Determinants of Disclosure Quality: A study of environmental liability disclosures

Abstract

Accounting for environmental provisions involves judgment and individually developed accounting policies have led to the nature and extent of current disclosures to vary considerably among companies. Critics argue that the quality of disclosures is threatened, which causes problems with comparability. IAS 37 does not seem to be the only determining factor of quality in environmental liability disclosures. Defining quality as tone, readability and amount of narrative environmental liability disclosures, this study aimed at exploring what other potential factors could be determining the quality of such disclosures. An identification of determinants is deemed to be helpful for standard setters when developing and improving current standards aiming to overcome problems with e.g. comparability. The study was conducted using a sample of European oil- and gas producers that follow the IFRS. Quality of environmental liability disclosures was measured through the use of the computer based content analysis software DICTION and three different readability formulas. The output, in terms of tone, readability and amount represents the dependent variables. Conducting a literature review, the most commonly used potential determinants were identified and used as independent variables in the current study. Potential associations were investigated through the Variable selection model in STATA. The findings of this study show a use of positive and certain tone, difficult language and large dispersion in terms of amount of disclosures among oil- and gas producers. Country was found to be one of the most frequently appearing determining factors of quality, alongside with firm size and performance. The results show low quality of disclosures among UK firms, indicating the use of impression management, while the opposite was found for Scandinavian firms who present disclosures of high quality. The lower quality found among UK firms, compared to firms in other European countries, could be explained by the fact that UK have a shareholder-orientation. Scandinavian countries on the other hand are stakeholder-oriented and global leaders when it comes to CSR and corresponding reporting. These companies’ greater emphasis on environmental issues is interpreted as being reflected in their higher quality of disclosures in environmental liabilities. In terms of size, larger firms tend to have a neutral and certain tone and provide larger amount of disclosures, which indicate high quality. On the other hand, they tend to provide disclosures that are difficult to read. Better performing firms provide larger amount of disclosures but use a less certain language. Serving as guidance, the results have implications for organizations such as the IASB when developing accounting legislation, aiming to harmonize accounting practice and hence enhancing comparability of disclosures across countries. The findings serve as an indication of drivers of disclosure quality and can be used as a starting point for further research in terms of studying determining factors more closely.