Accounting communication has attracted substantial attention in the last decade since several regulators issued guidelines that aim to increase financial reporting quality. In this chapter, the authors aim to study the association between the issuance of the technical guidance 07 (OCPC 07) by the Brazilian Accounting Standard Committee (CPC) and the readability of notes to the financial statements of Brazilian public firms. The authors use a multiple linear regression of panel data, controlling by industry and year fixed effect. The results suggest that there is no significant change in the average readability of financial notes after the issuance of OCPC 07. The authors contribute with additional disclosure to accounting literature by collecting empirical evidence on the relationship between the publication of normative guidance and accounting evidence. Moreover, these results may contribute to regulatory decisions made by regulatory agencies, which are certainly among the main stakeholders in the impacts caused by the issuance of norms and guiding the preparation and disclosure of economic-financial information.
TopIntroduction
The International Financial Reporting Standards (IFRS) provided managers with greater discretion in accounting choices, both in bookkeeping and in disclosure. In addition, after IFRS adoption, Brazilian standards began to require the disclosure of additional information in notes to financial statements, which increased the information content of financial reporting (Antunes et al., 2012).
Cunha (2008) states that narrative information is as much used for decision-making as numerical information, and the former have occupied a higher percentage in the size of the statements. Lo et al. (2017) document that the textual narrative represents an average of 80% of an annual report, highlighting the relevance of clarity of notes for understanding and interpreting the quantitative information contained in financial reporting.
In the last decade, several regulatory bodies around the world began to pay more attention to the accounting disclosure process with the aim of making narrative statements more useful in the decision-making process of external users, especially with regard to the clarity of information. Some examples of international organizations that issued documents related to this matter are the Securities and Exchange Commission (SEC), the European Financial Reporting Advisory Group (EFRAG), the International Accounting Standards Board (IASB).
In view of this worldwide movement aimed at improving the disclosure of qualitative information, in 2014, the Brazilian Accounting Standard Committee (CPC) issued Technical Guidance 07 (OCPC 07) – Disclosure of General Purpose Financial Reporting. Since Brazilian standards are in line with IFRS, OCPC 07 follows guidelines similar to EFRAG. This document was intended to guide developers in the preparation and dissemination of higher quality notes to the financial statements (Cruz Junior, 2018).
In this sense, one of the characteristics that is expected to be improved is the readability of financial reports. Readability refers to the inherent ability of the text to be read quickly and easily, therefore it is a property of the complexity of the narrative (Smith & Taffler, 1992). Distorted and confusing writing impedes the fluid understanding of messages by the reader, especially if unfamiliar or unnecessary polysyllabic words are used, in addition to long sentences (Courtis, 2004).
Recent studies have sought to verify characteristics of narrative statements before and after the issuance of OCPC 07 (Silva, 2017; Gomes et al., 2018; Cruz Junior, 2018; Telles, 2020). However, the results are conflicting, since they vary depending on the strategies to measure readability or statistically analyses used. Thus, this chapter contributes with additional information to the accounting literature by exploring the following research question: Did Brazilian public firms change the readability of notes to the financial statements after the issuance of OCPC 07?
To answer this research question, it is used a sample of Brazilian public firms listed on B3 in the period from 2010 to 2018. The methodology is classified as a descriptive and quantitative approach, through a document examination. Data were analyzed using multiple linear regression with panel data controlled by sector and year fixed effect.
Thus, this chapter aims to verify the association between the issuance of OCPC 07 and changes in the level of readability of the notes to the financial statements of Brazilian public firms. This chapter differs from the previous studies in the following aspects: i) sample with longer period post-IFRS and observations; ii) the inclusion of financial firms, commonly excluded from the analysis; iii) use of fixed effects and control variables; iv) analysis of legibility variance by sector.