The Accountant's Perception of the Usefulness of Financial Information in Decision Making--A Study in Portugal.
| Autor | Liborio Morais Cepeda, Catarina |
1 Introduction
Accounting was born with the evolution of civilization, and its progress coincides with that of human beings (Sa, 1998). In the last decades, there have been significant changes in accounting and many countries have developed their own accounting standards based on the International Accounting Standards Board (IASB) or the Financial Accounting Standards Board (FASB) (Boolaky, 2006). The IASB and the FASB indicate that the qualitative characteristics of a conceptual framework are the attributes that make the information useful to users (Christensen, 2010). With its development, accounting has become an important source of financial information (FI), and with the progress of economic activity, it has come to be seen as an essential tool to support management (Schwartz, 2016). However, the "practitioner's views on the relationship between strategic management and financial accounting have endured changes over time, but no consensus on this issue has been reached so far" (Mihaylova & Papazov, 2018, p. 24). Ozturk and Ozcelik (2014) maintain that the FI produced through accounting is thus a fundamental tool for the development of business activities, since it can assist the various FI users in decision making.
According to Akhtar and Liu (2018), financial statements (FSs) contain important information for making financial decisions. Hence, information available for internal purposes can be highly relevant for external FS users as well (Eierle & Schultze, 2013). There are several types of FI, and each stakeholder assigns them different levels of usefulness. According to Macve (2010), there are two distinct functions of FSs, namely providing useful information for investment decisions and providing control information for monitoring and rewarding managers. Eierle and Schultze (2013, p. 158) argue that "in the absence of agency conflicts, accounting largely serves the information needs of managerial owners" and from this perspective it is possible to identify two central qualitative characteristics that make accounting information useful, namely predictive ability and feedback value. The authors also point out that the usefulness of FI in this configuration is broadly derived from the feedback value of information and performance measured on an ongoing basis, with the objective of providing timely information for management as a basis for corrective action.
For Auken, Ascigil and Carraher (2014), FSs, which are a structured representation of an entity's financial position, performance and changes in financial position, provide important information for assessing the impacts of various factors on previous or future decisions, such as liquidity, financing needs, and risk factors. The FI's utility has a positive relationship with the company's performance and survival (Amoako, 2013), and today, to overcome economic instability, it is necessary to analyse past FI to predict future risks (Mom, Fourne & Jansen, 2015). This leads to the conclusion that FI-based management can determine a company's success (Amoako, 2013).
Given the above and the importance of FI in companies' performance, the objective of this study is to determine whether a manager's individual characteristics (gender, company owner, academic qualifications and management skills) and the characteristics of the company in which the manager works (size, applicable accounting standards, performance and seniority) have an impact on the usefulness of the FI. For this analysis, it is possible to develop and evaluate a theoretical model that allows this investigation to achieve its objectives.
This paper is structured as follows. In the next section, we address the conceptual background of the study that allowed us to develop the proposed research model and hypotheses. Next, we present the methodology and empirical study. The final section covers the discussion and conclusions, which include the limitations of the study and directions for future research.
2 Literature Review and Hypotheses Development
According to Cvetkoska (2016, p. 350), organizational managers are decision makers and "making the right decision leads to the organization's success, whereas wrong decisions lead to failure, and in the worst case, to disintegration of the organization".
Decision making is a logical thought process conducted in an organizational environment by a person with legitimate decision-making power, who, with the help of specialized parties, seeks to prepare, manage, implement and control a given decision (Gencia, Sandu, Puscas & Mates, 2016). It is not always easy to control this, because making decisions quickly can be dangerous and delaying for too long can mean lost opportunities (Saaty, 1996). To make a good decision, it is necessary to respect the decision process, which involves the recognition and evaluation of problems, strategy selection, information processing, strategy implementation and finally decision making (Akdere, 2011). In the decision-making process, according to Culp (2016), there must be more than one option, enabling the manager to choose between several alternatives. However, before making the decision, the manager must anticipate the possible outcomes and analyse the extent to which they achieve the desired goal. In fact, Akhtar and Liu (2018, p. 390) indicate that the benefits of using FSs in decision making are obvious and that FSs "should be utilized by the outside evaluators and inside firm, to guide better decisions". In this context, Florin (2014) indicates that accounting is an indispensable tool in the management of an entity and is decisive in the decision-making process.
With the evolution of society, accounting has become a useful tool in decision making but this has not always been the case. For a long time, the market and companies only used accounting to fulfil tax obligations and did not take advantage of its utility (Filzen & Peterson, 2015). Currently, FI is useful for different stakeholders (current and potential investors, employees, lenders, suppliers, customers and the state). They use FI to meet some of their different information needs (Gencia et al., 2016), which is largely due to the changes made by the IASB and the FASB in the last few decades.
In the accounting literature, there are several theories. The best known are agency theory, positive accounting theory, and decision-usefulness theory. Matsumura and Shin (2005, p. 102) state that according to agency theory, "managers (executives) who are not also owners are shareholders' agents and will not necessarily act in shareholders' best interests" and that they "are assumed to choose actions to maximize their own expected utility". Watts and Zimmerman (1978) indicate that it is important to keep in mind the motivations of managers because they contribute to the determination of accounting standards. These authors point out that "a precondition of a positive theory of standard-setting is understanding management's incentives" (Watts & Zimmerman, 1978, 113). However, for Eierle and Schultze (2013), the incentive effect of FI and its implications for information that is useful for economic decision making by external investors has not yet been given special consideration by accounting standard setters. The decision-usefulness theory is related with accounting standards that provide useful FI to users in their decision processes (Dandago & Hassan, 2013). Although decision-usefulness has been adopted by the IASB and the FASB, which have defined qualitative characteristics that make information useful to the various users (Christensen, 2010), they have been subject to criticism. In this context, Eierle and Schultz (2013) point out that there are qualitative characteristics that overlap, which makes it difficult to identify the economic phenomenon that is most relevant for decision making and that can simultaneously be represented in a trustworthy way.
According to Gencia et al. (2016), FI is the basic source of intelligence that affects the behaviour of users (internal and external) when dealing with an economic entity, and it is provided through a reporting system in which the descriptive value influences the decision maker regarding a particular action.
Bondt and Thaler (1995) maintain that FI is valued by managers and is fundamental to the decision-making process. In addition, Amoako (2013) emphasizes that FI analysis allows managers to obtain accurate information on which to base their decisions. Frydman and Camerer (2016) argue that financial decisions are the most important ones that an organization will make. The same authors point out that, in these decisions, FI is necessary for managers to be able to determine profits or losses and assets and liabilities (among others) at any given moment. Amoako (2013) states that the utility of the FI (attributed by the manager) thus has a positive relationship with the performance and survival of the company. Moreover, according to the same author, a lack of accounting records can lead to the closure of some companies and therefore poses a significant problem for business success.
For good decision making, a manager needs complete, adequate and up-to-date FI, which in most companies is not available, making decision making risky (Culp, 2016). The majority of Small and Medium-sized Enterprises (SMEs) do not survive beyond the first few months of existence, which is partly due to the lack of FI and sound management of their financial situation (Amoako, 2013).
Mukhametzyanov and Nugaev (2016) state that the main objective of using FI is to reduce uncertainty in decision making and that economic analysis and reliable decision making are only possible if there is useful information about the company's activity. Managers tend to use different kind of FSs, but the question is how the managers of companies use FSs in economic decision making (Macve, 2010). FS analysis represents an intermediate step between the FI...
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