Reinforced Disclosure: The Effect of Audit Committee Quality on
IFRS 15 Disclosure Quality in the Construction Industry
University of Groningen, Faculty of Economics and Business Combined Master Thesis Accountancy and Controlling
THEUN KOOTSTRA
S3525392 June 22nd, 2020
Supervisors R. van Duuren Prof. Dr. R. L. ter Hoeven
Abstract: This study investigates the effect of audit committee quality on the disclosure quality of IFRS
15 in the European construction industry. The study is characterized by three mechanisms safeguarding disclosure quality, namely international reporting standards, corporate governance and learning effects. The sample consists of data from the 2018 and 2019 annual reports of 37 construction organizations listed on European stock exchanges, totaling 63 observations. Audit committee quality is measured by the following characteristics: size, independence, financial expertise, meeting frequency, gender diversity and members holding (no) other subcommittee positions. The disclosure quality of organizations is measured by a disclosure index based on the IFRS 15 disclosure requirements. I provide evidence for a positive significant relation of audit committee independence and audit committee members holding no other subcommittee positions with IFRS 15 disclosure quality. The results of audit committee independence endorse current policies of audit committee requirements, whereas the results of audit committee member busyness initiate an area for consideration.
Keywords: Financial reporting quality, IFRS 15, audit committee characteristics, learning effects,
disclosure index, agency theory, signaling theory.
Word count: 11.974
Acknowledgements: I express my gratitude towards the supervisors from the University of Groningen
for their constructive feedback and availability, towards my fellow student researchers for gathering the data and providing helpful insights, towards PricewaterhouseCoopers for creating an environment to excel.
TABLE OF CONTENTS
I. INTRODUCTION ... 4
II. THEORETICAL FRAMEWORK ... 6
Accounting Standards ... 7
Corporate Governance ... 8
Learning Effects ... 10
Agency Theory ... 11
Signaling Theory ... 12
III. HYPOTHESES DEVELOPMENT ... 13
IV. METHODOLOGY ... 16
Sample ... 16
IFRS 15 Disclosure Quality ... 17
Audit Committee Quality ... 18
Control Variables ... 20 Empirical Model ... 22 V. RESULTS ... 23 Descriptive Statistics ... 23 Correlation Analysis ... 27 Regression Analysis ... 28 Additional Tests ... 31
VI. DISCUSSION AND CONCLUSIONS ... 32
REFERENCES ... 35 APPENDIX Ⅰ ... 40 APPENDIX Ⅱ ... 42 APPENDIX Ⅲ ... 43 APPENDIX Ⅳ ... 51 APPENDIX Ⅴ ... 56 APPENDIX Ⅵ ... 58 APPENDIX Ⅶ ... 60
I.
INTRODUCTIONs it possible to safeguard information quality? This research attempts to find an association between audit committee characteristics and the information quality of IFRS 15 disclosures within the European construction industry. The safeguarding mechanisms for information quality prominent in this research are accounting standards (interpretation of IFRS 15 disclosure requirements), corporate governance (audit committee characteristics) and learning effects (experience of IFRS 15 practice). An example highlighting the importance of information quality is the Carillion-case. A case where IFRS 15 might be adopted too late. The bankruptcy of UK construction giant Carillion came as a bolt from the blue. Carillion was involved in aggressive accounting and went bankrupt in 2018 (BBC, 2018a). Red flags in their accounting were optimistic profit margins (doubling the average margins of other construction companies), complex debt structures and questionable judgment in the recognition of revenue (BBC, 2018b). The principles of the updated revenue recognition standard, the IFRS 15, intend to expose information that better reflect the current situation of an organization. Hence, the standard could have provided decisive information in the financial statements about the continuity of Carillion.
As of January 1st, 2018, companies applying IFRS, which is mandatory for European listed
firms, are required to adopt IFRS 15 Revenue from Contracts with Customers. IFRS 15 is the accounting standard which provides the principles for how to report on the nature, amount, timing and uncertainty of revenues from a contract with a customer. IFRS 15 superseded IAS 18 Revenue Recognition, IAS 11 Construction Contracts and related standards (IASB, 2019). The International Accounting Standards Board (IASB), the independent body that is responsible for preparing and issuing the International Financial Reporting Standards (IFRS), collaborated with the US GAAP issuer, the Financial Accounting Standards Board (FASB), in attempt to execute their strategy of international accounting standards convergence (Doupnik et al., 2020). Unlike the preceding standards, the guidelines in IFRS 15 are adapted to the complex revenue contracts in different industries. Introducing the five-step model in the standard creates an unambiguous approach to the recognition of revenue (Aarab et al., 2015; Roozen & Pronk, 2018). Another change in the standard, affecting the construction industry, is the more extensive explanation about the recognition of revenue and the judgments made in applying the standard (IASB, 2019). Thus, an important aspect of the issuance of IFRS 15 is the step towards enhancing comparability, consistency and informativeness of the financial statements.
This research attempts to capture the informativeness (quality) of IFRS 15 disclosure. The method to distinguish disclosure quality of IFRS 15 between organizations is by means of a developed disclosure index. The disclosure index is based on the disclosure requirements of IFRS 15 tailored to the requirements of construction companies. This disclosure index and the way it is set-up enables us to critically review the annual reports on the IFRS 15 requirements and distinguish companies on their informativeness based on a score. The relevance of investigating the information quality of IFRS 15 is that the recognition of revenue is one of the most important parts in the financial statements. Revenue
is an essential indicator reflecting an organization’s activities and performance (Aarab et al., 2015; ESMA, 2019). This implies that the users of the financial statements value the information that is disclosed about revenue and the recognition thereof. Another consideration is that the European financial regulators, such as the AFM, AMF, ESMA and FRC, all sharpened their oversight on how organizations present their revenues. In their reviews, revenue recognition is one of their enforcement priorities (AFM, 2019; AMF, 2019, ESMA, 2019, FRC, 2019).
However, the management of an organization is in charge of how and what information they disclose in the extent of the financial reporting standards to the public (Healy & Palepu, 2001). What information an organization decides to disclose may depend on how the organization is governed (corporate governance). The corporate governance mechanisms and their effect on information disclosure is a common venue for researchers. Corporate governance mechanisms, such as ownership structure, board composition and audit committees matter in the provision and quality of information (Bajra & Čadez, 2017; Dey, 2008; Eng & Mak, 2003). This intermingles with the basis of this research, namely the agency theory. Institutions (e.g. regulators, external auditors, audit committees) facilitating credible disclosures play an important role in mitigating the information and agency problems between managers and investors (Healy & Palepu, 2001). In this research, I specifically zoom in on audit committees as a corporate governance function. The audit committee has the responsibility to oversee the financial reporting process and, additionally, meets separately with senior financial management and the external auditor (Klein, 2002). Therefore, the audit committee has significant influence on the organization’s financial disclosure in order to assure that management, internal and external auditors act in the best interest of the organization and its stakeholders. Noteworthy is the reform of the European audit committee function in 2016. Increasing audit committee accountability regarding the oversight of internal controls, internal audit and risk management, and tighten the audit committee composition requirements, making the role of audit committees of European listed firms more instrumental (FEE, 2016).
An impetus for this research is the paper by Krishnan (2005). Krishnan (2005) examines the association between audit committee quality and the quality of internal control of organizations. She shows that the quality of audit committees matters as a corporate governance function in the United States. This is an interesting starting point for investigating audit committee quality in a European sample. Thereby, contributing to research by making inferences about the influence of audit committees on the disclosure quality for European companies. This research extends by testing audit committee characteristics as a proxy for audit committee quality that are up for debate in future recommendations and regulations about audit committee composition. These characteristics include audit committee size, independence, financial expertise, meeting frequency, gender diversity and audit committee members holding no other subcommittees positions. In summary, I explore the mechanism of audit committees and information disclosure quality in attempt to answer the following main research question:
What are the effects of audit committee characteristics on the quality of IFRS 15 disclosure?
The sample of this research consists of annual reports from 2018 and 2019 of European construction companies involving the annual reports from which IFRS 15 is being effective. This provides the opportunity to investigate information quality improvement through learning by experience by making a year-over-year comparison between (mandatory) first-year and second-year IFRS 15 disclosures. Considering only construction companies in the sample is because of the industry’s significance. Construction is a critical and a sizeable industry, because every other sector depends on the building and maintaining of infrastructure (OECD, 2010). The expectation is that the implementation of IFRS 15 has a relatively high impact on disclosures of organizations in the construction industry (Aarab et al., 2015; Roozen & Pronk, 2018; PwC, 2017). A substantial part of the revenue of construction companies originates from complex long-term contracts with customers. The impact of these long-term contracts widely affects the financial statements, because, for example, the standard requires more detailed information about the future revenue streams (remaining performance obligations) and an explanation about the significant judgments made in the allocation of transaction prices to performance obligations. This kind of revenue information is useful to the users of the financial statements (Wagenhofer, 2014). For instance, for investors to make future revenue estimations or for contractors to assess continuity.
I examine the effects of audit committee characteristics on IFRS 15 disclosure quality by hand-collected data about audit committees from annual reports and measuring disclosure quality in annual reports based on a disclosure index. I find a positive association between audit committee independence and IFRS 15 disclosure quality. Additionally, I find a positive association between audit committee members with no other subcommittee positions and IFRS 15 disclosure quality. These results support existing research and correspond with the agency-background that independent members and less distracted members by other subcommittees are better monitors of disclosure quality. I do not find significant results for audit committee size, financial expertise, meeting frequency and gender diversity. This paper takes on the perspective of standard setters, regulators and practitioners, as this research involves suggestions for enhancing corporate governance structures and guidance in determining the quality of financial reporting.
This paper is organized as follows. Section Ⅱ contains an explanation of the relevant theories and an elaboration on the safeguarding mechanisms. Section Ⅲ outlines the hypotheses, followed by section Ⅳ which details the research design. Next is Section Ⅴ, which presents the results. Section Ⅵ begins with discussing the results and ends with the concluding remarks.
II.
THEORETICAL FRAMEWORKThe first part of the literature section is dedicated to frame the safeguarding mechanisms of information quality. IFRS 15 is the fundament of the disclosure index, therefore, to get a thorough
understanding of the rationale behind the disclosure requirements, the relevant matters of the standard are highlighted. Thereafter, a comparison of corporate governance structures across Europe is made to find an explanation for the diverse role and composition of audit committees between countries. At last, the possibility of learning effects is discussed.
Furthermore, the second part of this literature section involves the relevant theories in this research. Financial disclosure is one of management’s tools to communicate an organizations’ performance and governance to stakeholders (Healy and Palepu, 2001). Healy and Palepu (2001) argue that the demand for financial disclosures comes from the agency conflicts and information asymmetry between management and outside investors. From this perspective, disclosing higher quality information should decrease this agency problem. Furthermore, an independent audit committee is established to monitor the actions of management and to maintain a certain quality level of the organization’s financial reporting (Beasley et al., 2009). The signaling theory extends this theory by suggesting solutions to these information asymmetry problems through the disclosure of voluntary information as means for management of an organization to signal their quality with the goal to distinguish the organization from their industry peers (An et al., 2011).
Accounting Standards
IFRS 15 is the result of a collaboration between the European accounting standard setter, the IASB and the United States accounting standard setter, the FASB. The standard from the IASB (IFRS 15) is constructed in a way that it better corresponds with its US counterpart, the FASB’s US GAAP ACS 606 Revenue from Contracts with Customers, advancing the process of accounting convergence. The objectives of converged standards are to enhance quality, consistency and comparability of reported revenue (FASB, 2014). IFRS 15 Revenue from Contracts with Customers supersedes accounting standards IAS 18 Revenue Recognition, IAS 11 Construction Contracts, and the following interpretations IFRIC 13 Customer Royalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfer of Assets from Customers and SIC-31 Revenue – Barter Transactions Involving Advertising Services (IASB, 2019). The primary objective of the transition to a new revenue standard is to enhance the consistency of revenue recognition, improve the comparability of revenue between organizations and provide more revenue-related information (Aarab et al., 2015; Kuij-Groenberg & Pronk, 2019; Roozen & Pronk, 2018). The transition to IFRS 15 has impact on the disclosure of revenue information. Firstly, with IFRS 15, the approach of revenue recognition the emphasis lies on the balance sheet. This asset-liability method, in contrast to the revenue-liability method, revenue is recognized based on the changes in value of contract assets and liabilities (Wagenhofer, 2014). Secondly, the measurement of contract progress under IFRS 15 impacts the construction industry. Under IAS 11 revenue from construction contracts is recognized based on the percentage of completion method, whereas under IFRS 15 progressive revenue recognition is only allowed when the rights and obligations in the contract meet certain criteria (KPMG, 2014).
More importantly for the construction industry is the transition to provide more detailed information about the recognition of revenue and the judgments applying the standard (IASB, 2019). For this research, these enhanced disclosure requirements in IFRS 15 play an important role in determining and distinguishing the quality of organizations’ revenue disclosures. Relevant components of the standard that require additional disclosure in the construction industry are performance obligations, contract balances and significant judgments. Performance obligations require disclosure because of the significant judgments made to determine the different elements in a construction contract, to allocate a transaction price to these separate elements and to determine when the amounts will be recognized as revenue. Another normality in the construction industry are the reporting of billings in excess of the costs (contract liability) and costs in excess of billings (contract asset). The revenue standard requires organizations to disclose opening and closing balances of theses contract assets and liabilities, significant changes in contract balances and revenue recognized from contract liabilities. Other disclosure requirements regarding the key judgments are the methods used to determine and allocate the transaction price. This is challenging particularly for the construction industry because of the variable considerations such as incentive-based payments, contract modifications, penalties and claims included in a construction contract (EY, 2015; IASB, 2019; KPMG, 2014; PwC, 2017).1
Corporate Governance
The purpose of this section is to analyze the different corporate governance structures across Europe. This research targets public interest entities in the construction industry listed on European stock exchanges. Consequently, these entities are subject to European Company Law. This law mandates entities that have significant public relevance to establish an audit committee. The audit committee, as defined by the European Union (directive 2014/56/EU), is a stand-alone committee of the entity. The minimal requirements for an audit committee set by the European Union are: the entire audit committee should consist of non-executive members of the entity and should be appointed by the general meeting of shareholders, at least one member of the audit committee should have competence in accounting or auditing, the committee members as a whole should have competence in the entity’s sector and the majority of the members, including the chairman, should be independent of the entity (EU, 2014). Aforementioned requirements are minimal conditions of EU member countries for establishing an audit committee. Individual member countries have leeway in stricter guidance regarding audit committees. All of the countries in the sample apply the ‘comply or explain’ principle, meaning that an explanation is required for not adhering to a guideline. Apparent in the different corporate governance codes of EU countries, audit committees are different in role and composition from each other. Although, the laws in corporate governance codes are not binding, it is highly recommended to apply these guidelines.
The sample consists of organizations from ten different EU countries (Austria, Belgium, Finland, France, Germany, Italy, the Netherlands, Spain, Sweden, United Kingdom). The corporate governance structures of these countries are therefore relevant.
Audit committees of organizations across Europe diverge in governance model, responsibilities, size and level of activity (EY, 2019). Hence, board structure is an important dependent in forming the role and structure of audit committees. Noteworthy for the analysis is that only the requirements of audit committees stated in corporate governance codes in the extent of European Company Law are summarized (in order to prevent stating similarities).
First, the details of audit committee requirements where one-tier boards are the dominant board system are discussed. Belgium extends by recommending that the chairman of the board should not chair the audit committee (Corporate Governance Committee, 2009). In France the audit committee members should all be competent in finance or accounting and their duties are more emphasized on monitoring risks (AFEP-MEDEF, 2018). In Spain all audit committee members, in particular the chairman, should have knowledge and experience in accounting, auditing and risk management (CNMV, 2015). Audit committees in the United Kingdom should be comprised of at least three members, all independent, whereby the chair of the board should not be on the committee (FRC, 2018).
The following are details of audit committee requirements where two-tier boards are the dominant board system. Austria extends by recommending that the chairperson or the financial expert, in a timeframe of three years, should not be a member of the board or part of senior management or an auditor of the company or signed an auditor’s opinion or who is not independent (Austrian Working Group, 2018). In Germany the chair of the audit committee should have knowledge and experience in applying accounting principles and internal control procedures, should not chair the supervisory board and should not be a former (less than two years ago) member of the management board (DCGK, 2017). The Netherlands adds the guideline that the chairperson of the audit committee should not be the same as the chairperson of the supervisory board and should not be held by a former member of the management board. The role of Dutch audit committees is extended by the responsibility of monitoring information and communication technology (MCCG, 2016).
The board structure of Finland and Sweden is set up differently. They are subject to the Nordic Corporate Governance Model characterized by a strict hierarchical chain of command from the general meeting of shareholders to the board of directors to the executive management team (Lekvall, 2014). Finland extends by recommending at least one independent member of the audit committee should have expertise in accounting, bookkeeping or auditing. In addition, the role of Finnish audit committee is extended by the responsibility to monitor financial, credit, tax and IT risks (SMA, 2015). Sweden follows the European Company Law and adds the possibility of the board of directors to fulfill the role of the audit committee (Swedish Corporate Governance Board, 2016).
Italy is an exception in this context, where a unique horizontal board structure is the dominant (EY, 2019). Here, the Collegio Sindacale, an equivalent body of other European audit committees, sits
alongside the board of directors (Comitato per la Corporate Governance, 2015). The Collegio Sindacale or board of statutory auditors is subject to strict rules. The members must be registered as a professional and must be independent, at least one member must be a certified public accountant, and the board must meet at least four times a year (CNDCEC, 2009).
This analysis shows that all countries in the sample have their own recommendations of configuring an audit committee. The expectation is that these differences will be reflected in the data. The question arises whether the function of the audit committee is comparable across the European countries.
Although, the composition of audit committees in the European countries are dominated by (soft) guidance rather than (hard) regulation, the corporate governance codes show a high degree of commonality (Mouthaan, 2007). Mouthaan (2007) concludes, based on almost a similar sample, that there exists a high degree of interrelation between the corporate governance codes and between EU directives and the corporate governance codes, because of their united European perspective.
Learning Effects
A unique character of this research is the opportunity of learning effects in the application of IFRS 15. This contains that organizations after their first-time application of IFRS 15 are improving their IFRS 15 disclosures in subsequent publications. The reviews of the financial statements by the financial regulators resulted in critical comments about the quality of IFRS 15 disclosures in the first-year of application (AFM, 2019; ESMA, 2019; FRC, 2019). This implies that organizations struggle with the practical implementation of a new reporting standard. Now, in the second year of application, the reviews of financial regulators, annual reports of industry peers and articles including best practices (AFM, 2018; Kuij-Groenberg & Pronk, 2019) are publicized providing guidance for organizations in how and where to improve their IFRS 15 disclosures.
There is limited existing research on the improvement of financial reporting over time attributable to learning effects. However, to point out that practitioners learn from IFRS application over the years, the research of Salewski et al. (2016) investigate the short-term and long-term effects of IFRS adoption on disclosure quality in Germany. They find a significant decrease in earnings management from the early-phase compared to the mature-phase of IFRS accounting which is attributable to the learning effects of preparers, users and auditors. This from the rationale that over time auditors and users become more experienced resulting in financial statements of higher quality. Additionally, the increased awareness of auditors and prepares, as well as the learning curve of enforcers contribute to the quality of financial statements (Salewski et al., 2016).
In short, reflecting on last year’s disclosures and the availability of best practices provide sufficient ground for organizations to improve current disclosures.
Agency Theory
The paper of Jensen and Meckling (1976) define an agency relationship as a contract between the principal and the agent, where the agent performs a service on behalf of the principal (the principal-agent relation in this context are the investors and the management). The principal delegates their decision-making authority. The problem arises when both parties (principal and agent) are both utility maximizers, leading to a misalignment between the interests of the principal and the agent.
Eisenhardt (1989) elaborates on this theory by identifying two situations of goal conflicts between the principal and the agent. The first situation arises from observable behavior, whereby the principal knows what the agent has done. The second situation arises when behavior is not observable, leading to two agency problems. The first problem is the lack of effort from the agent. The agent does not behave as agreed by the principal (moral hazard). The second problem occurs when the agent claims to have certain abilities or skills when he/she is hired. The principal is unable to verify these abilities (adverse selection). Consequently, the principal incurs certain costs to ensure that the behavior of the agent is consistent with the principal’s interests. As the agent does not bear the costs of making wrong decisions. These agency costs include incentives for appropriate behavior and costs incurred for monitoring an agent’s behavior (Fama and Jensen, 1983; Jensen and Meckling, 1976). An example of an important monitor of management’s behavior is the audit committee. As the majority of the audit committee members have to be independent of the organization, the committee has the ability to prevent opportunistic behavior by management (Beasley et al., 2009).
Furthermore, the quality of information has influence on the information asymmetry between the principal and the agent (Brown and Hillegeist, 2007). In the paper of Brown and Hillegeist (2007), they state that firms with higher disclosure quality are more likely to publicize material information about the organization reducing the information gap (information asymmetry) between informed and uninformed investors.
The agency theory intermingles with the primary objective of financial reporting, that is to provide decision-useful information to the users of the financial statements (IASB, 2010). As quality financial disclosure in terms of IFRS 15 Revenue from contracts with contracts is equivalent to decision-useful information, the more decision-decision-useful information available to investors the better they are in interpreting the financial statements. Disclosing quality financial information, in accordance with accounting standards and extending on these mandatory requirements are then meant to increase the decision-usefulness of the annual reports.
Elaborating on revenue recognition is relevant, especially in the construction industry. In this industry, where the recognition of revenue involves significant judgments at multiple moments (as aforementioned), the transparency about these judgments enhances the assessment of the nature, amount, timing and uncertainty of revenue. Consequently, these circumstances make the audit committee more instrumental, their monitoring role has the potential to enhance these financial disclosures. Important stakeholders, such as investors, contractors and the government, benefit from
these expanded disclosures. Revenue disclosure guide investors to the source of profitability and value generation (Wagenhofer, 2014). As for the government and contractors, they are better able to assess the continuity of the party they want to collaborate with. From this perspective, management has incentive to disclose high quality information, investors are better able to interpret the financial statements potentially leading to an increased stock price valuation and government and contractors may engage in a collaboration increasing revenue potential.
Signaling Theory
Extending on the agency theory, the signaling theory purports that management engages in the information provision by positively highlighting the organization’s excellent quality to their stakeholders, potentially reducing the information asymmetry between management and stakeholders (An et al., 2011). Organizations of high quality have an incentive to distinguish themselves from their industry peers that are of lower quality (for instance, increase demand for their stock instead of industry peers to increase firm value). Furthermore, if the investor is not able to see through the differences in quality, organizations of higher quality face an opportunity loss and organizations of lower quality face an opportunity gain. In order to reduce this kind of information asymmetry, voluntarily disclose information is a possible way to distinguish between high-quality and low-quality organizations.
The signaling theory contains three key elements, namely the signaler, the receiver and the signal itself (Conelly et al., 2011). The signaler is referred to as insiders who possess information about the organization (management) that is not available to outsiders. The receiver are outsiders with interest of the organization (investors) who lack information about the organization. The signal is the communication of private information (positive or negative) by the insiders to the outsiders of the organization. There are two important characteristics of the signal. The first characteristic is signal observability, which contains the ability of outsiders to notice the signal. The second characteristic is signal cost, this is the ability of a signaler to absorb the cost that comes with sending the desired signal (Conelly et al., 2011). Conelly et al. (2011) makes an important note that the signal must contain a strategic effect. This means that the signaler should benefit from an action by the receiver, because of sending the signal.
The signaling mechanism in the context of this research consists of the management of a construction organization (signaler), an (potential) investor of the construction organization (receiver) and the disclosure of revenue information (signal). High quality construction organizations have incentive to distinguish themselves from low quality construction organizations, because of the investment decision of an (potential) investor. Distinction in quality can be determined by means of profitability (Dainelli et al., 2013) or debt (Ross, 1977). In terms of the signal, the management of the construction organization has several possibilities. Positive signals, that are difficult to imitate, are for instance the disclosure of project-specific information. This project-specific information can be an update about the status of a project or provide very detailed information about significant changes in
contract balances. These signals or additional disclosures contribute to the disclosure quality of an organization.
III.
HYPOTHESES DEVELOPMENTThe audit committee is in a position to reduce the information asymmetry between managers and owners, as they fulfill the role of an independent oversight body within an organization. The audit committee has the ability to prevent opportunistic behavior of management and has the oversight of the financial reporting process, meaning that the audit committee has influence on (financial) information provided by the management and the credibility thereof. Placing this problem in the context of this research, an investor of a construction organization does not possess as much information related to revenue as the management, this leaves the opportunity for management to withhold certain important information (e.g. chances of significant revenue reversals, significant project setbacks, reduction in order backlog) that could be perceived as negative for the investor (agency problem). Regulation, such as IFRS 15, contributes to the transparency by mandating the disclosure of this important information (e.g. disclosure of contract balances, report remaining performance obligations). Moreover, the external auditor and the audit committee, including the interaction between the two bodies (Beasley et al., 2009), objectively assess the credibility of the financial information, ensure that appropriate judgments are made and ensure that material information for investors is included. This role of the audit committee is also emphasized by a public statement from the ESMA (2016), which includes the expectation that the audit committees will be involved in monitoring the quality of IFRS 15 implementation.
As the role of audit committee gains importance (FEE, 2016), the question arises, if the effectiveness and competence of audit committees may depend on their characteristics. This is explored by various research. Bajra and Čadez (2017) find that audit committee monitoring effectiveness and competencies are positively associated with financial reporting quality. Krishnan (2005) finds a negative association between internal control problems and the independence and financial expertise of audit committee members in a United States-sample. The research of Abbott et al. (2004) investigates the effect of audit committee structures on earnings restatements and find that certain structures negatively affect earnings restatements. Based on existing research, audit committee quality is proxied by the following characteristics (predicted relation on disclosure quality in the apprentices): the size of the audit committee (+), the number of independent members on the audit committee (+), the number of audit committee members with financial expertise (+), the meeting frequency of the audit committee (+), the gender diversity of the audit committee (+) and audit committee members with no other subcommittee positions (+).
Krishnan (2005) includes audit committee size as one of the proxies for audit committee quality. She follows SEC-legislation that require audit committees to consist of at least three members. The EU directive (2014) also speaks of audit committee members, implying that the audit committee has to consist of at least two members. Increasing the number of members on the audit committee means that
there are more members monitoring the financial reporting process, the better the financial reporting quality is safeguarded. As Klein (2002) fairly points out, the audit committee is a subset of the supervisory board, thus there are not unlimited resources to assign members to organizational committees. Meaning that it is unlikely that audit committees will be as large as boards and become dysfunctional (Yermack, 1996).
More members on the audit committees in this context, increases the opportunity to follow-up on issues and to diversify the committee on expertise and knowledge. Therefore, I hypothesize that the size of audit committee is positively related to the quality of IFRS 15 disclosure.
H1: The size of the audit committee is positively related to the quality of IFRS 15 disclosure.
Article 39 of the European Union directive (2014) states that a majority of the members of the audit committee must be independent of the organization. Existing research on the relation between audit committee characteristics and financial reporting quality indicate that the independence of audit committee members is a relevant indicator of audit committee quality (Abbott et al., 2004; Bajra and Čadez, 2017; Krishnan, 2005). Independent audit committee members are less likely to be influenced by management. Consequently, independent audit committee members are more likely to be unbiased in executing their responsibilities (Hayes, 2014). Additionally, in accordance with Klein’s (2002) line of thought, independent audit committee members are better able to monitor the financial reporting process. She finds that audit committee independence enhances financial reporting quality. As from an agency perspective, audit committee members that are not independent have an interest in an organization’s performance, this may interfere with their objectivity in assessing the quality of information disclosure. Hence, I hypothesize that the number of independent audit committee members is associated with a higher quality of IFRS 15 disclosure.
H2: The number of independent members is positively related to the quality of IFRS 15
disclosure.
Article 39 of the European Union directive (2014) also mentioned that an audit committee is required to have at least one member to have competence in accounting and/or auditing. One of the core responsibilities of the audit committee is to oversee the financial reporting process. Financial reporting concerns the highest level of technical detail, as a consequence, audit committee members who possess financial expertise are more effective in detecting inappropriate accounting and audit practices (Dhaliwal et al., 2010). This is substantiated by Krishnan (2005) and Abbott et al. (2204). Krishnan (2005) finds a negative association between the number of audit committee members with financial expertise and internal control problems. Abbott et al. (2004) find that audit committees with at least one
financial expert is negatively associated with financial restatements. Therefore, I predict that audit committee members with financial expertise is associated with the quality of financial reporting quality.
H3: The number of members with financial expertise is positively related to the quality of IFRS
15 disclosure.
Abbott et al. (2004) find that the meeting frequency of audit committees is negatively associated with financial restatements. Audit committees that meet more frequently have the potential to reduce the probability of financial restatements. First, the audit committee is better able to stay informed if there are more frequent meetings with the internal audit department. Second, they are better able to respond on a timely matter to accounting and auditing issues (Abbott et al., 2004). An effective audit committee meets on a regular basis in order to ensure the functioning of the financial reporting process. Moreover, audit committees that meet more frequently send the signal of being informed and vigilant (McMullen & Raghunandan, 1996). The expectation of ESMA (2016) is that IFRS 15 will be on the agendas of audit committees, given more audit committee meetings throughout the year, this gives the committee more time to discuss the topic and more time to evaluate issues regarding IFRS 15 disclosures. It is, therefore, plausible that audit committees meeting more frequently have more time to discuss and evaluate the financial disclosure, which benefits the quality of the financial disclosure. Resulting in the expectation that the meeting frequency of the audit committee is positively associated with the quality of IFRS 15 disclosure.
H4: The frequency of audit committee meetings is positively related to the quality of IFRS 15
disclosure.
Pucheta-Martínez et al. (2016) provide evidence from an agency perspective that gender diversity on the audit committees is of relevance for enhancing financial reporting quality. They find that the percentage of female members on the audit committee enhances financial reporting quality. Lai et al. (2017) mention the importance of gender diversity among board members (including audit committees) to the corporate governance function. Female board members have less tolerance for opportunistic behavior and respond differently than their male board members to similar situations. Female board members are more trustworthy, are less likely to take actions for their own benefit and have different risk preferences than their male counterparts (Heminway, 2007). As Hemingway (2007) exemplifies, female members are less likely to manipulate financial disclosure in order to reach compensation bonuses. Concluding that female members are better monitors, and with regard to the disclosure of financial information, they will watch out for external stakeholders more than their male counterparts. Hence, I predict that the percentage of female members on the audit committee is positively associated with the disclosure quality of IFRS 15.
H5: The gender diversity of the audit committee is positively related to the quality of IFRS 15
disclosure.
The last proposition entails the existence of a relation between members of the audit committee holding multiple board committee positions within the same organization and IFRS 15 disclosure quality. This is also referred to as common membership (Liao & Hsu, 2013), whereby, for example, a director serving on the audit committee is also a member of the nomination committee. To clarify, memberships of other organizations’ committees are not considered as common memberships in this research. From an agency perspective, common membership may lower the monitoring effectiveness of independent directors, because they might become overcommitted and neglect their role as monitor of management (Ferris et al., 2003). Additionally, directors serving on multiple committees within the organization have less time to spend on each committee (Ferris et al., 2003). Liao and Hsu (2013) find that common membership is associated with poor governance structures, arguing that common membership is not an effective monitoring scheme. They also find that firms with directors involved in common memberships have lower earnings quality. Therefore, I predict that audit committee members holding no other committee positions within the same organization has a positive effect on the disclosure quality of IFRS 15.
H6: Audit committee members with no other subcommittee positions within the same
organization is positively related to the quality of IFRS 15 disclosure.
IV.
METHODOLOGYA quantitative approach is used to gather data in order to answer the research question. The primary data source are annual reports publicized by the sample organizations. Due to specific data needs, most of the data is collected manually. The data is collected by four other student researchers under supervision, all from the Faculty of Economics and Business of the University of Groningen. The sample data is retrieved from Orbis. Table Ⅰ shows an overview and explanation of all the variables used in this research.
Sample
The dataset consisted of 37 construction companies listed on European stock exchanges. The 37 construction organizations are retrieved from the Orbis database based on active status and publicly traded on markets of European Union member states (including the UK). Organizations are considered a construction company when the organization are labeled 41 – Construction of Buildings, 42 – Civil Engineering or 43 – Specialised Construction Activities according to the NACE Rev. 2 classification
index (EC, 2008). These search criteria in Orbis led to a search result of 222 organizations, this sample was too large in order to analyze all the annual reports considering the timeframe. Therefore, 37 construction companies based on their revenue and the availability of their annual reports were selected. Because of their size, these construction companies have significant public relevance (e.g. infrastructure projects, people employed).2
Of these 37 construction companies, 63 annual reports were analyzed. The dataset contained the 2018 and 2019 annual reports retrieved from the investor relation webpages of the respective organization. A total of 11 annual reports were not included into the sample, due to either no publication or no IFRS 15 application (use of a different year-end). The specific sample period is determined to ensure that all organizations in the sample included the IFRS 15 accounting requirements. Annual reports of 2017 that included early adoption of IFRS 15 are not considered. In addition, we ensured that two annual reports of the same organization are included in the sample to be able to compare disclosure scores of the same organization between years. This with the underlying reasoning of potential learning effects of organizations that accumulated experience and knowledge with the reporting standard.
IFRS 15 Disclosure Quality
Organizations are awarded a score based on their IFRS 15 disclosure quality. The score is defined, first and fundamentally, by adhering to the disclosure requirement sections of IFRS 15. Second and complementary, the quality is determined by whether organizations provide useful information in addition to what is prescribed in the standard. Each section in the disclosure index is provided with guidance in the valuation of additional information (e.g. project-specific information, a qualitative explanation of a quantitative format).
A disclosure index is the appropriate research method to pinpoint the quality of IFRS 15 disclosures. The use of a disclosure index is a regularly applied method in accounting research and especially in the analysis of annual reports (Coy and Dixon, 2003). The method is appropriate under the circumstances of this research, as annual reports were used as the source of our data and IFRS 15 disclosure requirements were used as underlying benchmark. A disclosure index can include and can make a distinction between required disclosures and voluntary disclosures (Marston and Shrives, 1991). The data used to determine the quality of IFRS 15 disclosure are derived from the scores on the disclosure index. The items of the disclosure index are based on the disclosure requirements of IFRS 15 (IFRS 15.110-129).3
The disclosure quality of an organization (SCORE) is determined by the sum of points awarded for each section divided by the maximum possible score for the organization (maximum possible of points minus not applicable points). The scores are not weighted per organization and the points of all
2 Appendix Ⅱ includes an overview of the total sample.
sections are treated equally (unweighted), because the research concerned overall disclosure quality of IFRS 15. The validity of the disclosure index is achieved by giving meaning to scores (Marston and Shrives, 1991). Organizations are awarded based on an ordinal scale, they either are awarded 0, 1 or 2, meaning that ending up with a higher score stands for a higher disclosure quality.
The disclosure index was composed by four other student researchers with guidance from supervisors. We took a previous used disclosure index as starting point for our scoring table and tailored the index to ensure disclosure quality was recognized in the best way possible. As unweighted disclosure indices include subjectivity we incorporated several measures to increase the reliability of the results.
We started with preliminary discussions with the supervisors (who possess practical and theoretical knowledge of IFRS 15) about IFRS 15 to gain a basic understanding of the standard and how it is applied in practice. Next, we did numerous trail assessments of annual reports to catch discrepancies of individual ratings and interpretations. Meetings were in place to discuss the use of judgment and to align interpretation between different members in the group in order to formulate a consistent classification of information disclosure. The last measure included were peer reviews of scores of randomly selected annual reports to align interpretation differences ensuring consistency in the scores. In total 17 of the 63 annual reports are reviewed and discussed among the primary assessor and the reviewer. These ‘review scores’ are not added to the sample, but merely used for robustness purposes.
Audit Committee Quality
The audit committee quality is proxied by characteristics that have an effect on the financial reporting quality. The following independent variables are measured: audit committee size (ACSIZ), audit committee independence (ACIND), audit committee financial expertise (ACEXP), audit committee meeting frequency (ACMEE), gender diversity of the audit committee (ACDIV) and audit committee members with no subcommittees positions (ACSUB).4
The size of the audit committee (ACSIZ) is measured by the number of members on the audit committee for the year. Klein (2002) uses the same approach in measuring board size. In all of the annual reports all members of the audit committee are mentioned. In case of movements in audit committee positions; a member leaving the audit committee during the year who is not replaced is included in the size. A member leaving the audit committee during the year who is replaced is considered as one audit committee member (the characteristics of the member sitting the longest part of the year is considered). Additionally, employee representatives on the audit committee are excluded.
Audit committee independence (ACIND) is measured based on the number of members that are independent of the organization divided by the total audit committee members. Similarly, Krishnan (2005) uses the proportion of independent outside directors on the audit committee. In general, an audit committee member is considered independent if he/she has no relationship to the organization that can
influence his/her independence from management and organization (BRC, 1999). However, the independence requirement for audit committees in article 39 of the European Union directive (2014) is not specifically explained. Therefore, I rely on the definition of an independent director by the country-specific corporate governance codes. One flaw is the comparability of the definitions of independence across the European countries. Analyzing the corporate governance codes of the countries included in the sample, the definitions show a high degree of commonality (as determined in the theoretical section). Only Spain deviates by stating three rather general recommendations for independence, where the other countries include several requirements for independence. All organizations in the sample indicated if members of the board of directors or the audit committee were independent. All members indicated as independent by the organization are at least independent from the organization (in some cases independent both from the organization and management). They either explained this in the annual reports or the corporate governance reports.
The financial expertise of the audit committee (ACEXP) is measured by the number of members that have financial competence divided by the total audit committee members. Current research uses ranging definitions for financial expertise. Article 39 of the European Union directive (2014) requires at least one audit committee member to have competence in accounting and/or auditing. Certified Public Accountant is the highest level of accreditation in the auditing field and comes with a title. Therefore, I consider a member of the audit committee a financial expert, when he/she is or was certified as a professional accountant. This is substantiated by Krishnan (2005) and Abbott et al. (2004), in their research they classify an audit committee member with certified public accountant credentials as a member with financial expertise. To ensure consistency in the level of expertise, I follow the professional accountancy organizations per country conform the International Federation of Accountants (IFAC).5 All individual audit committee members were checked on certification credentials
in the registers of their country of origin (or otherwise stated).6 The source of these registers is from the
professional accountancy bodies applicable to that specific country. The following difficulties occurred during the process. I was unable to verify members in the French and Spanish registers and certified auditors outside the sample countries were not verified. In these cases, the corporate reports were
5https://www.ifac.org/who-we-are/membership
Austria: Wirtschaftsprüfer, Belgium Bedrijfsrevisor/Reviseur d‘Enterprises, Finland: Keskuskaupparakamin Hyväksymä Tilintarkastaja (KHT) for PIE, France: Commissaires aux Comptes, Germany: Wirtschaftsprüfer, Italy: Dottori Commercialisti (DC)/Esperti Contabili (EC), The Netherlands: Register Accountant (RA), Spain: Censor Jurado de Cuentas, Sweden: Auktoriserad Revisor (AR)/Ggodkänd Revisor (GR), United Kingdom: Chartered Accountant (ACCA/CA).
6 The following registers regarding auditor certification were used:
Austria: https://www.ksw.or.at/desktopdefault.aspx/tabid-90/, Belgium: https://www.ibr-ire.be/nl/openbaar-register/belgi/bedrijfsrevisoren and https://search.itaa.be/nl-nl, Finland:
https://epalvelut.prh.fi/tilintarkastajahaku/, France: Not publicly available (based on request), Germany:
https://caruso.idw.de/mverz.jsp, Ireland:
https://www.charteredaccountants.ie/Find-a-Firm/Firms-Directory?type=firm, Italy: https://commercialisti.it/iscritti, The Netherlands: https://www.nba.nl/register/, Scotland: https://www.icas.com/find-a-ca, Spain: No access, Sweden: https://www.far.se/medlem/sok-far-medlem/, United Kingdom: https://find.icaew.com/.
leading. There were three cases in which the corporate report indicated the member as an auditor, but certification in the register was absent. In these cases, the registers were leading.7
The meeting frequency (ACMEE) is determined by the number of meetings held by the audit committee in the reporting year. This independent variable consists of all meetings held by the audit committee including ordinary and extraordinary meetings. This corresponded with the measurements of Pucheta-Martínez et al. (2016). All organizations in the sample mentioned the number of audit committee meetings in either the annual report or the supplement corporate governance report.
The gender diversity of the audit committee (ACDIV) is measured by the number of female audit committee members divided by the total audit committee members. Pucheta-Martínez et al. (2016) use a similar approach to account for gender diversity on audit committees. All organizations in the sample mentioned the full name of the members of the audit committee in either the annual report or the supplement corporate governance report, the gender of the audit committee members is traced based on these reports.
Audit committee members with multiple positions on board committees within the same organization (ACSUB) is measured by a dummy variable. An audit committee consisting of members with no other committee positions is classified as 1 and an audit committee consisting of at least one member with another committee position is classified as 0. A dummy variable is used to separate the group audit committees with members holding other subcommittee positions from the group audit committees with members holding no other subcommittee positions. This is consistent with the way of measuring common membership in the research of Liao and Hsu (2013). More specifically, I look at the members of the audit committee and determine whether they hold within the same organization another board committee position. This means that it does not matter if one audit committee member holds one, two or more subcommittee positions, but the number of individual members with at least one additional subcommittee appointment. The number of subcommittees within one organization is dependent on the organization. The most common subcommittees next to the audit committees are the nomination committee and renumeration committee. The only requirement for a subcommittee is that it must be permanent for the year, taskforces or other ad hoc committees are excluded. All organizations in the sample shared their permanent board committees and their members in either the annual report or the supplement corporate governance report.
Control Variables
Five variables are used to control for unintentional influence on the disclosure quality of IFRS 15. Firm size (SIZE) is controlled for, because of the significant differences in size (in total assets) between the organizations in the sample. As mentioned in the theory, from a signaling perspective I control for profitability (PRFT) and leverage (LVRG). The sample contains organizations from ten
different European countries, therefore I control for country (CNTR) effects. Finally, I control for reporting year (YEAR), in order to separate year observations from the same organization.
Firm size (SIZE) is measured by a logarithm of total assets (full amount in €). Based on existing research, the effect of firm size on disclosure quality can be negative or positive and is therefore difficult to determine beforehand. On the one hand, larger firms tend to have stronger internal controls than smaller firms, which can be considered as an alternative monitoring mechanism (Klein, 2002). Therefore, a positive relation with financial reporting quality can be expected. On the other hand, larger firms are more likely to manage earnings to meet analysts’ expectations, therefore a negative relation with financial reporting quality can be expected (Bajra and Čadez, 2017).
Profitability (PRFT) is determined by net income (full amount in €) divided by total revenues (full amount in €). From a signaling perspective it seems plausible that organizations with a higher profitability have higher financial reporting quality (Dainelli et al., 2013). Therefore, I expect that profitability has a positive influence on IFRS 15 disclosure quality.
Leverage (LVRG) is defined by the total liabilities (full amount in €) divided by total assets (full amount in €). Firms with a higher leverage ratio are assumed to be riskier and as a consequence have an increased chance of receiving a qualified auditor’s opinion (Pucheta-Martínez et al. (2016). Additionally, the incentive to manage earnings is increased for organizations with a higher degree of leverage (Bajra and Čadez, 2017). Therefore, the expectation is that leverage is negatively related to IFRS 15 disclosure quality.
The next control variable is the country of the sample organization (CNTR). I distinguish country by their legal system. The legal systems are code law (Austria, Belgium, Finland, France, Germany, Italy, Netherlands, Spain, Sweden) and common law (United Kingdom) countries. I use a dummy value of 1 for organizations originated from common law countries and a value of 0 for organizations originated from code law countries. Investors are considerably better protected in common law countries in comparison to code law countries (La Porta et al., 1998). Ball et al. (2000) concluded that common law disclosure standards reduce the agency costs of monitoring managers. Therefore, I predict that organizations from common-law countries have higher disclosure quality scores.
The last control variable is the year-dummy for data from the corresponding year (YEAR). In order to control for year effects, I mark all data from 2018 as 0 and all data from 2019 as 1. The effects of disclosure score from a particular year is not predicted.
TABLE Ⅰ
Overview of Variables
Empirical Model
For predicting the dependent variable SCORE, I use the OLS regression method. To test the different hypotheses, I test each independent variable separately including the control variables in the various models. In the first model, I use the general model where the independent variables are excluded and only the control variables are tested. The equation below is the entire model (Model 8) which includes all independent and control variables.
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,"!56 + *'∗ !-.% + *(∗ 2$78 + *)∗ 94$: + *!*∗ "/8$ + *!!∗ ;%,$ + <
Dependent Variable SCORE Firm Score on IFRS 15 Disclosure Firm disclosure score divided by maximum applicable score (total maximum points minus points of not applicable sections)
Disclosure Index & Annual Report
ACSIZ Audit Committee Size Total number of members on the audit committee
Annual/Corporate Governance Report
ACIND Audit Committee Indepedence Proportion of independent members on the audit committee
Annual/Corporate Governance Report
ACEXP Financial Expertise Audit Committee Proportion of members with financial expertise on the audit committee
Annual/Corporate Governance Report & Register for Licensed Accountants
ACMEE Meeting Frequency Audit Committee Total number of audit committee meetings
Annual/Corporate Governance Report
ACDIV Gender Diversity Audit Committee Proportion of female members on the audit committee
Annual/Corporate Governance Report
ACSUB Audit Committee Members on Subcommittees Dummy variable; 1 for audit committees consisting of members with no other committee positions and 0 otherwise
Annual/Corporate Governance Report
SIZE Firm Size Logarithm of total assets Annual Report PRFT Profitability Net income divided by total
revenue
Annual Report LVRG Leverage Proportion of total liabilities divided
by total assets
Annual Report
CNTR Country Dummy variable; 1 for common
law countries and 0 for code law countries
Orbis
YEAR Year Dummy variable; 1 for 2019 data
and 0 for 2018 data
Annual Report Source Definition Independent Variables Control Variables Description
V.
RESULTS Descriptive StatisticsAiming for an understanding of the characteristics of the sample, this section covers the statistics of the sample. Table Ⅱ shows the distribution of the sample across Europe. For the data analyses, I recognize 2018 and 2019 data as separate observations (N=63) instead of company observations (e.g. 2018: N=34 and 2019 N=29) and choose, therefore, to distinguish year observations by including a dummy variable. This final sample is based on the availability of a disclosure score. The United Kingdom is higher represented due to their weight on the capital markets. Apparent in the table, there is no 2019 data available for Austria and Italy.
TABLE Ⅱ
Sample Distribution per Country
In Table Ⅲ the average disclosure score per country is presented. Notable are the small differences in average disclosure scores between the years. Next to that, the Nordic countries in our sample (Finland and Sweden) score on average relatively high on IFRS 15 disclosure quality. On average, Belgium scores the lowest in both years. Italy and Finland score on average the highest in 2018 and Spain scores on average the highest in 2019.
2018 2019 Austria 2 0 2 Belgium 2 2 4 Finland 2 2 4 France 4 3 7 Germany 2 2 4 Italy 1 0 1 Netherlands 4 4 8 Spain 5 2 7 Sweden 5 5 10 United Kingdom 7 9 16 34 29 63
TABLE Ⅲ
Average Disclosure Score per Country
In Table Ⅳ the audit committee statistics are presented. The table includes the averages of the audit committee characteristics across Europe. In line with expectation, Italy shows outliers in the collected data particularly in the financial expertise of the members and their meeting frequency. The reason for these outliers is that the board of statutory auditors is considered the audit committee. As aforementioned, the board of statutory auditors (Collegio Sindacale) is subject to strict regulations regarding their role, composition and responsibilities.
TABLE Ⅳ
Average Audit Committee Characteristics per Country
Table Ⅴ include the descriptive statistics of the dependent and independent variables. SCORE is the dependent variable representing the disclosure quality of IFRS 15. The lowest and highest disclosure given were respectively 0.26 and 0.75. Regarding these scores, we did not include a threshold score, because we scored based on information relevance and usefulness and not on compliance. Hence, the disclosure score does not reflect IFRS-compliance. In addition, no organization obtained the maximum score. The data is normally distributed and shows a representative overview of differences in
2018 2019 Austria 0,57 N/A 0,57 Belgium 0,39 0,41 0,40 Finland 0,58 0,56 0,57 France 0,45 0,49 0,47 Germany 0,53 0,51 0,52 Italy 0,58 N/A 0,58 Netherlands 0,52 0,52 0,52 Spain 0,49 0,66 0,54 Sweden 0,55 0,55 0,55 United Kingdom 0,47 0,48 0,48 0,50 0,51 0,51
Size Independence Financial Expertise Meeting Frequency Female Members Subcomittees
Austria 4 3 1 4 0 3 Belgium 4 3 0 4 2 2 Finland 4 3 0 6 1 1 France 4 3 0 5 2 2 Germany 4 2 1 6 2 1 Italy 3 3 3 20 1 0 Netherlands 3 3 1 4 0 2 Spain 4 3 0 7 1 3 Sweden 3 3 0 5 2 1 United Kingdom 4 4 1 4 2 4 4 3 1 5 1 2
disclosure quality between the organizations. Remarkable is the minimum proportion (0.25) of the audit committee independence (ACIND), where it is expected to be at least the majority of the members to be independent of the organization (>0.50). This is caused by Hochtief AG, a subsidiary of ACS Group, which has members on the board with business relations with ACS conflicting their independence. A minimum proportion of financial experts (ACEXP) of zero is acceptable, due to the strict definition I use for a financial expert. Moreover, in the sample, the size of the audit committee ranges from three to five members and the audit committees meet at least three times a year.
TABLE Ⅴ
Summary Statistics Dependent and Independent Variables
Table Ⅵ include the descriptive statistics of the control variables.
TABLE Ⅵ
Summary Statistics Control Variables
N Min. Max. Mean Std. Dev.
SCORE 63 0.26 0.75 0.508 0.106 ACSIZ 63 3 5 3.620 0.728 ACIND 63 0.25 1 0.863 0.199 ACEXP 63 0 1 0.164 0.202 ACMEE 63 3 20 5.050 2.517 ACDIV 63 0 0.75 0.390 0.236 ACSUB 63 0 1 0.170 0.383
N Min. Max. Mean Std. Dev.
SIZE 63 8.811 10.960 9.737 0.461
PRFT 63 -0.161 0.237 0.038 0.063
LVRG 63 0.249 1.314 0.689 0.191
CNTR 63 0 1 0.250 0.439
Best Practices
In addition to the inferences through statistical analyses, I include examples of organizations that applied distinct IFRS disclosures on certain sections by means of a normative analysis. In this section, I highlight best practices of IFRS 15 disclosure. Complementary, I provide insight in the judgments made in the scoring-process.8
Regarding the presentation and disclosure of contract balances (IFRS 15.116), I selected Hochtief AG and Vinci SA. Although, Hochtief is not identified as a best practice in terms of quantitative presentation of the contract balances, they did include project-specific information related to a significant amount of contract assets. With this explanation Hochtief provides insight about the entitlements under the contract, which can be useful for the readers of the financial statements in assessing future revenue streams. Therefore, a point is awarded for the additional voluntary elaboration. Vinci SA is selected as a best practice in the presentation of the contract balances, because they separated the contract balances by business segment. Additionally, they included a categorization of changes related to these contract balances. This is useful for the readers of the financial statements to assess the financial position of an organization’s important business segments. This section is awarded the maximum score of two points.
Regarding the presentation and disclosure of the remaining performance obligation (15.119), I selected Balfour Beatty PLC as a best practice. For reference purposes, I included the disclosure of remaining performance obligation of VolkerWessels NV. There is a clear distinction between the organizations in how they decide to disclose this information. Balfour Beatty decided to quantitively disclose their remaining performance obligations by business segment and gave a more detailed expectation of satisfaction. In comparison, VolkerWessels decided to disclose their remaining performance obligations qualitatively, and gave a broad estimation of the satisfaction of the performance obligations. The disclosure of Balfour Beatty shows a better representation of the timing in satisfying performance obligations across the business segments and is awarded the maximum score of two points. Whereas, VolkerWessels, which is more secretive, is awarded one point for their disclosure.
Learning Effects
Another part of this research is the possibility of learning effects in disclosing IFRS 15 information. As it is statistically difficult to substantiate these learning effects, I include examples of organizations that show a substantial improvement of IFRS 15 disclosure in the 2019 annual report compared to the 2018 annual report based on a normative analysis. In order to execute this normative analysis, during the process of assessing disclosure quality, we assessed the 2018 as well as the 2019 annual report of the same organization simultaneously. This way we were able to identify differences of disclosures between years.
