Post-Application Model

The important elements of an organization‟s accountability and responsibility for disclosure are based today on the quality of the information released by the accounting practices, policies and procedures of the organization in the stewardship/accountability report. This could be corporate, social or public sector, and how stakeholders and stockholders judge the information contained in the reports. The orgaisation‟s accountability and responsibility for preparing financial statements are explained by the accounting practices, policies and procedures followed in producing the stewardship/accountability reports. The requirements are contained in the SAS and IAS‟s requirements for preparing and presenting financial statements to aid users in making informed decisions.

The requirements demand that financial statements are prepared and presented for external users by entities and provided guidelines on the structure (form) and contents of these financial statements, to ensure comparability with other entity‟s financial statements.

These include the components of the financial statements that together would be considered a complete set of financial statements for a variety of uses depending on the circumstances (Greuning, Scott, & Terblanche, 2010).

In preparing the revised common requirements, two set of conceptual frameworks- the stewardship/ accountability and the resource allocation decision usefulness objectives financial statements were contemplated by the IASB and FASB (IASB, 2006). The stewardship/ accountability objective financial statements stated that shareholders, in their capacity as owners of the business, make decisions other than to buy, sell or hold (IASB, 2006). The other decisions include a consideration of whether they, as owners of the business, need to intervene in its management. The shareholders look at financial reporting to

access information relating to management‟s stewardship of the business (IASB, 2006). The IASB (2011) makes the point that:

It is obvious from the preparers‟ comments that management is keen to communicate to the investors by means of financial reporting. For them, it is the means by which they make the agency relationship work and ensure ongoing communication with the investors in the company. GAAP provides a language for communication with investors that is mutually understood and its use in producing financial reports means that the information provided therein is unambiguous and has credibility as well as being seen as independently verified during the audit process (p. 32).

Worthy of note also is the fact that the converged conceptual framework specifies only one objective of financial reporting, that is “…being the provision of information that is useful to users in making investment, credit and similar resource allocation decisions” (IASB, 2006, p.

41), the resource allocation decision-usefulness objective. The IASB (2006) discussion paper argued that this objective encompasses providing information useful in assessing management‟s Stewardship.

However, the majority of opinions of respondents to the discussion paper pointed to the fact that the stewardship objective is information that provides a foundation for a constructive dialogue between management and investors. The respondents elaborated that stewardship is inherently linked to agency theory. If owners assigned stewardship of their company to management, they would want to oversee management behaviour to ensure that:

i. It is aligned to the owners‟ objectives;

ii. Management are devising strategies aimed at making the best use of company assets;

and

iii. No misappropriation of the company assets takes place (Lennard, 2006).

Lennard (2006) further asserted that the owners would attempt to ensure alignment to their objectives by monitoring the company against some criteria, such as the increase in profits and net assets over the year (s).

Eisenhardt (1989) argued that the main focus of agency theory is where there is a conflict between owners and management. Agency theory is concerned with resolving two problems that can occur in an agency relationship. The first problem arises when:

(a) The desires or goals of the principal and agent conflict and

(b) It is difficult or expensive for the principal to verify what the agent is actually doing (Eisenhardt, 1989).

This means that the principal anticipated misbehaviour but cannot verify that the agent has behaved appropriately or inappropriately. The second problem is that of risk sharing. That is when the principal and the agent have different attitudes towards risk and therefore prefer different actions (Eisenhardt, 1989).

In addition, respondents to the discussion paper complained that if the objectives of stewardship/ accountability and the resource allocation decision-usefulness in the framework are separated, there would be in use a variety of definitions of the elements of financial statements. One definition would be to meet the stewardship objective and another would be to meet the resource allocation decision usefulness objective (IASB, 2006). This circumstance would also result in the use of different criteria for recognition and measurement of items in the financial statements and a preference for different bases of measurement to satisfy each of the objectives (IASB, 2006). This action would have serious consequences on the scope of the financial statements and the disclosures made in them.

Therefore, the IASB (2011) stated that the interest of the convergence framework is to

narrow these differences by harmonizing the regulations, accounting standards and procedures relating to the preparation and presentation of financial statements (IASB, 2011).

Thus in Nigeria SAS 2 specifies that the financial statements of an enterprise should state among the following:

i) Statement of accounting policies.

ii) Balance sheet, Profit and loss account or income statement.

iii) Notes to the accounts.

iv) Statement of cash flows.

v) Value added statement.

vi) Five-year financial statements, was changed with the introduction of IFRS and the revised IAS; was changed to IAS 1: Presentation of Financial Statements.

The revised IAS stated that financial statements are a structured representation of the financial position and financial performance of an entity. The complete set of financial statements under IAS 1 comprises:

i. A statement of financial position as at the end of the period.

ii. A statement of comprehensive income for the period.

iii. A statement of changes in equity for the period.

iv. A statement of cash flows for the period.

v. Notes, comprising a summary of significant accounting policies and other explanatory information, and

vi. A statement of financial position as at the beginning of the earliest comparative period; when an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements or when it reclassified items in its financial statements.

These set of financial statements meet the two objectives of stewardship/accountability and the resource allocation decision usefulness advocated making financial statements useful to all users. Greuning, et al., (2010) stated that:

Financial statements also show the results of management‟s stewardship of the resources entrusted to it. This information, along with other information in the notes to the financial statements, provides users of financial statements with information about the amount, timing and uncertainty of the entity‟s future cash flows in order that they can make economic decisions. In order to meet this objective, financial statements contain information about-

i. assets;

ii. liabilities;

iii. equity;

iv. income and expenses, including gains and losses;

v, contributions by and distributions to owners in their capacity as owners; and vi. cash flows (P. 4)

2.5.1 Delegation and Disclosure

Delegation is the assignment of responsibility or authority to another person (normally from a manager to a subordinate) to carry out specific activities (Angst &

Borowiecki, 2013). It is one of the core concepts of management leadership. However, the person who delegates the work remains accountable for the outcome of the delegated work (Finacial Regulations, 2009). Delegation is a corporate governance element and Agency theory offers assistance in understanding the complex motivations of managers under delegated authority from the board, towards compliance with accounting standards in financial reporting (Hendriksen & van Breda, 2001). Agency theory concerns with resolving

the problems that can occur in agency relationships (Jensen & Meckling, 1976). They argued that the agency relationship is a contract under which the board of the organization (principal) engages the managers (agent) to perform some services on their behalf. Under this arrangement, the board delegates some decision making authority to the managers.

However, both parties are utility maximizers, with varying philosophies and this could result in divergent and misaligned interest between them. For example, the board would want to maximize net present value of the firm to impress shareholders that they are indeed discharging their duties as expected; while the managers would want to maximize their own utility of which income is part of it. In most cases, managers will not always act in the best interests of the board. Managers could hide some information for selfish purpose by not disclosing important facts about the organization in the report prepared for them, if the implication of such disclosure will hurt their interest (Barako, Hancock & Izan, 2006). The board faces moral dilemma because most times they cannot ascertain or evaluate the calculations and valuations included in the financial reports.

This conflict of interest can only be resolved by board threatening to remove the management (Al-Shammari, 2005) by withdrawing the delegated authority or by some form of sanctions, such as changing the management. Management naturally would not want to lose the powers or delegated authority confers on them by the board and so tries to discharge its own responsibility of disclosing in full all relevant information more than the management would have preferred, if the authority they enjoy is not delegated to them by the board. This means that delegation increases disclosure in financial reports of items the board are perceived to be interested in, for the fear that the board may change the management.

2.5.2 Legitimacy and Corporate Disclosure

Suchman (1995) defined legitimacy as “a generalized perception or assumption that the actions of an entity are desirable, proper, or appropriate within some socially constructed system of norms, values, beliefs, and definitions” (p. 574). In the conception of this study, legitimacy theory has the role of explaining the behaviour of management towards mandatory disclosures of information in order to fulfil the conditions under their contract with owners, which helps in the recognition of the objectives and the survival of the firm in the turbulent business environment.

In addition, under legitimacy theory, social perceptions of the organization‟s activities are reported in accordance with the expectations of society and the stakeholders. In such a situation, the organization‟s activities are expected to align with the existing obligations, social and moral values. If it fails to do so the organization would be severely sanctioned by society.

The managers are hired to run the enterprise on behalf of the owners to provide products and services under existing obligations in the society. Under legitimacy theory, they have the authority, power and autonomy to discharge their duties efficiently and effectively within the confine of their authority and to report all the details to the owners who assigned the responsibilities to them unhindered (Jensing & Meckling, 1976). Where this duty is not discharged as expected, managers stand the chance of losing that legitimacy confers on them by the owners. Therefore, because managers do not want to lose that legitimacy, they try to disclose relevant information to the owners as required by law to prevent the owners from taking actions that would be unpleasant to the management.