) suggested that the accounting and auditing profession may be paying limited attention to quarterly reports. This study investigates whether fourth‐quarter adjustments are significantly different from the previous three, thereby limiting the reliability or faithful representation of the firms' results for each quarter. This study includes four years (2003–2006) of quarterly financial information of 353 Canadian public companies. Our results indicate that the volatility of net income in each of the first three quarters is considerably lower than in the final quarter. While lower volatility can improve predictability, the resulting relevance may be limited. The low volatility of reported earnings in the first three quarters suggests that either earnings management is taking place or that management may not be exercising sufficient care at the end of each of the first three quarters on the measurements that generally accepted accounting principles call for and readers of financial statements expect. This could result in quarterly financial statements that do not faithfully represent the underlying resources and obligations of the reporting firms at the end of the quarter, or the firm's performance during the quarter. Our findings support Boritz's proposition for increased audit requirements for interim reports and changes in the approach to the annual audit to integrate it more closely with interim financial reporting. Qualité de l'information livrée dans les états financiers intermédiaires Résumé Exprimant ses préoccupations à l’égard de l'environnement des marchés de capitaux canadiens, Boritz () a avancé que le milieu professionnel de la comptabilité et de l'audit faisait peu de cas des rapports trimestriels. Les auteurs effectuent une étude empirique visant à déterminer si les ajustements du quatrième trimestre sont sensiblement différents de ceux des trois trimestres précédents, ce qui pourrait indiquer que les états financiers intermédiaires ne sont pas complets et, par conséquent, ne donnent une image ni fiable ni fidèle des résultats de chaque trimestre. Leur étude porte sur quatre années (2003–2006) d'information financière trimestrielle provenant de 353 sociétés canadiennes faisant appel public à l’épargne. Les résultats obtenus par les auteurs indiquent que la volatilité du résultat net observée dans chacun des trois premiers trimestres est considérablement moindre qu'au quatrième trimestre. Cette constatation atteste l'hypothèse selon laquelle les investisseurs et autres intéressés peuvent estimer que la volatilité des résultats communiqués dans les états financiers intermédiaires rend la valeur prédictive de ces résultats moins évidente que beaucoup ne le supposent ; en d'autres termes, ces résultats risquent de n’être pas aussi pertinents qu'ils pourraient l’être. L'ampleur de la volatilité à elle seule semble indiquer que, si la gestion du résultat n'est pas en cause, la direction pourrait ne pas accorder suffisamment d'attention, au terme de chaque trimestre, aux mesures qu'exigent les principes comptables généralement reconnus et auxquelles s'attendent les lecteurs des états financiers. Cette situation a pour conséquence que l'information publiée ne donne pas une image fidèle des ressources et des obligations sous‐jacentes au terme du quatrième trimestre ou de la performance de l'entité au cours de la période. Les observations des auteurs confirment la proposition de Boritz () que soient accrues les exigences de l'audit relativement aux rapports intermédiaires et que soit modifiée l'approche de l'audit annuel afin de mieux l'intégrer à l'information financière intermédiaire.

Suggested Citation

  • Karen Lightstone & Nicola M. Young & Tyra Mcfadden, 2012. "Information Quality of Interim Financial Statements," Accounting Perspectives, John Wiley & Sons, vol. 11(4), pages 297-313, December.
  • Handle: RePEc:wly:accper:v:11:y:2012:i:4:p:297-313
    DOI: 10.1111/1911-3838.12002
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    References listed on IDEAS

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