Non-Financial Reporting in the EU

Bachelor thesis Accountancy & Control Universiteit van Amsterdam

Supervisor: Dr Réka Felleg

Words: 5.016

Date: 30-06-2021

Final version

Non-Financial Reporting in the EU

THEEFFECTOFDIFFERENTASSURANCEIMPLEMENTATIONSOFDIRECTIVE 2014/95/EUONTHEQUALITYOFNON-FINANCIALREPORTS.

STANDEBOER–12420840

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S

TATEMENT OF ORIGINALITY

This document is written by Student Stan de Boer who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document are original and that no sources other than those mentioned in the text and its references have been used in creating it. The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

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A

BSTRACT

In October 2014, the EU published the EU Directive of Non-Financial Information and Diversity. This directive requires certain organizations to report information regarding the environment, social and employee issues, human rights, and bribery and corruption, on an annual basis. However, the expectation that the Non-Financial Reporting directive will automatically lead to improved Non-Financial Disclosure performance is not as straightforward as it may seem. In the Member States, three different implementations with regards to assurance exist. Previous literature has called for harmonization within different Member States regarding the NFR directive and conducted research on the consequences of the NFR directive in individual countries. This paper examines the relation between two assurance implementations and disclosure quality, and the costs and benefits of those implementations. Based on a literature review, it is argued that the extra assurance requirement does result in NFRs with a higher disclosure quality. Furthermore, this paper reasons that the costs for firms are higher in the countries with the extra assurance requirement.

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T

ABLE OF

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ONTENTS

Statement of originality 1

Abstract 2

Introduction 4

Literature Review 7

Information asymmetry, agency theory and signaling theory 7

Mandatory disclosure and assurance 8

Non-Financial Information and the Non-Financial Reporting Directive 11 The three different implementations of the Non-Financial Reporting directive 13

Hypothesis development 15

Reference list 18

Appendix 22

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I

NTRODUCTION

In October 2014, the EU published the EU Directive of Non-Financial Information and Diversity (hereinafter NFRD). According to the European Commission, “this directive requires certain companies to report information regarding the environment, social and employee issues, human rights, and bribery and corruption, on an annual basis” (Directive 2014/95/EU). With this directive, the European Commission intended to increase Corporate Social Responsibility Reporting in the European Union. However, the expectation that the Non-Financial Reporting directive will automatically lead to improved Non-Financial Disclosure performance is not as straightforward as it may seem (Maas & Sampers, 2020).

Seven years later, this directive has received critique from academics, accountants, and corporations, they argue that the directive lacks requirements to standardize NFR within the Member States and that there is a need for guidelines and frameworks that result in an increased reporting quality (La Torre et al., 2018).

The directive has a minimal requirement to check whether a Non-Financial Report (NFR) has been provided. However, the NFRD had the option for the Member States to include stricter requirements with regards to the assurance of Non-Financial Reports. Because of this flexibility, across the European Union, three different groups of assurance implementations of this directive emerged. The first group of countries only require that an NFR is provided. The “second/ middle group” of countries require the statutory accountant to check the consistency of the Non-Financial Report by comparing it to the companies’

financial report; in other words, the auditor must check whether the disclosed information is consistent with the operations of the company. The third implementation in the European Union is an independent assurance requirement with regards to the Non-Financial Report (Appendix 1). To summarize the situation, it is mandatory to disclose a Non-Financial Report in the European Union, but in some countries, firms have a mandatory assurance requirement, while in other countries there is no assurance requirement.

In this paper, I examine the effect of two different implementations of the Directive 2014/95/EU on the quality of Non-Financial Reports. The research question of this study is:

“Does checking the consistency of the Non-Financial Report with the Financial Report, result in a higher disclosure quality compared to NFRs of firms with no additional check?”

Specifically, I examine whether assurance increases the quality of the disclosure of Non- Financial Information. As an independent variable the two groups of implementations of

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Directive 2014/95/EU; The minimal requirement group and additional requirement group; to check whether the Non-Financial Report is consistent with the financial report of the company. The study discusses information asymmetry and agency theory, the mandatory disclosure literature, and information overload. Based on the existing research in those research topics, this study contributes to the existing literature on Non-Financial Reports, and I examine the costs and benefits of the assurance implementation for companies and investors.

This paper compares the quality of NFRs of firms in countries with flexibility and freedom as to how they disclose their Non-Financial Information, to the NFRs of firms in countries with mandatory assurance with only one check.

Existing literature shows that companies, which are required to have independent assurance on their Non-Financial Reports, have a higher quality compared to companies with the minimal requirement, companies that only have to provide the NFR (Mion & Loza Adaui, 2019). However, little research has been conducted on ‘the middle group’. Most previously conducted research was about individual countries or harmonization of the NFRD in order to get more comparable NFRs across the European Union, whereas I look specifically at the different implementations of assurance requirements.

At the end of 2016, European national governments translated this directive into national law. Because of this, organizations with more than 500 employees, and ‘public interest companies’, for example, banks and insurance companies, which account for around 6000 organizations within the European Union, have to comply with this directive since 2018, for information covering the 2017 financial year. Those corporations have to disclose the following information which can be divided into different categories, topic, scope, and type.

First of all, the categories of topics corporations have to disclose are Environmental, social and employee, human rights, and anti-corruption/ bribery matters. Secondly, organizations have to disclose the scope of the matters: business management/ organizational model, company policies, and the results organizations have made. Last of all, companies have to disclose the type of actions, for example, impact of risk factors on the environment, greenhouse gas and pollutant activities, use of energy and water resources, active and passive anti-corruption measures adopted. (Caputo et al., 2019)

The information to be disclosed is extensive in quantity. Hans Hoogervorst, Chairman of the IASB, is raising his concerns about information overload. He acknowledged, in a speech, that the ‘widely perceived problem of information and disclosure overload’ may be

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growing bigger and bigger. (Stolowy & Paugam, 2018) This may become a problem for investors, regulators, and companies. Investors may have more difficulties finding the best investments with this information overload and organizations may grow tremendous costs of disclosure, because of the amount of information to be disclosed, and may fail to deliver the most significant information, those could be reasons why information overload must be avoided; it may reduce disclosure quality.

This paper is structured as follows: first, it discusses existing literature on information asymmetry, agency theory, mandatory and voluntary disclosure. Secondly, this article discusses literature about the Non-Financial Reporting Directive, empirical findings on the directive in the European Union. Afterward, the study discusses differences in implementation of the directive, what those differences contain and what effects those differences may have on the quality of the Non-Financial Reports. In the hypothesis development, the findings of the literature review are summed up, to develop the hypothesis.

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L

ITERATURE

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EVIEW

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NFORMATION ASYMMETRY

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AGENCY THEORY AND SIGNALING THEORY

Information affects decision-making processes, both for firms and investors.

Information asymmetries happen when different people know different things. (Connelly et al., 2011). Some information is publicly available, while other information is private. Because of this private information, information asymmetries could occur between those who possess the information and those who do not. Information asymmetry can be further explained with the following example: Firms and entrepreneurs want to obtain as much funding as possible, their incentives are aligned to attract many investors. While the investors want to invest in companies with an above-average return on capital and need a lot of information in order to make the best investment decisions possible. High-quality disclosure could give them the information they need, however, management of firms may have the possibility to omit some information that should have been disclosed, for example, because of fear of decreased market value. Especially at the moment in Non-Financial Reporting, because of the lack of guidelines and reporting standards (La Torre et al., 2018)

Agency theory is defined as a contract in which one or more persons or firms, (the principal closing a relationship with another person (the agent)), take actions on behalf of the principal (in this setting: investors), the contract/relationship results in the delegation of some decision-making authority to the agent (in this setting: managers) (Jensen & Smith, 1985).

Because the principal has delegated some decision-making authority to the agent, information asymmetry and incentive problems may arise.

These information asymmetry and incentive problems disrupt efficient allocation of resources in a capital market economy, whereas high-quality disclosure, signaling theory and institutions, created to facilitate credible disclosure between firms and investors, are of major importance to mitigating these two problems. (Connelly et al., 2011; Healy & Palepu, 2001) There have been large quantities of studies conducted regarding information asymmetry and incentive problems concerning financial disclosure. However, in recent years there has been an increasing focus on the disclosure of Non-Financial Information, both regulatory (for example the NFR Directive 2014/95/EU) and demand-driven (Arvidsson, 2011). Investors want to know whether the company and the company’s business model are feasible for the future. Stiglitz highlights two types of information where information asymmetry is especially important: information about quality and information about intent. The first is important when

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one party is not aware of all characteristics of useful decision-making information the other party possesses. (Healy & Palepu, 2001; Stiglitz, 2000) Whereas the latter is important when one party is concerned about the other party’s behavior or intentions (Elitzur & Gavious, 2003). For example, employers often do not possess all the necessary decision-making information when looking for employees. Potential employees obtain higher levels of education to signal their qualities, this may be a reliable signal of information about qualities because lower quality candidates would not be able to withstand the ordeal of higher education (Spence, 1978).

In the NFR setting, information about quality and information about intention are important as well. Because, in terms of information about intention, companies have the possibility to signal their intentions in the Non-Financial Reports. For example, by their goal- setting, having ambitious but achievable goals can show investors the intentions of the firms, which reduces information asymmetry between managers and investors. In countries where the NFR has an assurance-check whether the NFR is in line with the financial report of the firm, those goals may be perceived as more credible compared to firms in countries where no such assurance-check is needed. It may be even more important to reflect on accomplished goals from NFRs from previous years to enhance reliability. In terms of information about quality, firms may show it with a costly signal, namely assurance, high-level assurance reduces the information asymmetry (Fuhrmann et al., 2017). In countries where the assurance is mandatory, in the middle group, this signal may be less effective because every comparable firm is required to do the assurance in accordance with the law, investors may perceive this signal as not reliable, in that case, the costs of assurance may outweigh the benefits.

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ANDATORY DISCLOSURE AND ASSURANCE

With respect to the setting of this study, the disclosure of NFRs in the European Union is mandatory, for all firms with more than 500 employees or ‘public interest companies’. This may raise the following questions: Why would those companies not disclose their information voluntarily? When should a mandatory disclosure regulation be implemented? And who are the winners and losers because of this mandatory Non-Financial disclosure?

To answer the first question, you have to understand that managers and investors have both a conflict of interest and information asymmetry. Knowing the incentives for a manager of the nondisclosure of adverse information, mandatory disclosure could be seen as a desirable supplement to an anti-fraud rule (Coffee, 1984). Managers may be willing to

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voluntarily disclose positive information, in order to signal information about quality or intention. However, they are less willing to disclose adverse information voluntarily.

According to a more recent Harvard study, in which the consequences of mandatory Corporate Sustainability Reporting were studied, looking at a variety of countries from all over the world. One of their findings was that the treated firms significantly increased disclosure following the regulations (Ioannou & Serafeim, 2017). Regarding the setting of the NFRD, this means an increase in information, regarding the environment, social and employee issues, human rights, bribery, and corruption. This increase in information may help investors to make better decisions, especially informed investors, and it may help to reduce the information asymmetry between firms and investors.

Previous studies about mandatory disclosure, give a few ideas about when a mandatory disclosure regulation should be implemented. According to Coffee, if market forces are not sufficient enough to produce “the socially optimal supply of research”, then a mandatory disclosure system may be justified (Coffee, 1984). Another idea is: when the fraction of customers is inadequate to understand a firm’s disclosure, voluntary disclosure is not forthcoming. A mandatory disclosure system should be implemented in markets where product information is difficult to understand (Fishman & Hagerty, 2003). In this study’s setting, the information to be disclosed is indeed difficult to understand for a large fraction of (uninformed) investors, and mandatory disclosure may be justifiable. Informed investors, on the other hand, have long supported the continuous disclosure system, because it results in costs savings to them; mandated disclosure reduces the informed investor’s marginal costs of acquiring and verifying information. Mandatory disclosure also increases the aggregate amount of securities research and verification. Bidders/ investors need information before they will invest large quantities of money in for example acquisition, mandatory disclosure may respond to this information need (Coffee, 1984). Mandatory disclosure increases pressure to comply with ‘the advice’ (Delmas et al., 2010; Sah et al., 2013). In this setting, companies may perceive an increased pressure to comply with enhancing their operations regarding the environment, social and employee issues, human rights, bribery, and corruption, because of mandatory disclosure and the demand of investors.

With regards to the presently available literature concerning “the winners and losers”

of a mandatory disclosure system. According to Fishman & Hagerty (2003), who conducted research on general mandatory and voluntary disclosure in markets with informed and uninformed customers, mandatory disclosure benefits informed customers, is neutral for

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uninformed customers, and harms the sellers (Fishman & Hagerty, 2003). Contrarily, findings from the Harvard study, about mandatory disclosure concerning corporate responsibility reporting, suggest that increases in sustainability disclosure, driven by regulation, are associated with increases in firm valuations. In other words, firms do benefit from mandatory disclosure as well (Ioannou & Serafeim, 2017). However, maybe is the increase in valuation not enough to outweigh the costs of disclosure and assurance, or times may have changed in recent years. Coffee argued in his study on the economic case of mandatory disclosure that detailed periodic reports are only useful to professional analysts and not to the individual trader, however that was in 1984, he further stated that in a computerized securities marketplace future clients will increasingly rely on professional advice (Coffee, 1984). That is why mandatory disclosure with regards to NFR could benefit society in the long run. The information is difficult or too much to understand or process for the average uninformed investor, however it reduces information asymmetry for informed investors. The additionally provided information could help informed investors to make better investing decisions, furthermore, uninformed investors do increasingly rely on the advice of informed investors due to information available on the internet.

Ioannou & Serafeim argue that because of mandatory disclosure, there is an increased likelihood of firms voluntarily receiving assurance, probably explainable by the fact that firms want to signal information about quality and information about intention. Firms want to prove to potential investors that they are better regarding NFR compared to their competitors.

Collectively, their results suggest that the efforts to increase transparency around organizations’ impact on society, for example, a periodic mandatory disclosure system, are effective at improving the disclosure quantity and quality of the treated firms (Ioannou &

Serafeim, 2017). In summary, the mandatory disclosure system is beneficial for investors and probably for firms as well, however, what will be the impact of the difference in assurance regulation across the European Union?

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INANCIAL

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NFORMATION AND THE

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INANCIAL

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EPORTING

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IRECTIVE In accounting, finance, and other business literature the firm’s performance is a central concept for the stakeholders. Because of this, measurements such as net income, return on assets/ return on equity and total return are important for most investors, and these topics take a prominent place in accounting studies. Those performance measures are an accepted form of measuring changes in the wealth of capital providers and companies. (Erkens et al., 2015)

The scope of Non-Financial Information (NFI) is less restrictive at the moment. It is used in different contexts to describe different forms of disclosures. According to Erkens, there are two main academic approaches to Non-Financial Information, in some papers applied simultaneously.

The first approach to NFI is about performances that do not fall under the definition of traditional financial performance measures. Those studies mostly rely on different performance measures than those used to measure financial performance. (For example industry-specific indicators, qualitative indicators, job satisfaction, and customer satisfaction.) The second approach, the term NFI is used to describe disclosure related to financial performance but provided outside the annual report or in a different report. This type of NFI disclosure describes the information given on an organization’s websites or other communications with market participants and stakeholders. (Erkens et al., 2015) For example qualitative assessment, forward-looking indicators, and other non-monetary items (Orens &

Lybaert, 2010). This approach of the term NFI will be used in this study.

Non-Financial Disclosure was when it was voluntary disclosure, an instrument to signal a good public image, to demonstrate what the organization is undertaking regarding Corporate Social Responsibility, and to show the public that the company is operating within the boundaries and norms established by the society in which it is operating. (Deegan &

Rankin, 1996; Guthrie & Parker, 1989; Manes-Rossi et al., 2018). By disclosing the boundaries in which the firms operate they might be able to attract investors, who are interested to invest in companies operating within those boundaries.

Non-Financial Disclosure is associated with increased earnings forecast accuracy by financial analysts. First of all, issuing Corporate Social Responsibility reports is significantly negatively associated with earning forecast errors by financial analysts (Dhaliwal et al., 2012).

Moreover, this association is stronger in more stakeholder-oriented countries, in those

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countries, social performance likely has a greater impact on the firm’s financial performance (Dhaliwal et al., 2012). Improvements in the earnings forecast accuracy and a decrease in financial analysts’ forecast errors show why qualitative good Non-Financial Disclosure is beneficial to investors; Non-Financial Disclosure of good quality helps to reduce the investment mistakes they or their financial advisors could make while achieving more accurate forecasts.

The information to be disclosed in European Non-Financial Reports is divided into the topic, scope and type: Topic (environmental, social and personal, human rights, active and passive anti-corruption and bribery matters), scope (business management and organizational model, company policies, and results) and type (use of energy and water resources, greenhouse gas and pollutant emissions, impact of risk factors on the environment, respect for human rights and measures adopted to prevent their violation or discriminatory actions or attitudes, active and passive anti-corruption measures adopted). (Caputo et al., 2019)

The expectation that the Non-Financial Reporting Directive, in other words making Non-Financial Disclosure mandatory, will automatically lead to improved Non-Financial Reporting performance is not as straightforward as it may seem; Organizations could benefit from more guidance or a framework which states how to report and what information to report (Maas & Sampers, 2020). Only publishing a NFR is not enough to improve the quality of those reports and the environmental performance, Maas & Sampers argue that organizations need to receive more guidance to increase the disclosure quality. This could be done in the form of frameworks or reporting standards.

For example, the AFM, the Dutch independent market conduct authority, has made several publications with the main issue, the fact that the European directive and Dutch implementation are still, 4 years later, too flexible. “Non-Financial Reporting is a great step with regards to CSR, however, market conduct authorities cannot conduct the best possible market investigations, when the laws are not specific and standardized; Standardization and new legislation are important steps to encourage in the use of and information on non- financial aspects in reporting (16 February 2021)”.

“In the development of international standards for Non-Financial Reporting, attention needs to be paid to the possibilities for actual verification and certification as well. This means that clear and specific reporting standards are needed that lead to relevant and reliable information that is verifiable and enforceable. (23 December 2020)”

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With regards to the environmental performance of companies; more attention is related to a more active approach generally (Stolker et al., 2020). Stolker et al. state that climate-attention and climate-related actions are on the rise among AEX companies (the Dutch S&P 500), in 2016 only 11 AEX firms mentioned climate issues compared to 21 AEX firms in 2018, respectively 44% vs 88%. (Stolker et al., 2020). This rise can be explained by the fact that a NFR is mandatory since 2018, in other words, the NFRD did result in a rise of AEX companies mentioning climate issues in the Non-Financial Reports.

Most Non-Financial Reports have a qualitative nature, the relation between attention and action should become clear. Hypocrisy reporting, idealistic reporting, and ‘ticking the box’ are all problems concerning Non-Financial Reports (Adams, 2015; Baret & Helfrich, 2019; Cho et al., 2015; La Torre et al., 2018). A solution for these problems is, according to Baret & Helfrich, to integrate the Non-Financial Reports into the financial reports. To show the relations between the companies’ information about intention and their current financial/

operating performance. In ‘the middle group’ countries this solution is not implemented, however, the Non-Financial Report should be consistent with the financial disclosure, the NFR should be consistent with their current financial/ operating performance, and this helps to make the NFR more credible for investors.

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HE THREE DIFFERENT IMPLEMENTATIONS OF THE

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EPORTING DIRECTIVE

The implementations of the Non-Financial Reporting directive can be categorized into three groups. Because in earlier stages of the NFR, there was a debate between voluntary and mandatory assurance, and countries had flexibility with regards to implementing the directive.

The NFR Directive does not impose specific standards or detailed rules for reporting NFI; it only establishes the minimum requirements for the information to disclose. (La Torre et al., 2018) The first group of Member States did not implement further requirements. (Group 1 in this study; Appendix 1) The second group of Member States did implement more requirements; in those countries, corporations have to make sure their NFR is in alignment with their financial report, a statutory accountant has to verify this. (Group 2 / the middle group in this study; Appendix 1) The third group of Member States (France, Spain, and Italy) did implement the strictest requirements with regards to the NFRs; an independent assurance requirement on the disclosure of Non-Financial Information.

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This study investigates the quality of Non-Financial reports of companies, which have to disclose their reports with minimal requirements, and companies, which have to disclose their reports with an additional check whether the NFR is in line with the financial report conducted by a statutory accountant. The disconnection between strategy, risks and opportunities, and operations and financial performance was a risk for companies disclosing their NFR. (Investor Demand for Environmental, Social, and Governance Disclosures, 2012) Because the NFR is often a report disconnected from the operational and financial report. This risk is reduced by the additional check, an auditor checks whether the two different reports are aligned. This could be an argument for the middle group to have an increased quality compared to the minimal requirement group.

Prior research shows that due to mandatory disclosure generally, firms are forced to improve their operating performances relating to the environment. For example, companies within the electricity sector did change their operating performances concerning the environment. They decreased their fossil fuel percentages more when a mandatory disclosure program was active. (Delmas et al., 2010) With regards to the literature on mandating Non- Financial Disclosure and the costs of disclosure associated with mandatory Non-Financial Disclosure. It would lead to net costs for firms with weak non-financial performances and disclosure, however, it would lead to net benefits for firms with strong non-financial performance and disclosure. (Gao et al., 2016; Grewal et al., 2017) The higher the quality of non-financial performance and disclosure, the more benefits the firm and stakeholders might receive in a voluntary setting, however, does this finding still hold in a mandatory disclosure setting? Companies with a minimal requirement of disclosing their NFR reports do not have any required quality assurance or checks, but even in absence of regulation that mandates assurance, some firms seek the qualitative properties of comparability and credibility (Ioannou & Serafeim, 2017). If firms in the countries with no requirements seek assurance checks, they signal information about quality and intention, wanting to signal a non-financial performance of higher quality compared to competitors. For those firms, the benefits received are larger than for firms in the middle group, because the assurance is compulsory there.

Firms with better CSR performance, tend to provide a higher quality of Non-Financial Disclosure and this higher quality delivers economic benefits in the long run, due to greater analyst coverage, and lower yields to maturity in bond issuances. (Gao et al., 2016) The firms with an additional check, however, do get some feedback on their Non-Financial Disclosure, which may help to improve the quality of the NFR. Also, investors may perceive their NFRs

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as NFRs of higher quality or more credible reports, and if this is the case Grewal et al. argue those firms could receive net benefits because of the mandatory assurance.

Comparing the Non-Financial Reporting of the countries Italy and Germany. Italy is one of the countries where independent assurance with regards to the Non-Financial Reports is mandatory, in Germany only providing a Non-Financial Report is required. Their findings;

the cross-country analysis demonstrates that mandatory independent assurance on NFD makes the Non-Financial Reports more homogeneous and bridges the gap in SRQ (Sustainability Reporting Quality) compared to when NFD is voluntary. (Mion & Loza Adaui, 2019) In other words, the reports are more homogeneous and thus better comparable, which is what for example AFM is pleading for. Furthermore, if a NFR is better comparable, investors have better possibilities to make the best investment decisions. In the middle group, the NFRs are more homogenous compared to the NFRs of firms in companies with the minimal requirement.

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YPOTHESIS DEVELOPMENT

This paper examined the influence of two assurance implementations of directive 2014/95/EU on the disclosure quality and the costs and benefits of those assurance implementations. Based on the literature review, I expect that (1) the extra assurance requirement does lead to increased disclosure quality of the average firm in those countries, compared to the average firm in countries with the minimal requirement. Because, if

companies have a mandatory assurance check, then they do receive more guidance regarding their NFRs, which may help to increase the quality of disclosure, and the extra assurance increases the reliability of the NFR. Moreover, the disconnection between strategy, risks and opportunities, and operations and financial performance was a risk for companies disclosing their NFR. (Investor Demand for Environmental, Social, and Governance Disclosures, 2012) Because the NFR is often a report disconnected from the operational and financial report. If the risk of disconnection between strategy, risks and opportunities, and operations and financial performance is reduced by the additional check because an auditor has to check whether the two different reports are aligned. Then we can assume increased disclosure quality for the middle group. Ioannou & Serafeim argue that because of mandatory disclosure, even when there are no further requirements, there is an increased likelihood of firms

voluntarily receiving assurance. However, this increased likelihood is probably explainable by firms with a great performance in sustainability wanting to signal their qualities and

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intentions, so it is not applicable for the average firm in countries with the minimal requirement.

With regards to the costs and benefits of the assurance implementations, I expect that (2) the average costs for firms will be higher in countries with the extra assurance check because those firms have both costs of disclosure and costs of assurance. Firms in countries with the minimal requirement only have costs of disclosure, unless they want to voluntarily receive assurance and send a costly signal about information about their qualities and

intentions, high-level assurance reduces the information asymmetry (Fuhrmann et al., 2017).

In countries where the assurance is mandatory, in the middle group, this signal may be less effective because every comparable firm is required to do the assurance in accordance with the law, investors may perceive this signal as not reliable, in that case, the costs of assurance may outweigh the benefits of assurance. If organizations in countries with the minimal requirement choose to voluntarily receive assurance, then they will receive more benefits compared to the average firm in the middle group, according to the literature review.

However, this could be explained because those firms are most likely firms with great

sustainability performance, they are most likely not average firms, but they are best of the rest in that aspect and they want to signal that.

Based on the literature on the winners and losers because of mandatory disclosure, there are different ideas: According to Fishman & Hagerty (2003), the informed investors are winners, uninformed investors are neutral and the firms will be the losers, due to the extra costs of assurance and disclosure. However, Ioannou & Serafeim (2017) argue that firms benefit as well, due to increases in firm valuations. This divergence in ideas may be explainable because Fishman & Hagerty focussed on mandatory disclosure in general and Ioannou & Serafeim on mandatory disclosure regarding sustainability reporting. However, I believe that researchers should conduct future research into this divergence in ideas.

There are some limitations to this research paper. First of all, this paper is a literature review and this study is based almost entirely on secondary data and information, I tried to make sure to use the most recent data and studies, however, compared to studies that collect their own data, this data may be less recent. Future studies could use more recent data in order to examine the effects of different assurance implementations within the European Union.

Secondly, I divided the different Member States into three groups based on their assurance implementation. In each country, there may be small differences regarding the laws about

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NFRs. Last of all, I tried to look at the average firm per assurance implementation, future research could conduct extra research regarding sector-specific NFRs.

This paper contributes to the existing academic literature because it is one of the first times, that there has been a research conducted to the assurance of companies and the Non- Financial Disclosure quality. Previous literature regarding the NFR research topic, was mostly about harmonization of the laws within the European Union, guidelines regarding Non-

Financial Reporting and about the consequences within individual countries. Regulators could utilize this information, to analyse the consequences of certain assurance requirements, and to improve future rules in the accounting sector.

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A

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directive/)