The Adequacy of Accounting Mandatory Disclosure under the Global Financial Crisis. A Field Study in Jordan

Al. Zoubi, Ali. A.; Al. Zoubi, Naser. Y. Article The Adequacy of Accounting Mandatory Disclosure under the Global Financial Crisis. A Field Study in Jordan Journal of Accounting and Management Information Systems (JAMIS) Provided in Cooperation with: The Bucharest University of Economic Studies Suggested Citation: Al. Zoubi, Ali. A.; Al. Zoubi, Naser. Y. (2012) : The Adequacy of Accounting Mandatory Disclosure under the Global Financial Crisis. A Field Study in Jordan, Journal of Accounting and Management Information Systems (JAMIS), ISSN 2559-6004, Bucharest University of Economic Studies, Bucharest, Vol. 11, Iss. 3, pp. 424-441 This Version is available at: https://hdl.handle.net/10419/310500 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. http://creativecommons.org/licenses/by/4.0/ Accounting and Management Information Systems Vol. 11, No. 3, pp. 424–441, 2012 THE ADEQUACY OF ACCOUNTING MANDATORY DISCLOSURE UNDER THE GLOBAL FINANCIAL CRISIS. A FIELD STUDY IN JORDAN Ali. A. AL. ZOUBI 1 Private National University of Ajloun, Jordan Naser. Y. AL. ZOUBI Private University of Irbid, Jordan ABSTRACT This research attempts to explore accounting academics and investors’ perception on the adequacy of the quality and quantity of disclosed information by Jordanian public shareholding companies listed on the Amman Stock Exchange (ASE). Jordanian Securities Depositary Center (JSDC) requires the public companies to follow IAS/IFRS to prepare their financial statements and its discloser requirements. To achieve the abovementioned objectives, a questionnaire was developed and distributed to a sample of accounting academics in the Jordanian universities and investors in the (ASE).180 questionnaires were distributed, ultimately 125 validquestionnaires were received from both groups. This paper used means, standard deviation, ANOVA, and t test to describe the respondents’ perception on this research questions. The results revealed that there is an agreement among respondents regarding the adequacy of quality of disclosure in the financial reporting of Jordanian public shareholding companies under the circumstances of the global financial crisis. Furthermore, the results showed that the investors perceived the quantity of accounting disclosure as inadequate surrounding circumstances of the global financial crisis. On the other hand, accounting academics perceived the quantity of disclosed information as sufficient. This study recommends that there is a need to consider quantities of disclosed information to meet the requirements of investors. Accounting discloser, quality of accounting, disclosers adequacy, global financial crisis 1 Corresponding address: Ali. A. AL. ZOUBI, Accounting Department, College of Business Administration, Ajloun National Private National University, PO Box 43, Ajloun-26810, Hashemite Kingdom of Jordan; Tel: 00962788114658; Email: d[email protected]  The adequacy of accounting mandatory disclosure under the global financial crisis. A field study in Jordan Vol. 11, No. 3 425 INTRODUCTION The international financial crises emerged in the USA during 20072008 and later expanded to the other world countries, made the investors distrustful in the global and local economies. Thus, the role of accounting bodies such as IAS/IFRS and FASB is to regain the investors trust. This can be done by obligating public companies to disclose important and sufficient information that help financial statements’ users in their decisions making. Currently, there is a global tendency to adopt IFRS as standard setters. For example, there is a joint project between FASB and IAS to unify the standards under IFRS and apply these standards in the USA and other countries that follow IAS/IFRS at the same time to avoid differences among standers requirements. Jordan is following IAS/IFRS standards since 1997, when Amman Financial Market Joined the International Organization of Securities Commissions (IOSCO) which require members to follow IAS/IFRS. Jordanian economy has been affected by global financial crises directly and indirectly. The crisis effect was easily noticed with a negative impact on the economy as a result of external and internal negative economic factors, with a decline in the financial and real estate markets in Jordan. This was consistent with official data declaring that the volume of trading in the real estate market in Jordan has declined during the first two months of 2009 by (34%) to 577 million Jordanian Dinars against 879 million Jordanian Dinars during the same period in 2008 (Alrai, 2009). The effect of the financial crises in Jordan was different from other countries due to open and free market economy policies, and also because of the dependence on foreign aids to finance the budget deficit. So the impact of this crisis is more severe for emerging markets particularly the financial sectors and stock market. The share prices had started to decline during the last quarter of 2008 and (- 17%) continued to decline in 2009 (- 11.6%),followed by decreasing in GDP growth rate and an increase in the budget deficit in Jordan which led government expanding borrowing as well as a decline in remittances from Jordanians residence abroad. Also a significant decline in export volumes Potash, Fertilizer, Cloths, Pharmaceutical products and Vegetables, furthermore, adversely affected the Jordanian industrial sector because of its reliance on imported petroleum products which have experienced a successive rise during and after the Crisis (Ministry of Finance, 2010). Mehyaoui (2010) highlighted the impact of the financial crises on stock prices in Jordan. The study has shown a potential for extraordinary returns in Amman Stock Exchange (ASE) during the crisis which caused a panic amongst investors resulted in a wave of sell-offs, notwithstanding a series of actions taken by Central Bank of Jordan in order to maintain a stability of the Jordanian currency. Nonetheless, the Securities Exchange Commission (SEC) should have taken precaution steps in Accounting and Management Information Systems Vol. 11, No. 3 426 order to maintain the small investors in the stock market and introduce a set of regulations and procedures related to the disclosure requirements in financial reporting to ensure providing the necessary information to small investors and enhance their ability to make a rational financial and investment decisions. Due to the impact of the global financial crisis in Jordan, analytical descriptive approach used to investigate whether the required accounting disclosure contained in the periodic financial reports are sufficient in quantity and quality, and whether disclosed information will enable investors to make the sound decisions. 1. PROBLEM STATEMENT This study is motivated by the absence of empirical evidence on the adequacy of quality and quantity of disclosed information in financial reporting in Jordan. Hence, the Jordanian economy is still suffering from the consequences of the global financial crises. Studying the adequacy of current accounting disclosure policies may be important to motivate professional and government committees to reconsider their accounting disclosure applications to provoke investors to reinvest in stock markets. The researchers try to combine the different academic perspectives, such as university academics, theorist and scholars in accounting and investors as beneficiaries and users for this information in light of the current financial crisis. Although the study provides a contribution to the academic research especially in Jordan due to the lack of relative studies regarding the effects of global financial crisis on accounting disclosure, and presents some information for the regulators of accounting profession in Jordan. These information are helpful to reform and develop the structure of disclosure in financial reports and to follow up decision maker needs, worthwhile it is the first applied study which examines the relevance of the global financial crisis with accounting disclosure requirements in Jordan. Nonetheless, there were no trends among financial securities authorities to demand listed companies in (ASE) for more disclosure enabling investors to make a comparison between the management of different companies and to assess their organizational performances during the global financial crisis. Does this mean that the current accounting disclosures are adequate? Accordingly the problem of the study may be stated in the following questions: 1.1 Is the quantity of current accounting disclosure (represented in the form of financial reports by the Jordanian companies) adequate under the present international financial crisis? 1.2 Is the quality of current accounting disclosure (represented in the form of financial reports by the Jordanian companies) adequate under the international financial crisis? The adequacy of accounting mandatory disclosure under the global financial crisis. A field study in Jordan Vol. 11, No. 3 427 2. OBJECTIVES OF THE STUDY This study aims to identify the needs for improving the mandatory accounting disclosure, either the one issued by the Jordanian Securities Depositary Center (JSDC) or the one issued based on the international accounting standards and financial reports preparation. The objectives of the study may be summarized in the following: 2.1 Identifying the adequacy of current accounting disclosure quantity provided in periodical financial reports issued by Jordanian listed companies in order to serve investors and decision makers’ purposes, in light of the current financial crisis. 2.2 Identifying users' level of satisfaction concerning the nature and quality of the disclosed financial information in the financial reports issued by Jordanian listed companies and their adequacy for the decision making process. 3. PREVIOUS LITERATURE Following the recent financial crisis, studies were conducted for a thorough understanding to define the aspects, characteristics, and dimensions of Global Financial Crisis (GFC). For example, Al-Mananseer & Al Kassasbeh (2009) explored the reasons and the roots of the international financial crisis, early emergence, stages and causes, identifying its effects on the international economy in general, and the Jordanian economy in particular. Their most important results were that the international financial crisis emerged as a result of accumulated errors in the financial policies and the bases of the capitalist financial systems applied by the United States of America. Irresponsible debt policies targeting both individuals and organizations led to major gaps in the assets and financial products markets. The authors recommended more firmness towards all stakeholders responsible of the emergence of the international financial crisis and more attention and supervision towards the stock markets. Al-Emam (2009) studied the relationship between institutional investment via the creation of a cognitive construct linking all aspects of the financial crisis with the institutional investment in the stock markets, analyzed the mechanisms for avoiding financial crisis by focusing on institutional investors by the role they play. Results of the study revealed that the international financial crisis emerges as results of the complicated and unique financial structures found in the different institutions. Hellwing (2009) analyzed the causes of the international financial crisis by examining the role of mortgage in the specifications of real estate investment risks and how the United States of America failed in fulfilling this role. A second aim of the study was to investigate the devastating dangers resulting from the financial crisis due to its negative effects and the pressures put on the prices of Accounting and Management Information Systems Vol. 11, No. 3 428 securities. Hellwing's study referred to all the negative effects of the modifications occurring in the financial system and its deficiencies, which led to disenabling the market interactions, leading to deficiencies in the role of fair value and the role of capital in the financial institutions. The study concluded that the cause of such deficiencies is a result of bad decisions and of the problems of the financial system inefficiency; all of this needs organizational reforms, effective supervision and absolute transparency. However, many studies focus on the global financial crisis and accounting profession, such as a study by Saloum & Nouri (2009). This study emphasized the urgent need for unified applicable international accounting standards in different countries to help investors make the most effective decisions in light of the international financial crisis and the role of the international accounting standards in the emergence of the international financial crisis. A significant result was that there were no relationships between the emergence of the global financial crisis and the applicable accounting standards.Al-Baseeri (2009) examined the role of auditors in light of the international financial crisis to identify their internal and external role in the economic facilities and the quality of information provided in financial lists. His study revealed that there was no commitment by auditors towards the need for financial reporting, which in turn contributed in the overcoming of the financial international crisis, and there were gaps in the work of auditing offices, and some problems relating to their independency which contributed to the emergence of the international financial crisis. The researcher recommended unifying the international accounting standards and developing them to control the work of auditors and ensuring their independency. Bhimani (2008) highlighted the need for reformulation of accounting in the United States as a result of the financial crisis encountered and in light of the changes in the American markets and the trends of several companies to abandon the American markets and change their activities overseas. There were increasing demands to abandon the American accounting standards and return to the international accounting principles. On the other hand, the study reviewed the attractiveness of the international accounting principles and the agreement of the different countries worldwide upon them, including the United States of America, particularly during instability periods in the preparation of financial reports (20012002). The study concluded with the need for reconsidering the adoption of the international accounting standards as they lead to reducing the effects of the international financial high risks, and it is a response to the American market demands. Baba (2011) also indicated that a good financial reflections available in financial reporting characterized by transparency as much as the ability of the accounting professional to put to good use the financial accounting information delivered in optimal time help managers to surpass the economic crisis, furthermore attract The adequacy of accounting mandatory disclosure under the global financial crisis. A field study in Jordan Vol. 11, No. 3 429 investors. Presentation of Fair Value at financial statements was mentioned by Linsmeier (2011). Focused on measuring financial instruments at Fair Value in the financial statements after the financial crises in light of (FASB) (2010) proposes regarding the measurements of financial instruments at fair value in the financial statements. The study suggests that in order to prevent future financial crises, timely actions should be taken by accounting standard setters help investors and regulators with full fair value reporting for financial instruments to prevent bank failures due to the recent financial crises. In contrast Pinnuck (2012) examines the performance of financial reporting in the Global Financial Crisis (GFC), his study concluded that there is no empirical evidence that fair-value accounting (FVA) during the GFC added to the severity of the crisis. Other studies have been conducted on financial statements presentation and the relevance effectiveness of accounting disclosures to investment decision makers. AlHubail’s (2003)study investigated the adequacy and suitability of disclosure instructions issued by the Jordanian Securities committee in 1998. The most significant result of the study was the inadequacy of disclosure instructions to serve as means for helping investors in Amman Stock Market make their investments' decision. It was also found that Jordanian listed companies showed high commitment levels for the disclosure instructions. Abu-Nassar and Al-Thunaibat (2005) verified the importance of the disclosure instructions issued by Jordanian Securities Committee in 1998, especially those relating to listed companies in Amman Stock Market from external auditors, financial statements developers and investors perspectives. They investigate the adequacy of such instructions and their contributions in improving investment decision making process. The study revealed a consensus between the subjects of the study concerning the importance of disclosure requirements in the preparation of financial reports and decision making process. Abu-Nassar and Rutherford (2000) examined the opinions of individual investors, institutions, lenders, academics, and financial statement preparers in Jordan in order to define the most important information to be declared in the financial reports needed by financial statement users. Conclusions of the study pointed out a decline in the level of disclosure in financial reports, so much so that they did not meet the basic requirements of users. Al-Hawawi (2003) focused on the defects in financial statements prepared using the historical cost in terms of fair presentation of the actual financial position reflected in the financial statements. The study concluded that investors have insufficient details to take any investment decision without having appropriate accounting information to make the sound decisions. Zayoud et al. (2007) Identify the extent of traders’ awareness of financial markets, the study highlighted on the importance of accounting data and identify factors that may affect the efficiency of the stock market. The study showed that more disclosure in the financial reports increased effectiveness and rationalized decisions and become more convenient to serve the goals of investors. As well as Afeef (2010) aimed to Accounting and Management Information Systems Vol. 11, No. 3 430 measure the effects of accounting information quality contained in financial statements. He concluded that the quality of accounting information may be affected by the conditions of the economy particularly in economic disturbances. Iatridis (2011) examined the relationship between financial reporting quality and the timely disclosure of losses and difficult-to-verify accounting items and focus on conditional and unconditional conservatism. The study results showed those companies’ high quality accounting disclosures generally exhibit higher size, profitability and liquidity measures. The author concluded that the conditional form of conservatism is negatively related to unconditional conservatism, as the former tends to enhance contracting efficiency. The study provides evidence of asymmetric disclosure of losses for firms with high leverage, too. The same holds for high quality disclosures that display bad news. In contrast, firms that are in a growth phase are found to provide less conservative and less difficult-to-verify accounting information in order to influence their growth prospects. Sutthachai and Cooke (2009) evaluated the effectiveness of the financial crisis on the disclosure levels, financial reporting and accounting measurement. The study used the case study approach for examining the financial crisis of Thailand (1997). The study focused on Thai firms listed in the stock market between 1993 and 2002. The study focused on disclosure levels in each of these firms on three separate periods: 19931996, before the financial crisis, 1996-1998, during the financial crisis, and 19982002, after the financial crisis. The study concluded that disclosure levels increased, while accounting measurement did not change. The study recommended the use of the results reported in the study as the help in facing the following financial crisis. Mitton (2002) indicated that there are evidence that firms with more disclosures perform better than other firms during economic disturbance and crisis period. Ryan (2008) outlined the impacts of subprime crisis in United States on (FASB) requirements, particularly FAS. No 157 and FAS. No 159 fair value definition, measurement guidance and option. The study pointed out that the subprime crisis is the fault of human factors such as lenders, borrowers and investors or economic policies and regulations. The study concluded that there is necessity and a call for additional guidance and better disclosures needed for preparing financial statements and preparers need to provide these disclosures in an informative fashion. Eaton (2005) examines the interplay between (IASB) and American accounting authorities, US regulators and private-sector accounting institutions, especially after Enron and other corporate scandals in US. The study mentioned the major legislative response to the scandals which was Sarbanes-Oxley Act enacted in July 2002. The Act mandated that the SEC deliver a study commissioned on the question of how off balance-sheet transactions should be fairly reported. Loundi (2002) indicated that the International Accounting Standard 39, adopted by the commercial banks in Jordan was a necessary step led to improve and upgrade the quality of accounting reporting and information. Roberts et al. (2002) concluded The adequacy of accounting mandatory disclosure under the global financial crisis. A field study in Jordan Vol. 11, No. 3 431 that presenting and disclosing information is substantial for users of financial statements and decision makers in order to provide them with significant vision and necessary information in making their decisions. Haji et al. (2012) examines voluntary disclosure in the annual reports of Malaysian companies. The study attempt to determine whether financial crisis had some impact on corporate voluntary disclosure, researcher concluded that companies utilize their annual report voluntary disclosures as a means of influencing society's perception of their operations, and as a means of legitimizing their existence. Arabi (2010) concludes that accounting applications requires coordinated action at the international level to rebuild financial multilateralism, foster the stability and equity of the global financial system, promote stronger transparency or disclosure standards. 4. HYPOTHESES Studies conducted by Abu-Nassar and Al-Thneabat (2005) and Zayoud et. al, (2007) emphasized on the importance of disclosure of accounting information and its role to rationalize investors decisions. In addition Afeef (2010) indicated that the need of accounting information may vary depending on investors’ purposes or circumstances facing the Jordanian economy, since the financial crisis represents one of these effects. The hypotheses of the study may be summarized using the null hypothesis as follows: H01: There are no significant differences among respondents' perceptions towards the quality of the current mandatory accounting disclosure in financial reports. To identify the compatibility among academics and investors refers to their opinions and evaluations regarding the information quality disclosed in terms of understandability, timeliness, predictive value, neutrally, representational faithfulness, relevance and reliability. H02: There are no significant differences among respondents' perceptions concerning the quantity of the current mandatory accounting disclosure in financial reports. To examine the degree of agreement among the study sample members the information quantity disclosed in financial reports, whether financial reports should provide more significant items and extra necessary information. The above hypotheses were formulated to reflect the respondents' compatibility about the adequacy of the quantity and quality of information disclosed in financial reports. The perspective of each category of the respondents will be measured independently within the study hypotheses test. Accounting and Management Information Systems Vol. 11, No. 3 438 11 Half-annual financial reports contains sufficient information in accordance with the time period covered, thus enabling investors make suitable investment decisions. 0.220.91 0.06 1.23 0.08 - 0.98 12 The listed companies disclose the required information within reasonable periods to enable investors make suitable investment decisions. 0.97 1.79 0.49 0.87 0.73 1.44 All statements 0.305 0.169 0.237 7.3 Hypotheses Testing We used One Way ANOVA at the significance level of (α=0.05). With a repetition rule stating “if the significance level was less than (α= 0.05), the null hypothesis was rejected and the alternative hypothesis was accepted". To compute the respondents' attitudes, t-test was used at the same significance level in light of a rule stating "if the significance level was less than (α= 0.05). The respondents agree with each of the statements presented, if not; they disagree with them. We present here the results of testing the study hypotheses: 7.3.1 Testing H1 The first hypothesis states the following: "there are no significant differences at (α= 0.05) between respondents concerning the adequacy quality of current mandatory accounting disclosure in the financial reports. Table 8 below shows that the significance level for Ftest was (0.157) and this value is larger than (α= 0.05), meaning that we accept the null hypothesis stating “there are no substantial differences between respondents and that there is an agreement between them. Through the significance level (α=0.05) for t-test for both categories of respondents, we find that the value is less than (α= 0.05), meaning that the majority of respondents agree on the adequacy of the quality of mandatory accounting disclosure issued by Jordanian listed companies. 7.3.2 Testing H2 The second hypothesis states that "there were no differences at (α=0.05) between the respondents concerning the adequacy level of current mandatory accounting disclosure in the financial reports. Table 9 below shows that the significance level for F-test was (0.023) and this value is less than (α= 0.05), meaning that we reject the null hypothesis and accept the alternative hypothesis stating “there are substantial differences between respondents and that there is a disagreement between them. Through the significance level (α=0.05) for t-test for both categories of respondents, we find that investors saw that the disclosure levels provided by financial reports were insufficient to serve in the investment decision making while academics saw that disclosure levels provided by financial reports were sufficient to serve decision makers. The adequacy of accounting mandatory disclosure under the global financial crisis. A field study in Jordan Vol. 11, No. 3 439 Table 8. Results of testing the first hypothesis Type of test Significance level of α = 0.05 Result F-test 0.157 Acceptance of Null hypothesis T-test Value Academics 0.024 T-test Value Investors 0.035 Table 9. Results of testing the second hypothesis Type of test Significance level of α = 0.05 Result F-test 0.023 Reject of Null hypothesis T-test Value Academics 0.041 T-test Value Investors 0.178 CONCLUSIONS Based on the results of statistical analysis and hypothesis testing, it's obvious that investors and academics unanimously agreed that the quality of accounting information disclosed by public shareholding companies referred to the accounting disclosure requirements issued by the Securities Commission in Jordan and International Accounting Standards are sufficient to meet investors needs for taking appropriate decisions in light of the circumstances prevailing. Academics agreed that the amount of accounting information disclosed in mandatory financial reports is sufficient to meet the needs of various financial reporting’s users. On the contrary there is a substantial disagree in opinions between investors and academics on the adequacy of the quantity of accounting disclosure. Investors considerably need more disclosed information to reduce the uncertainty and serve their intended purposes effectively various investment decisions. This is consists with results revealed by Ryan (2008) and Loundi (2002). The inadequacy quantity of accounting information as perceived by investors at the ASE were a combination of various information related to financial reporting, such as clarifications included in the bottom of the financial reporting, observations concerning subsequent events or additional data. Researchers recommended that there is a need for re-consideration of disclosure requirements by the Jordanian accounting bodies regarding the quantities of accounting information disclosed by public shareholding companies listed on Amman Stock Exchange in order to meet the needs of investors and other financial reporting users. 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