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Financial reporting on the internet is now gaining more popularity in the field of research. Accounting practices and accounting communication in the modern business operations has been largely affected due to the rapid evolution of Internet Technology. The information expected to be provided in financial statements are those that are quantitative and qualitative in nature to aid their relevant users who normally range from shareholders, investors, government, customers, employees to management, competitors etc in making economic decisions. All accounting information that will help users to assess the financial liquidity, profitability and viability of a reporting entity should be disclosed and presented in a clear logical and understandable manner.
Financial reporting is regarded as an important and powerful means of disseminating financial information. Until recently, hard copies (paper) have been the primary means for communicating financial information to shareholders and other interested corporate stakeholders. The printed-based annual report involves writing and printing of financial information. However, this form of reporting has certain drawbacks as increased cost associated with printing, limited copies available to only selected market, less timely information and historical disclosure the use of obsolete technology. As a result, many companies in developed and developing countries now utilize the internet to disseminate corporate financial information and advertise their companies to shareholders and investors.
Internet Financial Reporting (IFR) refers to the use of a company's website to distribute information about the financial performance of the corporations. The internet has the potential to revolutionize financial reporting and enables companies to reach a wider range of users due to the availability of financial reporting information on the websites without time limits or boundaries. There are various aspects of IFR that are different from the traditional hard copy presentation. These factors include the actual mode of presentation and the method of access to the information, i.e. accessing a company's website rather than the hard copy version of the financial reports. Since no such research has yet been carried out here, it is a research area that is undoubtedly of great interest.
Objectives of the Study
The purpose of this study is to investigate on the status of financial reporting on the internet by the Top 100 Companies in Mauritius. It analyses the current practice of IFR by evaluating the nature and content of financial reporting information that a company may display on its website. With respect to the research topic selected here, the following objectives stand out:
To understand the impact of internet technology on financial reporting;
To check the existence or non-existence of companies' websites;
To assess the types of financial information companies publish on their websites. This will be done by investigating various attributes which will be categorized into two groups:
General Attributes that relate to the general information section of the website;
Financial/Annual Report Attributes that focus on the availability of financial information and the contents of annual reports as well as the availability of share price performance within the website.
To identify the formats that are most commonly used to present financial information online;
To identify the factors that could possibly determine Internet financial reporting;
To suggest recommendations to enhance the practice of IFR.
Outline of the Study
The scope of the study is organized as follows:
Chapter 1: Describes the problem statement and lays down the research objectives and research questions.
Chapter 2: Focuses on the literature review by extracting previous analysis and conclusions drawn on internet financial reporting.
Chapter 3: Describes the methodology by discussing and selecting the sample of companies and the specific attributes to be investigated.
Chapter 4: Reports the data analysis and findings on the extent and nature of LFR by the Top 100 Companies in Mauritius.
Chapter 5: Provides a summary, conclusion and suggestions.
The literature review will help in formulating research questions and establishing a relevant methodology to accomplish the study. Most of the research on this section has been based on previous analysis and conclusions drawn from web articles, textbook and related publications.
2.0 Financial reporting and the internet in the modern business environment
2.0.1 The frameworks of financial reporting
According to the modern organization, the aim of financial reporting is to supply useful information to stakeholders. Kieso and Weygandt (1986) states that "financial reporting should provide information useful to investors, creditors and other users". The International Accounting Standards Board (IASB) has a similar structure; this is the organization that develops International Accounting Standards / International Financial Reporting Standards, applied throughout the world and which came into effect on December 1, 2001 in Mauritius. Accounting information is contained in financial reports; for example, IAS 1- Presentation of Financial Reports, defines the set and basic configuration of the financial reports for companies that use IASB standards (IASB, 2000). Apart from the conceptual frameworks of the IASB, financial reporting can also be governed by additional regulations. For example, in Mauritius, as well as the accounting standards of the IASB, there are a number of laws and Regulations that govern the entire structure of financial reporting for various purposes and users. Thus the framework of financial reporting in the broader senses means all the rules and laws that regulate financial reporting.
2.0.2 The Internet and its application in modern business operations
The worldwide network of computer networks is known as the Internet. The year 1969 is usually known as the year in which the Internet was developed. Initially, the purpose of the internet was to mainly send and receive emails but there is no wonder that today the most rapidly-developed Internet applications are electronic commerce, Internet banking and advertising. During the last ten years or so modern business operations have been increasingly characterized by greater involvement of the Internet. Consumers can buy books, clothing, shares and cars all from the comfort of their own homes by just using their credit cards. Internet usage is growing all around the world, as in Mauritius as well. With a population of approximately 1,288,000, the number of internet users in Mauritius according to World Development Indicators (WDI) has increased continuously over the last ten years. As shown in Figure 1.
From data published in Figure. 1, it appears that at the end of 2008 about 22% of the population of Mauritius used the Internet.
Figure 1: Number of Internet Users in Mauritius, 1996 - 2008
Data Source: World Bank, World Development Indicators - Last updated October 23, 2010
2.1 An introduction to Internet Financial Reporting (IFR)
According to this research, the Internet is primary means of communication that enables the presentation and finding of financial reports and other useful information. Due to the Rapid developments in information and communication technology, this has led scholars and people in many countries to consider the nature of Internet Financial Reporting (IFR) and several other issues relating to the topic. In a 2010 article titled 'Financial Reporting on the Internet: Evidence from the Fortune 100', the author stated that 'The Internet has become one of investors' most frequently used sources of information, and many companies are now reporting all or part of their financial information on their websites". An important aspect of the study is how IFR is defined. By definition, IFR refers to "the use of the firms' web sites to disseminate information about the financial performance of the corporations". However, Ashbaugh, Johnstone and Warfield (1999) employ a somewhat narrow definition. They define IFR as "the presentation of a comprehensive set of financial statements accessible directly from the company Web site or through a link to another site (such as the Securities and Exchange Commission's site)". The inherent nature of the Internet affects financial reporting in the sense that information on a website is available to anyone, anywhere and at any time. For instance, if you need a company's annual report on a Saturday night, you can probably get it from the company's webpage. This shows that the Internet has changed the delivery of financial information.
2.2 Reasons for Adopting Internet Financial Reporting
2.2.1 Information available at Low Costs
According to FASB (2000), more than anything else, presenting financial reporting over the Internet helps in reducing the cost of production and distribution of financial information. In fact, any investor with a computer and an internet connection may obtain information that, used to be accessible to a small group of people only. The costs of printing and distributing information are no longer a barrier in preventing the spreading of the information and cheaper is it to modify the information to fit users from different background.
2.2.2 Timely Information
With the help of the Internet as a mean of communication, Companies could provide more timely information to users. Ettredge , M . , Richardson , V . J . and Scholz , S. ( 2001 ) have pointed out that "IFR could allow users access to digitized data without waiting for it to be produced through the traditional channels". It is thought that this ability to provide timely and up to date information will eventually help in increasing efficiency to the financial markets.
2.2.3 Increased the amount and type of data disclosed
The Internet has also been used as a means to broadcast more realistic information than is available in annual reports to investors, as a result of the improved accessibility of the information. 'The internet provides an opportunity for going beyond what is available in hard copy corporate financial statements to communicate additional financial information to users, possibly in real-time and on an interactive basis".(Wickramasinghe, N.,2006)
2.2.4 Improved equality of information access
The information provided to users over the Internet is also expected to up to date compared to the Reports and Accounts on paper. It also allows access to information to other sources through the use of hyperlinks, interactivity and search facilities. Wickramasinghe and Lichtenstein (2006) states that "IFR provides corporate organizations with a real opportunity to extend financial disclosure beyond the reproduction of a hard copy annual report and improve on the scope, and interactivity of financial reporting, with multimedia, such as sound, animation and video, being used to potentially increase the understanding of information".
2.3.5 Enhanced firm's Value
Voluntary disclosures on company's activities reduce information asymmetry between the investors and the management about a firm's financial condition and results of operations in the corporate environment. It also helps in attracting new shareholders, which would lead to an increase in demand for the company's stock and improves liquidity. Finally we may add that, IFR provides a platform for smaller companies to attract potential investors, giving them a better opportunity in reaching global market.
2.3 Nature/Types/Kinds of financial Information
To obtain a more detailed analysis of the scope and quality of financial reporting on the Internet in the context of Mauritian Top 100 Companies, it is necessary to find out what kinds of financial information they publish over the internet. Livingstone (2002) suggests that innovation on corporate websites should include the following:
2.3.1 General Attributes
First of all, it is imperative to check for the existence or non-existence of companies' websites which will then enable the investigation for general and financial/annual report related attributes. General attributes focus on the ease of navigating the Website and deal with the main Internet issues of financial reporting namely the existence of a Site Map or Search box, availability of general news about the company and News summaries, advertisements for companies' products or services and Investor relations' contacts.
Site Map or Search Box
According to Simon Petravick (1999:36), "the availability of financial information should be clearly indicated on a company's homepage and interested parties should be able to quickly locate the desired information in the financial reporting section".
Methods commonly used by companies to allow access to specific financial information are the existence of a site map that looks like an organizational chart or search box that may be utilized to locate specific information without browsing. The accessibility of a search engine on the website could help users find information more easily and more quickly.
News Summaries and links
News summaries sections on corporate websites typically include general news about the company and press releases, which normally can be obtained from a company's home page. A major advantage of providing those kinds of information on the Website is to reduce the number of standard phone calls a company receives for queries, which successively reduces mailing costs.
Advertisements for companies' products or services
Wikipedia Encyclopedia (2010) defined online advertising as a form of promotion which aimed at convincing an audience to purchase or take some action upon products, ideas, or services presented on the website. It includes the name of a product or service and how that product or service could benefit the consumers, thus allowing them to buy products and services at their own convenience.
Investor relations' contacts
Investor Relations (IR) allows two-way communication and offers the possibility of sharing information between a company and its users. During 1999, Trites revealed in a study done in North America and Canada that the use of technology in financial and business reporting is leading to greater interactivity amongst users. Investor relations' sections of company websites provide various means of communication between users, for example address of its headquarters, contact number for shareholder services and the use of e-mail for obtaining information. Companies sometimes allow investors to send messages from a web page within the company's website.
2.3.2 Financial/Annual Report Attributes
Ashbaugh et al. (1999) found that firms perceive their websites to have an important influence in disseminating financial information to shareholders. There is a rapid growth in the demand for this information by on-line investors. Based on previous studies, it can be expected that all the attributes selected as financial related information, will appear on websites. These attributes focus on financial information available online and the contents of annual report, as well as the availability of current share price and share performance.
By definition, Annual reports are evaluation prepared by companies at the end of a reporting year which might be either on a calendar or fiscal basis. They represent a special communication opportunity, reaching beyond simple reporting of financial information. According to Clackworthy (2000), an annual report is a way to show leadership and vision, to reflect corporate values and to position a company. It is against this context that the importance of a company's annual report on its website is evaluated. By making an on-line copy of the annual report available on a corporate website, this guarantees maximum attention from investors and the company benefits itself of an excellent opportunity to communicate in international markets. Typically, an annual report will contain the company's financial statements, auditor's report, notes to financial statements, summary of financial data, financial highlights, chairman's message, corporate information and management report.
Financial statementsÂ are records that outline the financial activities of a business and are regarded as the main purpose of the annual report. According to the International Financial Reporting Standard (IFRS) Framework, the objective of financial statements is "to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions". Thus the elements of the financial statements will comprise the statements of financial position, income statements, statements of comprehensive income, statement of changes in equity and cash flows.
Companies providing annual reports on their websites are normally accompanied with auditor's report tested to see whether the company's financial statements comply with the Generally Accepted Accounting Principles (GAAP). Â As indicated by the IASB requirements and other regulatory frameworks, Companies are not only required to provide audit reports with their annual reports, but they have to make sure that they separate audited information from un-audited information on their websites. It is important to note that auditor's reports on financial statements are neither evaluations nor any other similar determination used to evaluate entities in order to make a decision. The report is only an opinion on whether the information presented is correct and free from material misstatements, whereas all other determinations are left for the user to decide.
Financial ratios quantify many aspects of a business and are an integral part of the financial statement analysis. Ratios generally hold no meaning unless they areÂ benchmarkedÂ against something else, like past performance or another company. Businesses provide financial ratios in tables as a formal part of the annual report on their websites. Posting ratios online vary typically from two or more years allowing comparisons and showing the performance trends of the company. Financial ratios include profitability, capital adequacy, market and performance ratios among others.
In this section, we will discuss the attributes that focus on the narrative sections within annual reports; namely, chairman's message (letter to shareholders), statement of directors, management discussion and analysis, notes to financial statements and corporate profile. Berk (2001) stated that many companies expand their financial reports to include measures of progress towards strategic goals, as well as "softer" information on social and environmental performance. These efforts help diminish risk and build a reputation for integrity and responsible corporate citizenship.
Most of the companies normally provide a letter from the chairman addressed to the shareholders (labeled as the Chairman's Message) on their websites. In the 'Statement of Directors' section, company directors are required to present a fair review of results obtained in the financial statements, a description of the principal risks and difficulties faced by the company. This review enables shareholders to assess how the directors have performed their duty under the Companies Act 2006, to promote the success of the Company. The Management Discussion and Analysis (MD&A) is another very important section of an annual report used to provide an overview of the previous year of operation, how the company fared in that time period and outlining also theÂ future goals and approaches to new projects for the forthcoming year. Notes to the Financial Statements is an integrated part of a company's annual report which is added to the end of the financial statements to supplement the reader with detailed information. Its purpose is to explain the computation of specific items in theÂ financial statementsÂ as well as provide a more comprehensive evaluation of a company's financial condition. Finally, a company is considered as providing a 'Corporate Profile' within any section of their website if it had disclosed information about the number of employees by location, a brief history of the company, the mission & values or any other related information.
Share Price Performance
With the introduction of IFR, a company's share price and performance can now be available on its corporate website, providing investors with quicker access to this information. Besides share prices, companies may sometimes display dividends, latest trades, trade volumes and historical price data. Comparisons can therefore be made against relevant indices and competitors' share development. A share price display can be integrated anywhere on a website for example on the home page or on the investor relation section.
2.4 Formats used for presenting financial information
Companies throughout the world use different computer software's for financial reporting purposes among which are Microsoft Word and Microsoft Excel which were previously used for distributing and exhibiting financial as well as other forms of information. However, if a firm decides to go in for Internet financial reporting, there are various technical opportunities and formats for the presentation of information. Lymer et al. (1999) indicate that "Internet reporting by the largest companies primarily duplicate their printed financial statements in an electronic format such as Adobe Acrobat Portable Document Format (PDF) and Hypertext Markup Language (HTML)".
2.4.1 Adobe Acrobat Portable Document Format (PDF)
Lymer et al (1999:25) and Gray (2001) pointed out in their researches on financial information published on websites that companies frequently include downloadable versions of their annual reports in a Portable Document Format (PDF) file. PDF is a special file format, developed by the Adobe Corporation, for creating documents that can look and print exactly like the original printed document. To view a PDF file, the user requires an Adobe Acrobat Reader plug-in to be installed on his/her computer. Moreover according to Jones and Stanwick (2001:32), duplicating the printed financial statements into "electronic paper" is an inexpensive, straightforward process and is also safe because it is difficult to alter these documents (Bagshaw 2001:11).
2.4.2 Hypertext Mark-Up Language (HTML)
Another electronic format used by companies to report financial information on websites is Hypertext Mark-Up Language (HTML). HTML is the primary language for Web development. An HTML document can be viewed directly in the browser. Lymer et al (1999:26) highlighted that "HTML uses hypertext concepts to support on-screen navigation through links between any page and any other linked page". Although these links enable readers to acquire a large volume of related information efficiently, they may also create confusion about the boundaries and scope of a company's annual report and the associated auditors' report.
Throughout the study, I will analyze the extent to which the Top 100 Companies in Mauritius make use of either PDF files (for downloading purposes) or by using HTML or both at the same time to present their annual reports electronically.
Lymer et al. (1999) concludes: "Content ranges from entire annual reports, financial statements, and press releases. Presentation styles are equally diverse ranging from static information on one extreme to sites that are enlivened with sound, video and interactive features at the other review."
2.5 Factors determining Internet Financial Reporting
The objective of this research besides establishing the current practice of IFR in Mauritius is to analyse factors that might perhaps have an impact on the decision to publish or not to publish financial information on the Internet. Many studies conducted in other countries have revealed that financial reporting on the Internet may be associated with several factors, particularly with the size of a company or its profitability (Pirchegger and Wagenhofer, 1999; Craven and Marston, 1999).
2.5.1 Firm Size
Firm size seems to have an important influence on internet corporate disclosure. Results from prior studies frequently confirm a positive association between company size and a decision in favour of Internet financial reporting (Meek, Roberts and Gray, 1995; Zarzeski, 1996; Almilia, 2009). Xiao et al. (1996) stated that "large companies are more likely to use Information Technology than small ones to improve financial reporting to meet the greater demand for information".
Firstly, it is easier for large firms to adopt an innovation, such as internet financial reporting and disclosure, as they have information technology department and have adequate personnel as well as the necessary resources to adopt it. Moreover, larger firms usually have more products and more complex distribution networks which require larger and more complex management information systems and databases for management control purposes. They also have more current and potential shareholders than small companies, thus providing a greater interest in publishing financial reports. It is to be noted that various indicators can be used to measure size of a company, such as assets, equity, revenue or number of employees.
Studies suggest that profitable companies have an incentive to disclose more information, to signal the firm's profitability to investors in order to support management continuation of their positions and compensation (Oyeler et al., 2003), and to raise capital at the lowest price (Marston and Polei, 2004).
According to Stolowy (2004), "When profitability is low, managers are likely to disclose less information to conceal the reasons for losses or declining profit and to avoid the negative effect on the firm's market value". Ismail (2002) found that profitability may increase the likelihood of the firm publishing financial information via the internet when this variable is within a particular range. If it increases beyond this range, the likelihood of firms publishing financial information on the net decreases.
Following previous studies, two ratios were used to measure profitability; return on assets which is net profit divided by total assets (Xiao et al., 2004; Oyeler et al., 2003; Ismail, 2002; Bushee and Leuz, 2005), and return on equity which is net profit divided by equity (Abd El Salam, 1999; Marston and Polei, 2004; Haniffa and Cooke, 2002; Oyeler et al. 2003; Ismail, 2002).
2.6 Empirical research concerning financial Reporting on the Internet
With the development of the Internet and the expansion of the use of it for financial reporting, there has been an increase in the number of empirical studies related to this area. The earliest studies were produced during 1996 and 1997, only a year after the global, corporate interest in the Internet as an advertising media had commenced.
Most of the earlier studies focused on the existence of Websites for top, stock exchanges listed companies and involved a review of the various type of information presented online. This includes Petravick and Gillet (1996), Gray and Debreceny (1997), Lymer and Tallberg (1997), Deller, Stubenrath and Weber (1998), Gowthorpe and Amat (1999), Hedlin (1999), Ashbaugh et al. (1999), Ettredge et al. (2001) and recently Hindi and Rich (2010) to name just a few. Such investigations usually provide data about the percentage of corporations that use Internet financial reporting, the scope of the financial information published and the format of the reports published.
Not surprisingly, the percentage of companies adopting IFR has been increasing throughout the years and statistics tell us all about it. For example in 1996, T.J. Louwers, W.R. Pasewark, and E.W.Typpo reported that 97 (65%) of the Fortune 150 United States (US) companies had websites as of March 1996. In May of the same year, Simon Petravick and John Gillett reported that the number increased to 103 (69%) of the Fortune 150 had websites. In 1997, G.L. Gray and R.S. Debreceny found that 96 of the Fortune 100 companies had websites. In January 1999, the Business Reporting Research Project discovered that 99 of the Fortune 100 companies had websites.
A 2003 article "Developments in Internet Financial Reporting: Review and Analysis across five developed countries" by Lymer and Allam reported that 249 (99.6 %) out of the 250 companies in 5 countries namely USA, UK, Canada, Australia and Hong Kong have Websites and in only one case, no website was located. The results showed that 86% of the corporations having a website provide a site map or a search box to its users. Almost 99% of the companies surveyed had news summaries sections on their Websites which typically include press releases and general news about the company. This implies that most companies were providing latest news directly through their own corporate Websites. It was also found that only 54% of the companies surveyed provided e-mail contacts on their web pages. About 45% (113 companies) provide an e-mail address and 9% instead allow investors to send messages from a web page within the company's or investor relations' Website.
This study showed that over 99.6% of the 250 companies having a website, at least 95% present their annual reports out of which 94% include the company's financial statements. The auditor's report is an important source of credibility and reliability for annual reports. Consequently, 96.4% of the companies made the auditor's report available online and 9 (3.6%) did not provide it. This study discovered that more US companies (68%) provided data for financial ratios than the other 4 countries. Canada and Australia followed, 62% and 60% respectively whereas 56% of the UK companies and 42% of the Hong Kong companies supplied their financial ratios.
Most of the companies provided a letter from the chairman addressed to the shareholders. It was reported that 94.8% of the companies provided this. Only 14 companies did not provide such a letter and the majority which did not provide this section were those which did not provide their full annual report online. Most of the companies provided a statement by their directors, with the exception of Hong Kong's companies. 96% of Canadian and Australian companies reported such section, whereas 94% of UK companies and 84% of US companies reported it. 95.2% of the companies provided a Management Discussion and Analysis (MD&A) and Notes to Financial Statements within their annual reports. The Corporate Profile was the category of information provided by the fewest companies either in their annual report or within any other section of their Websites. Only 24 companies reported information about their employees' profile. The results showed that about 74.9% of the companies made their latest stock price available on their Website, and only 67.3% provided information about their share price performance.
The formats used in presenting annual reports on the Internet were also analyzed in the study. In this respect, the PDF format was the most used in presenting annual reports, approximately 53% of the sample used this format. The use of the HTML format to present annual reports was found not to be popular. Only 2.8% of the companies surveyed used this method only. However, of the 250 companies, it was found that 56 companies (22.4%) used both the HTML and the PDF formats to present their annual reports over the Internet.
In a latest study undertook by Hindi and Rich (2010) titled "Financial Reporting on the Internet: Evidence from the Fortune 100" during 2003, 2006 and 2009, the authors found that all Fortune 100 companies had websites and provided also a copy of their annual report online. 70%, 80%, and 100% of the Fortune 100 had a site map or search box in 2003, 2006, and 2009, respectively.
The Fortune 100 websites have emphasized a link to investor relations/financial information pages over the years, increasing the percentage of websites with such links from 75% in 2003 to 80% in 2006 and 97% in 2009. In this section, 100% included the latest stock prices, the press releases as well as advertisements for their products or services in 2009. It is worth noting that 100% of the companies provided an e-mail address to investor relations in 2009 compared to 54% in 2003 and 100% provided phone numbers in 2009 compared to 74% in 2003. Finally, 100% provided a postal address for investor relations in 2009 compared to 66% in 2003.
In terms of ability to analyze the financial information, out of the 100 companies presenting their annual reports online, at least 94% included the company's financial statements (compared to 82% in 2003), 93 % provided the auditor's report (compared to 80% in 2003), 97 of them presented the chairman's message, 92% had am MD&A and 90% integrated the notes to financial statements. Finally, 49% (60%) provided their annual report in an HTML format in 2009 (2003), while 98% (89%) provided their annual report in a PDF format in 2009 (2003).