Opening the “black box”
How internal reporting systems contribute to
the quality of financial disclosure
Florence Cave
´
lius
ESSEC Business School, Cergy, France
Abstract
Purpose – Institutional investors use the information disclosed by listed companies to analyze the
performance of their investments. The purpose of this paper is to open the “black box” of the
construction of financial disclosure by analyzing the internal reporting systems of firms with reference
to the information disclosed.
Design/methodology/approach – Using indexes, the quality of the financial disclosure and
the internal reporting systems are measured, and analyzed with a view to finding some links
between them. It is expected that the quality of disclosure is dependent on the quality of the internal
reporting.
Findings – Complex interactions between internal reporting and financial disclosure are revealed,
which leads to the identification of a typology of practices. The dependence of the relationship may be
troubled by the willingness of the firm to communicate, or by the internal methods of control.
According to the various cases, different levels of usefulness of the information for the investor are
expected.
Originality/value – This paper is a first attempt to analyse information disclosed by firms with
regards to the internal information at their disposal.
Keywords Financial reporting, Disclosure, Financial communication, Quality of information,
Public and private disclosure, Indexes
Paper type Research paper
1. Introduction
Institutional investors use the information disclosed by listed companies to understand
the strategic and operational key factors explaining their performance (Eccles et al.,
2001). This information has to possess a number of features or qualities that are
essential to investors in order to ensure its usefulness.
Following the accounting harmonization in Europe, in 2005, which requires all EU-
listed companies to adopt international accounting standards (IAS/IFRS), commission
regulations must assess whether the application of accounting standards in financial
statements offers a true and fair view of the financial position and performance of a
company. The commission must check whether the financial information meet the
criteria of “understandability, relevance, reliability and comparability” in order to make
economic decisions and assess the stewardship of management (Article 3, Regulation
No. 1606/2002). In fact, these requirements have been laid out by international
regulations (IASB, 1111, IAS1) in terms of the following criteria: representativeness
or fair view (the information accurately reflects the economic reality of the company),
substance over form, reliability (the information is exempt from fault or error),
relevance (it allows the investors to make decisions) including timeliness or
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/0967-5426.htm
Journal of Applied Accounting
Research
Vol. 12 No. 3, 2011
pp. 187-211
r Emerald Group Publishing Limited
0967-5426
DOI 10.1108/09675421111187665
The author would like to thank the two anonymous reviewers and the participants of the 30th
Annual Congress of the Association Francophone de Comptabilite
´
(AFC) for their helpful
comments on an earlier version of the paper.
187
Opening the
“black box”