Perceptions of the quality of financial information in Portugal
Эта статья посвящена качеству финансовой информации и ее влиянию на процесс корпоративного управления. Рассматриваются две главные темы. Во-первых, обсуждаются причины недавно произошедших случаев корпоративного управления, которое несоответствует общепринятым правилам. Во-вторых, проанализировано в...
Збережено в:
| Дата: | 2005 |
|---|---|
| Автор: | |
| Формат: | Стаття |
| Мова: | English |
| Опубліковано: |
Кримський науковий центр НАН України і МОН України
2005
|
| Назва видання: | Культура народов Причерноморья |
| Онлайн доступ: | http://dspace.nbuv.gov.ua/handle/123456789/33042 |
| Теги: |
Додати тег
Немає тегів, Будьте першим, хто поставить тег для цього запису!
|
| Назва журналу: | Digital Library of Periodicals of National Academy of Sciences of Ukraine |
| Цитувати: | Perceptions of the quality of financial information in Portugal / А. Martins // Культура народов Причерноморья. — 2005. — № 58. — С. 217-226. — Бібліогр.: 15 назв. — англ. |
Репозитарії
Digital Library of Periodicals of National Academy of Sciences of Ukraine| id |
irk-123456789-33042 |
|---|---|
| record_format |
dspace |
| spelling |
irk-123456789-330422016-04-15T12:14:48Z Perceptions of the quality of financial information in Portugal Martins, A. Эта статья посвящена качеству финансовой информации и ее влиянию на процесс корпоративного управления. Рассматриваются две главные темы. Во-первых, обсуждаются причины недавно произошедших случаев корпоративного управления, которое несоответствует общепринятым правилам. Во-вторых, проанализировано восприятия качества финансовой информации в ходе вышеупомянутых скандалов. Статья основывается на изучении восприятия человеком надежности финансовой информации и ее влияния на качество процесса управления. В роли опрашиваемых выступали португальские студенты старших курсов и финансисты-профессионалы. Главные выводы статьи - респонденты имеют существенно отличающееся восприятие качества информации, публикуемой различными компаниями. Проверка представляется как релевантный механизм для улучшения качества финансовой отчетности. Примечания к финансовым декларациям расцениваются как самый достоверный источник финансовой информации; балансу предприятия (как финансовой документации) доверяют больше, чем декларации о полученных доходах. Манипулирование рассматривается как вторжение в область финансовой информации; предложенные реформы предусматривают усовершенствование финансовой отчетности, принятие международных стандартов отчетности, предлагая пенальти менеджерам, которые ответственны за публикацию "манипулирующей" информации. Из всех стран Германия, Франция, Австралия и Япония имеют финансовые информационные системы, вызывающие наибольшее доверие. 2005 Article Perceptions of the quality of financial information in Portugal / А. Martins // Культура народов Причерноморья. — 2005. — № 58. — С. 217-226. — Бібліогр.: 15 назв. — англ. 1562-0808 http://dspace.nbuv.gov.ua/handle/123456789/33042 en Культура народов Причерноморья Кримський науковий центр НАН України і МОН України |
| institution |
Digital Library of Periodicals of National Academy of Sciences of Ukraine |
| collection |
DSpace DC |
| language |
English |
| description |
Эта статья посвящена качеству финансовой информации и ее влиянию на процесс корпоративного управления. Рассматриваются две главные темы. Во-первых, обсуждаются причины недавно произошедших случаев корпоративного управления, которое несоответствует общепринятым правилам. Во-вторых, проанализировано восприятия качества финансовой информации в ходе вышеупомянутых скандалов. Статья основывается на изучении восприятия человеком надежности финансовой информации и ее влияния на качество процесса управления. В роли опрашиваемых выступали португальские студенты старших курсов и финансисты-профессионалы. Главные выводы статьи - респонденты имеют существенно отличающееся восприятие качества информации, публикуемой различными компаниями. Проверка представляется как релевантный механизм для улучшения качества финансовой отчетности. Примечания к финансовым декларациям расцениваются как самый достоверный источник финансовой информации; балансу предприятия (как финансовой документации) доверяют больше, чем декларации о полученных доходах. Манипулирование рассматривается как вторжение в область финансовой информации; предложенные реформы предусматривают усовершенствование финансовой отчетности, принятие международных стандартов отчетности, предлагая пенальти менеджерам, которые ответственны за публикацию "манипулирующей" информации. Из всех стран Германия, Франция, Австралия и Япония имеют финансовые информационные системы, вызывающие наибольшее доверие. |
| format |
Article |
| author |
Martins, A. |
| spellingShingle |
Martins, A. Perceptions of the quality of financial information in Portugal Культура народов Причерноморья |
| author_facet |
Martins, A. |
| author_sort |
Martins, A. |
| title |
Perceptions of the quality of financial information in Portugal |
| title_short |
Perceptions of the quality of financial information in Portugal |
| title_full |
Perceptions of the quality of financial information in Portugal |
| title_fullStr |
Perceptions of the quality of financial information in Portugal |
| title_full_unstemmed |
Perceptions of the quality of financial information in Portugal |
| title_sort |
perceptions of the quality of financial information in portugal |
| publisher |
Кримський науковий центр НАН України і МОН України |
| publishDate |
2005 |
| url |
http://dspace.nbuv.gov.ua/handle/123456789/33042 |
| citation_txt |
Perceptions of the quality of financial information in Portugal / А. Martins // Культура народов Причерноморья. — 2005. — № 58. — С. 217-226. — Бібліогр.: 15 назв. — англ. |
| series |
Культура народов Причерноморья |
| work_keys_str_mv |
AT martinsa perceptionsofthequalityoffinancialinformationinportugal |
| first_indexed |
2025-07-03T13:31:18Z |
| last_indexed |
2025-07-03T13:31:18Z |
| _version_ |
1836632745918332928 |
| fulltext |
217
ZARIFIAN, PH. (1999). Objectif : compétence : pour une nouvelle logique. Editions Liaisons. Paris.
António Martins
PERCEPTIONS OF THE QUALITY OF FINANCIAL INFORMATION IN PORTUGAL
Резюме
Эта статья посвящена качеству финансовой информации и ее влиянию на процесс корпоративного
управления. Рассматриваются две главные темы. Во-первых, обсуждаются причины недавно произошед-
ших случаев корпоративного управления, которое несоответствует общепринятым правилам. Во-вторых,
проанализировано восприятия качества финансовой информации в ходе вышеупомянутых скандалов.
Статья основывается на изучении восприятия человеком надежности финансовой информации и ее
влияния на качество процесса управления. В роли опрашиваемых выступали португальские студенты
старших курсов и финансисты-профессионалы.
Главные выводы статьи – респонденты имеют существенно отличающееся восприятие качества ин-
формации, публикуемой различными компаниями. Проверка представляется как релевантный механизм
для улучшения качества финансовой отчетности. Примечания к финансовым декларациям расцениваются
как самый достоверный источник финансовой информации; балансу предприятия (как финансовой доку-
ментации) доверяют больше, чем декларации о полученных доходах. Манипулирование рассматривается
как вторжение в область финансовой информации; предложенные реформы предусматривают усовершен-
ствование финансовой отчетности, принятие международных стандартов отчетности, предлагая пенальти
менеджерам, которые ответственны за публикацию «манипулирующей» информации. Из всех стран Гер-
мания, Франция, Австралия и Япония имеют финансовые информационные системы, вызывающие наи-
большее доверие.
1. Introduction
Corporate governance is widely perceived to be in a troubled state in developed market economies. Recent
scandals in major financial markets – like Enron, Worldcom, Tyco, Parmalat and others – diminished the confi-
dence in good company governance.
Some of the core foundations of corporate governance were held hostage to special interests, and a set of
entities like stock analysts, banks, brokers and auditors colluded to deprive shareholders of their fair share of
firms´ results. (Levitt, 2002; Monks and Minow, 2001).
Financial fraud is not a new or unexpected event in economies where so much depends on the financial
performance of corporations. Schilit (1993) documents several cases of manipulation of financial information dur-
ing last century. Boatright (1999) presents evidence of conflicts of interest in financial services and financial mar-
kets. Chancelor (1999), analysing the history of financial speculation, documents unethical behaviour of market
participants since the 17th century. What seems to be new at the beginning of this century is the scale and the
global nature of the phenomenon.
The quality of corporate governance, strongly linked to the future of many people in major developed
economies, is thus a topic that merits further discussion. Workers´ jobs and remuneration are obviously related to
the decisions taken by people charged with governance tasks in companies; pensions of elderly people are affected
by the stock market performance of firms; the degree of perceived fairness and social acceptance of capitalism is
also dependent of the integrity of its captains of industry; and the efficiency of resource allocation through in-
vestment and financing decisions is also closely associated with good corporate governance.
This paper focuses on the quality of financial information and its impact on corporate governance, and ad-
dresses two major questions. Firstly, it will discuss the reasons for the recent occurrence of several cases of inap-
propriate corporate governance. Its causes will be dissected and the role of boards of directors and auditors will be
of special interest, as it seems that those two entities were at the root of many problems, or, at least, did not exer-
cise their control duties regarding to executives. Then, the new regulatory framework that is emerging to check
these problems will be discussed.
A second purpose of the paper is to analyse perceptions about the quality of financial information in the
wake of the aforementioned scandals. It will present a survey of people’s perceptions about the reliability of fi-
nancial information and its influence on the overall quality of the governance process. The survey will be based on
two samples: the first consists of undergraduate students that have been exposed to the conceptual aspects of fi-
nancial information and governance; the other will consist of professionals that must deal with daily life situations
where most potential sources of problems arise. Questions like the perception of the quality of financial informa-
tion in different types of companies, the impact of auditing in information quality, areas where rules are more eas-
ily bent, and areas where regulatory reform is needed will be of particular interest.
The main conclusions of the paper are that surveyed persons have significant different perceptions about
the quality of information published by different types of firms and that auditing is seen as a relevant mechanism
for improving the quality of financial reporting. Notes to financial statements are regarded as the most reliable
source of financial information and balance sheet is more trusted than income statement. Manipulation is seen as a
pervasive situation so far as financial information is concerned. When questioned about reforms to improve finan-
cial reporting in Portugal respondents advocate stronger penalties to managers who authorise the publishing of
manipulated information and the adoption of International accounting standards. Among a large group of coun-
tries, Germany, France, Australia and Japan have the most trusted financial information systems.
As a contribution, I expect that a better knowledge of perceptions about the quality of financial information
and its impact on corporate governance is helpful to academics, executives, regulators and investors.
António Martins
PERCEPTIONS OF THE QUALITY OF FINANCIAL INFORMATION IN PORTUGAL
218
The paper is organised as follows: section 2 presents a brief survey of financial scandals and its roots, sec-
tion 3 focuses on the new regulatory framework arising in the wake of the Sarbanes-Oxley Act, section 4 presents
survey results, section 5 concludes.
2. Uses and abuses of financial information: a short note
Financial information45 plays a vital role in the process of corporate governance.
Channels of influence of financial information into the governance mechanisms include its effects on the
operation of control mechanisms between principals and agents46, and the reduction of asymmetries of informa-
tion between interested parties in the financial performance of firms. These function are essential in a market
economy, mainly in the area of identifying investment opportunities to allocate scarce resources and to choose
how to finance projects.
The operation of control mechanisms based on accounting information is well documented in research lit-
erature47. For example, its role on takeovers is documented in Palepu (1986), its impact on shareholder litigation
is presented in Skinner (1994) and its influence in the designing of debt contracts is analysed in Sweeney (1994).
Also, research by LaPorta et al (1998) shows that the governance role of financial accounting information
is very important to the economic performance of countries. Rules of investor protection and the limiting of ex-
propriation by insiders are thought to be quite influential on the efficiency levels of financial markets and to the
proper allocation of resources.
If financial information has such a vital role, it is not surprising that it can be (mis)used to the benefit of
corporate insiders at the expense of outside investors. Chancellor (1999) presents several cases of misrepresenta-
tion of financial information aiming at expropriation of outsiders by company insiders. The author begins by pre-
senting the excesses of the tulipmania in Amsterdam48, in the 17th century, and then turns to the emergence of
London stock market and describes its first bubbles. The South Sea bubble, the speculation related to the appar-
ently promising markets of newly independent South American countries49 , and the railway mania, all share the
traits of schemes devised by insiders who controlled information and then sold worthless securities to outsiders.
In more recent times, the scandals uncovered at the end of the so-called “roaring eighties”, where Michael
Milken, Ivan Boesky and other finance professionals were major players, were a severe blow to the faith in the
good functioning of capital markets. It seemed that ethics was increasingly absent from the corporate executive
suites, from the market trading floor or from bank boardrooms.
The 90s began with a sense of uneasiness about the level of fairness of capital markets and a feeling that
corporate governance rules were serving insiders at the expense of outsiders. Printed stories of the excesses of the
80´s – like the one told by Burrough and Helyar (1990) about the leveraged buy out of RJR Nabisco – seemed to
confirm the scepticism about the role of ethics in financial markets and corporate governance practices.
Then, in 1995, the IPO of Netscape launched a new era of euforia50, that ended in early 2000 when the
Nasdaq index crashed. The mantra of his new era was that “this time is different”, and the difference got even a
glamorous name: the “new economy”.
The sensation that the “new economy” companies were so prone to the misuse of financial information was
a growing feeling towards the end of the 90´s; but it become all to clear at the bursting of the bubble when major
scandals like Enron, Worldcom, and others emerged.
Few authors were so well placed to document the growing trend of abuses of financial information and
corporate governance than Arthur Levitt. I will thus rely mainly on Levitt (2002) to characterise that period. Ar-
thur Levitt was the chairman of the Securities Exchange Commission from 1993 to 2001, and had to deal with a
lot of issues related to financial information and its use in the corporate governance process. Issues like the ex-
pensing of options51, the regulation of full disclosure52, the separation between auditing and consulting activities
of the then “big five” multinational audit firms53 were under intense scrutiny of politicians, lobbyists, executives.
45 “Financial information” is here defined in the sense of Bushman and Smith (2002) as the product of corporate accounting
and external reporting systems that measure and publicly disclose audited, quantitative data concerning the financial position
and performance of a publicly held firm.
46 A classical example of this function is the performance related pay of executives, where performance is measured by some
accounting numbers.
47 Bushman and Smith (2002) was especially helpful in documenting research trends in financial information related to gov-
ernance aspects.
48 In this context, Chancellor refers to the statement of a Spanish author – Vega – related to the way the Amsterdam market op-
erated. He says that “ the expectation of an event creates a much deeper impression upon the exchange than the event itself”.
49 Chancellor refers to a prospectus of a company that stated that its purpose was “ to carry an undertaking of great advantage
but no one to know what it is”.
50 Obviously that the precise moment when a new speculative era begins is quite difficult to define and is open to debate. The
internet and related technologies were available before; but the contagious effect of the so–called “net stocks” in the develop-
ment of world stock markets in the second half of the 1990s is generally associated with the decision of the Netscape board to
launch an initial public offering for a company with no earnings history and that was overbooked by eager investors. This is
now seen as the moment when the “everything is possible” sentiment of “dot com” companies began. See Cassidy (2002) for a
detailed account of this phenomenon.
51 The proper accounting treatment of stock options granted to executives and workers generated a hot debate between academ-
ics, Silicon Valley entrepreneurs and SEC officials. Many accounting and finance academics argue that options should be ex-
pensed, but the new economy entrepreneurs and their lobbyists in Washington pressed for a treatment that did not affect the net
income reported by firms.
219
His view of the main forces shaping the financial environment faced by investors and the potential for mis-
representation of financial information is summarized in the following statement:
“ When I arrived at the SEC, in July 1993, we were in the third year of a bull market … On the surface,
everything seemed fine. But there was much about Wall Street and corporate America that made me uneasy.
…many CEOs were paying more attention to managing their share price than to managing their business. Com-
panies technically were following accounting rules, while in reality revealing as little as possible about their ac-
tual performance. The supposedly independent accounting firms were working hand in glove with corporate cli-
ents to try to water down accounting standards” Levitt ( 2002: 7/8).
When the SEC chairman tried to change rules and increase auditor´s independence, his proposals were un-
dermined by the Congress, which oversees SEC. He published convincing evidence that many Congressmen were
acting in the interests of the then Big Five, which lobbied hard against the proposals that would deprive them of
important consulting revenues54.
But investors were not only at the mercy of executives and auditing failures. Other intermediaries between
firms and shareholders – like analysts – become prey to investment banking pressures to propel share prices. Re-
search was increasingly seen as mere tool for deal making between banks and firms, and sell recommendations
become more rare55. The leaking of estimations of earnings to selected analysts become widespread, and the
companies managed expectations just enough to “beat the consensus estimates”56.
The role of analysts in the market euphoria that happened in the US at the end of last decade was even
more marked in the IPOs of “dot com” firms. The one that epitomizes the new approach was Mary Meeker, at that
time at Morgan Stanley investment banking, and dubbed “ Queen of the Net”. During the “dot com” boom valua-
tions rose to limits that could not be explained by standard models of discounting expected cash flows at the ap-
propriate cost of capital. Analysts had to imagine new ways of rationalising those prices. And duly they did.
The key insight of analysts was that valuation should rely on earnings that those companies could produce
in the distant future, and, in order to achieve that potential, burning money and producing losses in the present
were seen as preconditions to build a customer base. Thus, the apparent absurdity of firms that produced ever in-
creasing losses and had ever increasing share prices was, at least, not so disturbing.
Investment bankers quickly saw that analysts could be used as marketing tools. The process worked like
this: an analyst would be assigned to value a firm and came up with a report that would support a convenient share
price that, in the Initial Public Offering (IPO), generated a hefty commission for the bank that employed the ana-
lyst. Then, the analyst continued to cover the stock and would maintain a buy recommendation, and the next round
of financing would be arranged by the bank. The “dot com” executives had a strong interest in producing numbers
that supported the share price, in order to cash in on large amounts of stock options.
The new mood about valuation those days is well illustrated by Meeker´s statement, in 1997, saying that
stocks ”entered a new valuation zone”57.
One particular abuse of financial information in this period was linked to the fact that executives were ea-
ger to use earnings guidance to support share prices, because so may firms were using options as a way of com-
pensation.
The relevance of managerial forms of compensation to corporate governance has its roots in the well
known agency theory, which can be traced back to Bearle and Means (1932). The separation from ownership and
control creates an organizational environment where owners (principals) must have some form of aligning the ac-
tions of managers ( agents) with their interests. Based on the work of Jensen and Meckling (1976) an extensive
body of research documented several types of agency costs and proposed new solutions to mitigate the agency
costs created by modern forms of management of public firms.
According to Bushman and Smith (2002) the main conclusions of this research literature can be summa-
rised as follows:
i) Financial accounting measures are widely used in executive compensation contracts58;
52 Regulation of full disclosure was approved by a majority vote in October 200 by the SEC. It requires that companies should
release important information to all investors and not just to a selected few. Such “selective disclosure” put small investors at a
disadvantage to analysts, brokers, and other more powerful entities.
53 As the new economy era progressed, it was becoming clear that soft auditing was spreading and that the consulting fees
earned by the big five were hampering their duties of proper auditing. Management actions and financial information were not
checked by auditors; they were acting more as advisors on financial schemes aimed at supporting share prices.
54 See Levitt ( 2002: 287-307). It is therefore no surprise when he says: “ Two things, I have learned, defy the political process:
closing military bases and setting accounting standards …The debate on stock options is a perfect example”.
55 For a detailed account of this process, see Boatright (1999), Cassidy (2002) and Levitt ( 2002)
56 The release of earnings is usually a very important event for firms and investors. As share prices should reflect an estimation
of the earnings growth rate, missing that target can trigger significant adjustments. CEOs and CFOs were thus under pressure
not to miss the targets. Another reason was that their options value would be severely punished with a decline in the stock
price.
57 The complete statement – from Cassidy (2002) – is :” We have one general response to the word “valuation” these days: bull
market. We have been in the technology sell-side trenches for about a decade and simply –we believe that we have entered a
new valuation zone. In addition to valuations being a function of a happy market, this zone is also a function of the Internet”.
58 The authors cite empirical evidence based on surveys of publicly traded US companies about their compensation plans pre-
sented by Itner et al (1997) do confirm the importance of accounting numbers in executive compensation plans.
António Martins
PERCEPTIONS OF THE QUALITY OF FINANCIAL INFORMATION IN PORTUGAL
220
ii) In the last three decades of the 20th century accounting measures have lost importance in influ-
encing compensation of executives, as these plans shifted towards other measures. The major trend have been the
extensive reliance on stock and stock options as compensation mechanisms59;
iii) Changes mentioned in ii) were more pronounced in firms with higher growth opportunities.
The reliance on accounting numbers to determine executive compensation creates potential opportunities
for the misrepresentation of financial information by executives. Sales, net income or rates of return, to mention
some of the common measures, are numbers whose computation depends on the practical application of account-
ing principles and rules.
Even when the weight of compensation policies moves towards stock and options, the problem of misuse
of financial information does not vanish. The role that reported earnings play on influencing stock prices makes
earnings management a prime target for some executives.
Public companies have control mechanisms that can act as a counterweight to executive temptations:
boards and auditors are two of the most important.
However, the effectiveness of boards was seriously questioned by the emergence of a wave of scandals in
the aftermath of the stock market bubble of the late 90s. The degree of independence of many boards seemed to
have been greatly diminished by the grip that top management had on board functioning. Board members with
consulting contracts with companies they were overseeing, the use of corporate perks, the use of corporate dona-
tions to institutions where board members had interests and other ways of limiting independence produced an en-
vironment skewed towards favouring executives´ power at the expense of investors.
Levitt (2002) points to several aspects that outsiders must carefully scrutinise in order to assess board ef-
fectiveness: the degree of independence, the commitments of board members and its impact on their capacity of
really perform their controlling functions with time and technical expertise, board size and board compensation
and perks.
But some of the problems that plagued board effectiveness in controlling executives were also common in
the relation between executives and auditors.
In capital markets, investors grasp of firms performance by relying on published financial information is
critically affected by the quality of auditing. The growing importance of consulting contracts and the fatter mar-
gins earned on consulting relatively to auditing, made some auditing firms too prone to engage in consulting con-
tracts with management of public firms.
Publicly, the argument for this state of affairs was that the deeper knowledge of public firms structure al-
lowed by auditing was an useful element in performing consulting tasks like information systems design, and tax
planning or strategic advice. But, in reality, the independence of the audit function was severely compromised by
the fear of losing lucrative consulting fees.
Earnings management activities had, in many cases, no checking entities. Analysts were under investment
banks overriding aim of not to endanger financing deals, board independence was weakened by tying members
with generous perks, and auditors were under the stick of losing consulting contracts.
In the aftermath of the scandals that emerged in the US and Europe in 2001 and 2002 – like Enron, World-
com, Tyco, Health South or Ahold – there was a public outcry. The US Congress rushed to enact new legislation
to limit the abuses of corporate executives´ power.
The new regulatory environment that resulted form these activities is the topic for next section.
3. A new regulatory framework
In the light of the scandals emerging in US, a strong reaction by Congress produced – in a very short time –
the Sarbanes-Oxley Act, enacted in July 2002. It tried to impose strict rules on financial disclosure and the corpo-
rate governance process.
In its section 201, the Act prohibits auditors of rendering non audit services, and, also, in sections 203 and
206, deals, respectively, with auditor rotation and conflicts of interest in hiring auditing firms if the CEO, CFO or
Controller worked for the audit company for one year before the audit.
Section 302 establishes corporate responsibility for financial reports, and sections 401 and 402 enhance
disclosure rules by firms, like off balance transactions and personal links between firms and executives.
The auditing committee is also strenghtened (section 407), and analysts conflicts of interest are covered in
section 501, by requiring that SEC produces new independence rules to be applied to the profession. But it is on
Title VIII of the Act – “ Corporate and Criminal Fraud Accountability “ – that most significant changes were
made. Penalties imposed on fraudulent behaviour of executives, auditors, accountants and others are quite severe.
For example, in section 802, the penalty for destruction, alteration or falsification of documents can go to 20 years
in jail. In section 906, the penalty for a CEO or a CFO for signing a fraudulent financial report can go up to 20
years in jail.
In Portugal, although nothing similar has been under way, the CMVM (the stock market watchdog) pub-
lished new rules on “the corporate governance of public companies” in December 2001, updated in July 2003.
The general sense of these rules is to offer better protection to investors, to induce the creation of better in-
ternal control systems, to limit the use of “poison pills”, to strenghten the independence of auditing and compen-
sation committees, to publish information on executive pay, to disclose more information to shareholders about
59 The authors state that “ ...not only have earnings apparently become less important in determining cash compensation, the
contribution of cash compensation to the overall intensity of top executive incentives appear to have diminished drastically in
recent years. The shrinkage is so dramatic that a number of recent studies on top executive pay- performance sensitivity simply
ignore the contribution of cash compensation as a second order effect…”
221
stock option plans and to encourage institutional investors to have a more involved relationship with the compa-
nies where they invest.
It can thus be argued that the wave of scandals created a favourable disposition for reform. Its effectiveness
remains to be seen and, presumably, only when the next prolonged market upswing will happen can the new rules
impact be tested.
Another important question is the impact of those facts – major failures of governance mechanisms and the
new regulatory framework – on public perceptions about the reliability of financial information and firms´ gov-
ernance process. That is the topic for next section.
4. Perceptions on the quality of financial information
This section presents a survey based on two samples. The first one consists of 100 undergraduate students
of Economics and Management courses that, by the time of the survey, had been exposed to Financial Accounting
and Financial Analysis courses. They were knowledgeable of conceptual topics related to the production and use
of financial information and the majority of them had to deal with financial reports, by using them in case studies.
The other sample consists of 76 professionals, graduated in Economics, Management or Accounting that attended
post-graduate studies. Both surveys were applied during classes.
By using two samples it can inferred if the quality of financial information is differently perceived by stu-
dents and professionals. It could be expected that students presented a higher degree of belief in the reliability of
financial information, because they have little or no exposition to real life situations that can shake confidence on
the quality of financial information. On the other hand, as both surveys were administered in 2003, the set of ac-
counting scandals in US and Europe could significantly affect student’s faith in the overall quality of financial in-
formation.
Table 1 presents some attributes of surveyed students and professionals.
Table 1. Samples characterisation
Students
(N = 100)
Professionals
(N = 76)
M (%) 46,0 65,8 Gender
F (%) 54,0 34,2
Mean 22,85 36,61 Age
St. dev. 2,31 11,84
Yes % 33,0 63,2 Investments holdings
No % 67,0 36,8
Females represent 54% of students’ sample, but they are only 34,2% of professionals’. It could be a sign
that although in the recent years females overtook males in Economics and Management undergraduate studies,
the situation is still different at the professional level.
As the mean age of professionals is 36,61 years, the number of females in managerial or other related jobs
that require previous Economics/Management studies is lower, because at the time of undergraduate studies (on
average, almost 20 years ago) the proportion of male students was higher.
A second factor can also explain the lower proportion of female professionals. It could be hypothesised
that, in career development, females have more difficulties in attending post graduate courses, either because ca-
reer advancing opportunities are more open for men or because family related tasks tend to burden females more
often than males.
Another attribute of respondents (holding of financial investments like shares, investment funds, bonds or
equity in limited liability companies) is presented in table 1. It shows an expected difference between profession-
als and students. In fact, only 33% of students hold some type of investments, while 63,2% of professionals do.
However, the proportion of students holding financial investments is quite important.
Table 2 presents evidence on the perception of the reliability of financial information published by differ-
ent types of companies. A scale from 1 – no reliable – to 7 – totally reliable – was used.
Table 2. Perceived reliability of financial information published by type of firm
Students
(mean)
Profession
als
(mean)
Significant differ-
ences
(Mann-Whitney test)
Portuguese corporation not listed in the stock ex-
change 3,62 3,57
Small portuguese LLC 3,28 2,64 **
Foreign corporation, operating in Portugal, not listed
in the stock exchange 3,73 3,96
Big Portuguese LLC 4,18 4,09
Portuguese corporation listed in the stock exchange 4,95 4,99
Individual entrepreneur 2,77 2,25 **
(**) Significant at 0,01 level
It can be observed that only two types of corporations (“big Portuguese Limited Liability Companies
(LLC)” and “Portuguese corporation listed in the Stock Exchange”) have mean scores higher than 4, which is the
mid point of the scale. These are the only type of companies that have scores higher than 4 in students and profes-
sionals samples.
António Martins
PERCEPTIONS OF THE QUALITY OF FINANCIAL INFORMATION IN PORTUGAL
222
However, the Portuguese listed corporations have the highest score (near 5) in both groups, and they stand
out as the sole case of a relatively consistent level of reliability in financial information. The fact that affiliates of
foreign companies operating in Portugal have scores lower then 4 can be explained by a certain degree of belief
that, as they belong to foreign groups, they could be used for convenient tax or financial planning, diminishing the
overall quality of their financial information.
From table 2 it is remarkable (and expected) the “small Portuguese LLC” and “individual entrepreneurs”
are the type of firms that produce the least reliable information. However, professionals are more sceptical re-
garding both, and a significant difference in mean scores is observed.
The overall picture that emerges from table 2 is quite worrying. For the 6 types of firms, only Portuguese
listed corporations have some degree of credibility with respondents, and very low scores are observed for small
LLC and individual entrepreneurs.
Let us note, however, that as the corporate governance process is more important in public companies, the
fact that listed firms are positively rated regarding their financial information by both groups is an encouraging
sign.
Table 3 presents evidence on the perceived influence of external auditing on the general quality of financial
information.
Table 3. Perceived influence of external auditing on the quality of financial information
Students Professionals
Big quality improvement 32,0 % 25,0 %
Some quality improvement 58,0 % 65,8 %
No influence 8 % 7,9 %
Some deterioration of quality 2 % -
Big deterioration of quality - -
No opinion - 1,3 %
100,0 % 100,0 %
It must be said that as, in Portugal, all corporations and big LLC are audited, it can be expected that there is
some relation between tables 2 and 3. If perceptions presented in table 2 – where corporations and big LLC had
the better scores – were influenced by mandatory external auditing, then results shown in table 3 should confirm
respondents’ awareness of auditing relevance. On the other hand, recent accounting scandals exposed big failures
in auditors’ diligence, and that could tarnish the reputation of auditors. But, as no major auditing scandal has yet
emerged in Portugal, results from table 3 are quite positive for the auditing profession, with 90% of both groups
assigning “big” or “some” quality improvement in financial information by external auditing.
Tables 4 and 5 present the perceived degree of reliability of different financial statements and accounting
aggregates (from 1 – no reliable –, to 7 - totally reliable).
Table 4. Perceived reliability of different pieces of financial information
Students
(mean)
Professionals
(mean)
Significant differences
(Mann-Whitney test)
Income statement 4,49 4,2
Balance sheet 4,48 4,05 **
Cash flow statement 4,37 4,32
Notes to the financial statements 4,86 4,42 **
(**) Significant at the 0,01 level
Table 5. Perceived level of truthfulness in financial statements in different aggregates
Students
(mean)
Professionals
(mean)
Significant differences
(Mann-Whitney test)
Operating revenues 3,68 4,15 **
Operating costs 3,78 4,16 *
Assets 4,66 4,46
Equity 4,94 4,65
Liabilities 4,25 4,44
Accruals 3,59 3,67
Financial revenue and costs 3,87 4,47 **
Extraordinary gains and losses 3,31 3,92 **
(**) Significant at the 0,01 level
(*)Significant at the 0,05 level
It is interesting to note that, in table 4, all financial statements and their related notes score between 4 and
5. It is also worth noting that students have more positive perceptions across the four alternatives. And, regarding
“balance sheet” and “notes to financial statements”, there are statistically significant differences between students
and professionals.
One important conclusion stands out from table 4: notes to financial statements are the most trusted source
of financial information for both groups.
223
As every user of a financial report knows, “notes” are, most of times, the only way to understand the num-
bers presented in financial statements, and must be carefully interpreted to gain a better perspective of raw num-
bers. It seems that students and professionals are quite aware of that.
Table 5 shows the perceived level of truthfulness in different accounting aggregates.
It is interesting to note that in the balance sheet – which contains, as it is well known, assets, accruals, eq-
uity and liabilities - accruals are the only one item that scored less than 4. Other balance sheet aggregates are
marked higher than 4 by students and professionals. The widespread perception that accruals can be used to influ-
ence earnings is certainly at the root of this result.
It is in the revenue and cost areas that groups’ perceptions mostly differ. Students have a more pessimistic
view of the truthfulness in reporting revenues or costs, be it at the operating, financial or extraordinary level. “Ex-
traordinary gains and losses” are the least trusted areas for both groups, in terms of revenues and cost aggregates.
And, in the professionals’ group, only “accruals” have a lower score.
Table 6 presents respondents’ views about the frequency of manipulation of financial information.
Table 6. Overall perception of frequency of manipulation in financial information
Students Professionals
Always 6,0 % 6,6 %
A lot of times 87,0 % 82,9 %
Some times 5,0 % 10,5 %
Never - -
No opinion 2 % -
100 % 100 %
Results are quite similar for both groups: 93% of students say that financial information is manipulated
“always” or “a lot of times”, while 89,5% of professionals say the same. No one said “never”!
A widespread feeling of manipulation of financial information is a severe blow to the faith in corporate
governance mechanisms, and can inhibit potential investors from participating in the development of financial
markets.
How can we square the results from table 6 with the more positive results from table 1? In table 1, the bet-
ter rated companies – according to the reliability of financial information – were big LLCs and listed corporations.
As it is well known, Portugal is a country of micro and small enterprises. Only a few dozens of corporations are
listed in the stock exchange. This being so, the perception of manipulation is probably related to the large numbers
of small firms where there is a wide perception of manipulation. Table 7 shows some possible causes for manipu-
lation and respondents´ views about their relevance, from 1 (not relevant) to 7 (very relevant).
Table 7. Relative importance of possible causes of manipulation in financial information
Students
(mean)
Professionals
(mean)
Improvement of external image of firm to
banks, customers and investors 5,53 5,48
Tax avoidance 6,23 6,00
To increase performance related pay 4,23 4,40
To hide management difficulties on running
firms 4,88 4,68
To please shareholders 4,65 4,81
Tax avoidance stands clearly as the main cause of manipulation of financial information. Given the well
known anomalous situation of the corporate income tax (IRC), where about 60% of companies do not pay any
profit related tax, the result is quite natural.
The second most important reason is “to improve the external image of firms”, and the least important is
“to increase performance related pay”.
This latter reason merits further discussion. In Europe or US most governance failures and accounting
scandals were heavily influenced by executive decisions to deceive investors with false information. Stock price
appreciation and options´ values were at the core of these schemes, so it could be expected that respondents placed
higher scores on this reason. The fact that they do not is eventually a sign of the low use of these mechanisms in
the Portuguese corporate world.
No significant differences were found between the two samples in table 7.
Table 8 presents respondents’ opinions about the levels of consistency in applying accounting principles,
from 1 (no consistency) to 7 (very high consistency).
Table 8. Perceived level of consistency in applying accounting principles
Students
(mean)
Professionals
(mean)
Significant differences
(Mann-Whitney test)
Historical cost 4,51 4,77
Specialization of accounting
periods 4,48 4,84 *
Materiality 4,31 4,35
Substance over form 4,38 4,33
Consistency 4,45 4,44
António Martins
PERCEPTIONS OF THE QUALITY OF FINANCIAL INFORMATION IN PORTUGAL
224
Prudence 4,40 4,39
Going “concern” 4,80 4,67
(**) Significant at the 0,05 level
Only “historical cost” and “going concern” score higher than 4,5.
The difference between both groups in the “specialisation of accounting periods” can be related to differ-
ences observed in table 5. In the latter, professionals had higher scores on revenues, costs and accruals. The prin-
ciple of specialisation has a strong influence in the recognition of these aggregates.
Table 9 presents respondents views on the need of reform in financial reporting rules (9.1) and the most
important proposed reforms (9.2).
Table 9. Clues to reform financial reporting
Table 9.1.“Do you think that financial reporting rules need to be reformed?”
Yes No
Students 73,0% 27,0%
Professionals 92,1% 7,9%
Table 9.2“State the four most important reforms you advocate to improve the quality of financial reporting”
Students Professionals
Higher penalties to managers that publish manipulated information 59 55
Higher penalties to accountants 39 20
Higher penalties to auditors 38 36
Introduce in Portugal the international accounting standards 36 39
A higher degree of precision in the Portuguese Accounting Rules
(POC) 47 33
Reduce links between accountancy and taxation 16 28
To improve accountants’ training 38 25
To compute profits on a cash flow basis 8 9
From table 9.1 it can be observed that professionals have a stronger opinion in favour of reform. This is
probably due to the fact that, having experienced real life situations using or producing financial information, they
have a more acute feeling of its shortcomings.
Table 9.2 presents solutions that respondents would propose to improve the quality of financial informa-
tion.
Higher penalties for managers are the most favoured option. This is a sign that respondents feel that at the
root of financial reporting problems are managers´ decisions. The harsher penalties for managers that Sarbanes-
Oxley Act introduced seem to find favour with public perceptions of executive misbehaviour as a central factor in
governance failures.
The second preferred option is, for students, a higher degree of precision in Portuguese accounting rules,
and, for professionals, to introduce international accounting standards. Thus, the second favoured option of both
groups is related to the rules that govern the production of financial information.
Two other results merit our attention. The first is the fact that although, in table 7, tax avoidance was seen
as the main cause for manipulation of financial information, the reduction of links between taxation and accoun-
tancy is not a prime reform area. The second is the big difference in “higher penalties to accountants” importance
of both groups.
The latter is an expected result: as some surveyed professionals have accounting related jobs, a self-de-
feating proposal could hardly been expected.
The former result is probably a sign that people do not have significant hopes of reducing links between
accounting and corporate taxation.
Finally, table 10 presents evidence regarding perceptions about the quality of accounting systems in differ-
ent countries.
Table 10. Perceived quality of accounting systems in different countries
Students Professionals
N Mean N Mean
Significant differ-
ences
(Mann-Whitney test)
Spain 79 4,37 67 4,25
Russia 67 3,15 63 2,56 **
Germany 72 5,14 66 5,11
Portugal 90 3,82 73 3,79
Japan 71 4,99 65 4,88
Brasil 71 3,00 68 2,68
U.S.A. 84 4,13 67 4,57
China 64 3,56 62 3,11
France 76 4,83 66 4,76
South Korea 64 3,62 62 3,52
225
Mexico 63 2,78 64 2,50
Australia 64 4,70 62 4,73
Egypt 63 2,81 62 2,55
(**) Significant at the 0,01 level
The first conclusion to draw is that some respondents did not feel comfortable with the question and did
not answer. This factor was more common among students. From the 100 surveyed students, only in 4 countries
(Portugal, USA, Spain and France) did more than 75 stated an opinion. For the 76 professionals, in every case
more than 62
(81,5%) answered.
For students, the highest score is 5.14 (Germany) and the lowest is 2.78 (Mexico). Professionals also gave
the highest score to Germany (5.11) and the lowest to Mexico (2.50).
There is a remarkable consensus between both groups. Two European countries (Germany and France), Ja-
pan and Australia stand out as the most appreciated accounting systems.
America, which tend to regard its accounting system as a model for the rest of the world, came after those
4 countries. Probably the accounting scandals that happened in the US affected the perception of the system´s
quality.
Respondents are not very confident as far as the Portuguese accounting system is concerned. This is not
surprising, given all the results shown in tables 2 to 9.
To sum up, it can be said that, in both samples, surveyed persons have quite different perceptions about the
quality of financial information published by different types of firms; that external auditing is seem in a positive
light as a way of improving the quality of financial reporting; notes to financial statements are seen as the most re-
liable source of financial information; balance sheet aggregates are more trusted than income statement ones; ma-
nipulation is seen as a pervasive situation so far as financial information is concerned; proposed reforms to im-
prove financial reporting are advocated in the areas of penalties for managers who authorise publishing of ma-
nipulated information; and Germany, France, Australia and Japan have the most trusted accounting systems.
5. Perceptions of the quality of financial information and corporate governance: a conclusive note
Corporate governance is a ongoing process of setting up adequate mechanisms to solve conflicts that arise
between different economic agents interested in firms’ performance.
As such, good corporate governance is heavily dependent on the reliability of financial information. Data
used for financial reporting are crucial for investors’ assessment of a firm profitability and fund allocation. Man-
agers’ pay for performance schemes - be they related to accounting numbers or to stock market measures - are
also strongly linked to the accuracy of financial reporting.
Lenders assessments of credit ratings are another area where published information is critical. And custom-
ers’, suppliers’ and public perceptions of a company’s performance are highly influenced by its published finan-
cial information.
It is undoubtedly true that deterioration in the fairness of financial reporting is a severe blow to one of the
cornerstones of good corporate governance.
If results presented in the previous section are representative of a global decrease in the reliability of finan-
cial information, then some changes should be made to restore lost confidence.
What is most striking is that students and professionals had a remarkable similarity of views. It is thus ex-
pected that students will go to the job market and make personal investment decisions with a pessimistic view of
the quality of financial information.
Recent developments, like the Parmalat scandal, are also damaging factors to the perception of quality of
financial reporting. Given that the present situation is not an ideal one, what changes could be promoted to re-
stores some last hope?
Surveyed people produced two major lines of suggestions: increase penalties for wrong doing and make the
accounting rules more suited to a better financial reporting. At a global level, it seems that authorities are moving
in both directions.
Sarbanes - Oxley act in US and the increasing willingness of countries to adopt common accounting stan-
dards (accounting for goodwill is a good example) show that the crisis faced by financial reporting sparked action
in some areas.
It remains to be seen if the momentum is not lost, and from the ruins of some of the worst ever cases of
corporate governance it emerges a system better suited to the interests of society as a whole.
References
Bearle A, and Means G, 1932, The modern corporation and private property, Commerce Clearing House
Boatright , 1999, Ethics in finance, Blackwell
Burrough B and Helyar J, 1990, Barbarians at the gate, Random House
Bushman R and Smith A, 2002, Financial accounting information and corporate governance, Contempo-
rary Accounting research, ed S Kothary et al, North Holland, p. 237-334
Cassidy J, 2002, Dot.con, Penguin Books
Chancelor E, 1999, Devil take the hindmost, MacMillan
Itner C et al, 1997, The choice of performance measures in annual bonus contracts, The Accounting Re-
view, 72, p.387-399
Jensen M and Meckling W, 1976, Theory of the firm: managerial behaviour, agency costs, and ownership
structure, In Jensen M and Smith C ( eds) The modern theory of corporate finance, McGraw Hill
La Porta R et al, 1998, Law and finance, Journal of Political economy, 106, 1113-1155
Levitt A, 2002, Take on the street, Pantheon
António Martins
PERCEPTIONS OF THE QUALITY OF FINANCIAL INFORMATION IN PORTUGAL
226
Monks R. and Minow N., 2001, Corporate governance, Blackwell
Palepu K, 1986, Predicting take over targets, Journal of Accounting and Economics, 8, 1, p. 3-36
Schilit H, 1993, Financial shenenigans, McGraw Hill
Skinner D, 1994, Why do firms voluntarily disclose bad news?, Journal of Accounting Research, 32, 38-60
Sweeney A, 1994, Debt covenant violations and managers´ accounting responses, Journal of Accounting
and Economics,17, 3, p.281-308
Filipe Coelho, Mário Augusto, Patrícia Moura e Sá, Arnaldo Coelho, Elsa Soares
THE EFFECTS OF ORGANIZATIONAL CULTURE ON SALESPERSON CUSTOMER
ORIENTATION
Резюме
Известно, что организация может добиться успеха только при условии удовлетворения потребностей
своих клиентов. Фактически, организационная работа в значительной степени зависит от понимания по-
требностей и требований клиента; необходимы исследования, демонстрирующие существование пози-
тивной взаимосвязи между рыночной ориентацией (составляющей которой является ориентация на кли-
ента) и работой организации в целом.
Особую важность для организаций представляет распространение собственной стратегии, ориенти-
рованной на клиента, среди своих сотрудников так, чтобы сотрудники разделяли эту стратегию и способ-
ствовали ее реализации.
В ходе исследований были выделены несколько важных результатов, относящихся к уровням ори-
ентации на клиента сотрудников, работающих в сфере продаж. Такие сотрудники должны быть настроены
на удовлетворение потребностей клиента, выполнение плана продаж и установление длительных отноше-
ний с клиентами.
В современных условиях наличие работников, ориентированных на удовлетворение потребностей
клиента, важно для успешной деятельности любой организации; но для фирм, занимающихся предостав-
лением услуг – это основное условие успеха. Происходит реализация концепции маркетинга в организа-
циях, оказывающих услуги. Ориентация на развитие и улучшение отношений с клиентами вызвала инте-
рес к факторам, способствующим ориентированию продавца на потребности клиента (что до сих пор еще
мало изучено). Поэтому целью статьи является дополнительное изучение рассмотренных определений и, в
частности, изучение роли культуры организации.
В статье исследуются теоретические основы изучаемых вопросов, а также факторы воздействия кон-
цепции, ориентированной на клиента. Изучается роль организационной культуры на предприятии; удов-
летворение от работы и обязательства работника по отношению к организации и выполнение продавцами
их должностных обязанностей. Выдвигаются гипотезы, касающиеся связи организационной культуры и
концепции, ориентированной на клиента. Рассматриваются данные тестирования выдвинутых гипотез на
базе двух организаций, занимающихся предоставлением услуг; предлагаются результаты проведенного
исследования.
INTRODUCTION
It is widely acknowledged that most organizations can only achieve success by satisfying their customers’
needs. In fact, organisational performance is largely dependent upon the understanding of customer needs and re-
quirements, with diverse studies demonstrating the existence of a positive relationship between market orientation,
of which customer orientation is a component, and an organization’s performance (e.g., Caruana, Ramasesham,
and Ewing, 1997; Jaworski and Kohli, 1990; Narver and Slater, 1990; Baker and Sinkula, 1999). Of particular im-
portance for organizations is how to disseminate their customer-oriented strategy to their employees so that these
share the customer-oriented values of the firm and are inspired to carry out such strategy (Hartline, Maxham, and
McKee, 2000). Several studies have already empirically identified several important outcomes of the level of cus-
tomer orientation of salespeople, which has been positively related with customer satisfaction, the sales per-
formance of salespeople and the development of long-term relationships with customers (Boles et al, 2001; Keilor,
Parker and Pettijohn, 2000; Martin and Bush, 2003; Saxe and Weitz, 1982; Williams and Attaway, 1996). Hence,
developing a customer orientated workforce plays an important role in any organisation, but for service firms it is
particularly key. In fact, contact employees have been considered crucial in the implementation of the marketing
concept in service organizations. This acknowledgement, spurred by the trend to develop better relationships with
customers (Webster, 1992) has promoted the interest in understanding the organizational drivers of salespeople’s
customer orientation, about which little is still known (Boles et al, 2001; Brown et al, 2002; Flaherty, Dahlstrom
and Skiner, 1999; Kennedy, Lassk and Goolsby, 2002). Hence, the goal of this study is to shed additional light on
these determinants considering, in particular, the role of an organization’s cultural traits.
This paper is organised as follows. Firstly, we review prior theory and research concerning the factors af-
fecting salespeople’s customer orientation and, in addition, we review the role of organizational culture on organ-
izational performance along with the impact of role stress and job satisfaction and organizational commitment on
salespeople performance. Next, we develop a set of hypotheses relating the cultural traits of the organization with
salespeople’s customer orientation. Subsequently, the hypotheses are tested in the context of two service organi-
zations, and the results are discussed.
RESEARCH BACKGROUND
Customer orientation at the individual level can be understood as “the degree to which salespeople practice
the marketing concept by trying to help their customers make purchase decisions that will satisfy customer needs”
(Saxe and Weitz, 1982: 344). Similarly, Brown et al. (2002) suggest that customer orientation is the “employee’s
|