Niamh M. Brennan
Niamh Brennan is Michael MacCormac Professor of Management at University College Dublin and Founder/Academic Director of the UCD Centre for Corporate Governance. A first-class honours, first-in-class UCD Science (Microbiology and Biochemistry) graduate, Prof Niamh Brennan qualified as a chartered accountant with KPMG, holds a PhD from the University of Warwick and is a Chartered Director of the Institute of Directors (London). With 100+ publications, she has a h-index of 31 reflecting 6,000+ Google Scholar citations. In recognition of her research, Niamh was elected to the Royal Irish Academy in 2020, Ireland’s highest academic honour, the first business school academic to be so recognised. Niamh also received the 2018 British Accounting & Finance Association Distinguished Academic Award, and was inducted into the Interdisciplinary Accounting Research Hall of Fame in 2019 and was awarded a Fellowship of the Irish Academy of Management in 2021. Prof Brennan’s papers received a British Accounting Review best-paper award, Mary Parker Follett Accounting, Auditing and Accountability Journal best-paper and ‘highly commended’ awards, and an Accountancy Ireland best-article award. She has received four best-reviewer awards. Prof Brennan is Associate Editor of the British Accounting Review, Accounting, Auditing and Accountability Journal and Accounting Forum. In a survey of alumni, Niamh was voted one of UCD's top three lecturers for the 2000s onwards. Former chair of the National College of Art & Design and of the Dublin Docklands Development Authority, she holds/has held non-executive directorships with the Children's Hospital Ireland, the Health Service Executive, Ulster Bank, Co-operation Ireland, Coillte (State forestry company), Lifetime Assurance (Bank of Ireland’s life assurance subsidiary) and several private companies, and is/was a member of numerous audit committees. She chaired the Irish Government's Commission on Financial Management and Control Systems in the Health Services and was Vice-Chair of the Irish Government's Review Group on Auditing. Niamh is an Inaugural Honorary Fellow of The Institute of Directors in Ireland and an Honorary Fellow of the Society of Actuaries in Ireland.
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Refereed Papers by Niamh M. Brennan
Design/methodology/approach – PFI-related annual report narratives of three UK PFI private-sector companies, over seven years and across two periods of significant change in the development of the PFI public policy, are analysed using manual content analysis.
Findings – Results suggest that PFI private-sector companies use impression management to legitimise during periods of uncertainty for PFI public policy, to alleviate concerns, to provide credibility for the policy and to legitimise the private sector’s own involvement in PFI.
Research limitations/implications – While based on a sizeable database, the research is limited to the study of three PFI private-sector companies.
Originality/value – Portrayal of public policy in annual report narratives has not been subject to prior research. The research demonstrates how managers of PFI private-sector companies present PFI narratives in support of public policy direction that, in turn, benefits PFI private-sector companies.
Keywords Annual report narratives, Impression management, Legitimacy theory, Private finance initiative
Paper type Research paper
Design/methodology/approach – We conducted 25 in-depth interviews and a focus group session with investment fund directors applying a grounded theory methodology.
Findings – Because of their unique position of power, we find that fund promoter organisations (that establish and attract investors to the funds) exercise control and monitoring roles. As a result, contrary to prior assumptions, oversight is the primary role of investment fund boards, rather than the control role or monitoring role associated with corporate boards. Our findings can be extended to other board-of-director contexts in which boards (e.g., subsidiary boards, boards of state-owned entities) have legal responsibility but limited power because of power exercised by other parties such as large shareholders.
Practical implications – Shareholders and regulators generally assume boards exercise control and monitoring roles. This can lead to an expectations gap on the part of shareholders and regulators who may not consider the practical realities in which boards operate. This expectations gap compromises the very objective of governance – investor protection.
Originality/value – Based on interviews with investment fund directors, we challenge the control-role theory of investment fund boards of directors. Building on our findings, and following subsequent conceptual engagement with the literature, we differentiate control, monitoring and oversight roles, terms which are often used interchangeably in prior research. We distinguish between the three terms on the basis of the level of influence implied by each.
Design/methodology/approach – The theoretical framework is based on two broad research perspectives on accounting communication: (A) a functionalist-behavioural transmission perspective and (B) a symbolic-interpretive narrative perspective. Eight traditions of communication research are introduced which provide alternative ways of conceptualising accounting communication, namely (1) Mathematical tradition, (2) Socio-psychological tradition, (3) Cybernetic/systems-oriented tradition, (4) Semiotic tradition, (5) Rhetorical tradition, (6) Phenomenological tradition, (7) Socio-cultural tradition, and (8) Critical tradition. Exemplars of each tradition from prior accounting research, to the extent they have been adopted, are discussed. Finally, a typology is developed, which serves as a heuristic device for viewing similarities and differences between research traditions.
Findings – Prior accounting studies predominantly focus on the role of discretionary disclosures in accounting communication in the functioning of the relationship between organisations and their audiences. Research is predominantly located in the mathematical, the socio-psychological, and the cybernetic/systems-oriented tradition. Accounting communication is primarily viewed as the transmission of messages about financial, environmental and social information to external audiences. Prior research is mainly concerned with the communicator (e.g., CEO personality) and the message (e.g., intentions and effects of accounting communication). Research from alternative traditions is encouraged, which explores how organisations and their audiences engage in a dialogue and interactively create, sustain, and manage meaning concerning accounting and accountability issues.
Originality/value – The paper identifies, organises and synthesises research perspectives, traditions, and associated theories from the communication studies literature in the form of a typology. The paper concludes with an extensive agenda for future research on accounting communication.
Design/methodology/approach – Our analysis of information/knowledge exchange, sharing and creation and the resultant conceptual model are based on the following elements: (i) manager-non-executive director information/knowledge, (ii) management-board information/knowledge and (iii) board dynamics and reciprocal processes converting implicit/tacit into explicit information/knowledge.
Findings – Our paper provides new insights into the dynamics of information/knowledge exchange, sharing and creation between managers and non-executive directors (individual level)/between management and boards (group level). We characterise this as a two-way process, back-and-forth between managers/executive directors and non-executive directors. The importance of relative/experienced “ignorance” of non-executive directors is revealed, which we term the “information asymmetry paradox”.
Research implications – We set out key opportunities for developing a research agenda from our model based on prior research of knowledge conversion processes and how these may be applied in a boardroom setting.
Practical implications – Our model may assist directors in better understanding their roles and the division of labour between managers and non-executive directors from an information/knowledge perspective.
Originality/value – We apply Ikujiro Nonaka’s knowledge conversion framework to consider the transitioning from individual implicit personal to explicit shared information/knowledge, to understand the subtle processes at play in boardrooms influencing information/knowledge exchange, sharing and creation between managers and non-executive directors.
Design/methodology/approach – We devise an analytical framework based on practice theory to conduct our review. We examine what audit committees should do (i.e., best practice) versus what audit committees actually do (i.e., actual activities in practice – praxis). Attributes of audit committee members, and the relationship dynamics relevant to their role execution (i.e., practitioners), are considered.
Findings – Research on boards has found that over-emphasis on agency theory’s monitoring role negatively impacts board effectiveness. We invoke other theories in examining what audit committees do in practice. We characterise the role of audit committees as oversight and not monitoring. We question whether, similar to auditing, audit committees are blamist tools or are genuinely orientated towards supporting improvements in organisational management systems. We unpack the ritualistic ceremonial behaviours and symbolic endeavours versus substantive engagement by audit committees. Our analytical framework also considers the “guardianship circle” around audit committees in the form of the key practitioners and their relationships: audit committee members, auditors and senior managers.
Originality/value – Drawing on our analytical framework, we provide directions for further opportunities for research of audit committees.
There were 204 (125) non-compliant companies, 537 (253) Code breaches and 438 (208) explanations for non-compliance, an average of 2.6 (2.0) Code breaches and 2.2 (1.7) explanations per non-compliant company. Although compliance increased over the period examined, explanations were found to be of variable quality. Results suggest that companies need to improve the quality of their explanations if they are to be useful to users, notably location, complexity and specificity of explanations. There are also important questions raised about the work of auditors and their apparent silence. Companies are being encouraged to move towards compliance. We argue that this is against the ‘comply-or-explain’ philosophy which accepts that ‘one size does not fit all.’ Better quality of explanation is more important than compliance and thus companies may be unwittingly heading in the wrong direction.
Design/methodology/approach – We adopt Aristotle’s triangular framework of the rhetorical situation to examine how the writer, the audience, and the purpose of communication interact in the choice of rhetorical strategies used to persuade others of the validity and legitimacy of a claim during a public controversy. Our analysis focuses on the strategies (i.e., moves and their rhetorical realisations) in the form of logos (appealing to logic), ethos (appealing to authority), and pathos (appealing to emotion), with a particular emphasis on metaphor, used to achieve social and political goals. We base our analysis on a case study involving a conflict between Greenpeace and six organisations in the sportswear/fashion industry over wastewater discharge of hazardous chemicals. The conflict played out in a series of 20 press releases issued by the parties over a two-month period.
Findings – All six firms interacting with Greenpeace in the form of press releases eventually conceded to Greenpeace’s demand to eliminate hazardous chemicals from their supply chains. We attribute this to Greenpeace’s ability to harness support from other key stakeholders and to use rhetoric effectively. Results show the extensive use of rhetoric by all parties.
Originality/value – We regard legitimacy construction as reliant on communication and as being achieved by organisations participating in a dialogue with stakeholders. For this purpose, we develop an analytical framework which situates environmental reporting in a specific rhetorical situation and links rhetoric, argument, and metaphor.
We find evidence of dialogism suggesting that CSR communication is an interactive process which has to be understood as a function of the power relations between a firm and a specific stakeholder. Also, we find evidence of intertextuality in the press releases by the six firms which engage in verbal interaction with the stakeholder. We interpret this as linguistic evidence of isomorphic processes relating to CSR practices resulting from the pressure exerted by a powerful stakeholder. The lack of response by ten firms that fail to issue press releases suggests a strategy of ‘watch-and-wait’ with respect to the outcome of the conflict.
Keywords: Dialogism, interaction, intertextuality, CSR communication.
Design/Methodology/Approach – Content analysis is applied to analyse twenty nine definitions of clinical governance from the perspective of the roles and responsibilities of those charged with governance, management and practice.
Findings – The analysis indicates that definitions of the umbrella term ‘clinical governance’ comprise a mixture of activities relating to governance, management and practice which is confusing for those expected to execute those roles.
Practical implications – Consistent with concepts from corporate governance, we distinguish between governance, management and practice. For effective governance, it is important that there be division of duties between governance roles and management and practice roles. These distinctions will help to clarify roles and responsibilities in the execution of clinical activities.
Originality/Value – Drawing on insights from corporate governance, in particular, the importance of a division of functions between governance roles, and management and practice roles, we propose three new definitions to replace the umbrella term ‘clinical governance’.
Key words: Clinical governance, Definitions, Governance, Management, Practice, Roles and responsibilities
Paper type: Conceptual paper
Design/methodology/approach – This paper takes concepts of hubris from the clinical psychology literature and applies them to discourses in CEO letters to shareholders in annual reports. The research comprises a longitudinal study of the discretionary narrative disclosures in the CEO letters to shareholders in eight annual reports, benchmarked against disclosures in the CEO letters to shareholders of the previous and subsequent CEOs of the same organisation.
Findings – Results point to evidence of narcissism and hubris in the personality of the Bank CEO. Over half the sentences analysed were found to contain narcissistic-speak. In 45% of narcissistic-speak sentences, there were three of more symptoms of hubris – what Owen and Davison (2009) describe as extreme hubristic behavior. In relation to CEO overconfidence, only seven (2%) sentences contained bad news. More than half of the good news was attributed to the CEO and all the bad news was attributed externally. The research thus finds evidence of hubris in the CEO letters to shareholders, which became more pronounced the longer the CEO served.
Research limitations/implications – The analysis of CEO discourse is highly subjective, and difficult to replicate.
Originality/value – The primary contribution of this research is the adaptation of the 14 clinical symptoms of hubris from clinical psychology to the analysis of narratives in CEO letters to shareholders in annual reports to reveal signs of CEO hubris.
Keywords Discretionary narrative disclosures, Annual reports, Narcissism, Hubris, CEOs, Social psychology
Paper type Research paper
Design/methodology/approach – PFI-related annual report narratives of three UK PFI private-sector companies, over seven years and across two periods of significant change in the development of the PFI public policy, are analysed using manual content analysis.
Findings – Results suggest that PFI private-sector companies use impression management to legitimise during periods of uncertainty for PFI public policy, to alleviate concerns, to provide credibility for the policy and to legitimise the private sector’s own involvement in PFI.
Research limitations/implications – While based on a sizeable database, the research is limited to the study of three PFI private-sector companies.
Originality/value – Portrayal of public policy in annual report narratives has not been subject to prior research. The research demonstrates how managers of PFI private-sector companies present PFI narratives in support of public policy direction that, in turn, benefits PFI private-sector companies.
Keywords Annual report narratives, Impression management, Legitimacy theory, Private finance initiative
Paper type Research paper
Design/methodology/approach – We conducted 25 in-depth interviews and a focus group session with investment fund directors applying a grounded theory methodology.
Findings – Because of their unique position of power, we find that fund promoter organisations (that establish and attract investors to the funds) exercise control and monitoring roles. As a result, contrary to prior assumptions, oversight is the primary role of investment fund boards, rather than the control role or monitoring role associated with corporate boards. Our findings can be extended to other board-of-director contexts in which boards (e.g., subsidiary boards, boards of state-owned entities) have legal responsibility but limited power because of power exercised by other parties such as large shareholders.
Practical implications – Shareholders and regulators generally assume boards exercise control and monitoring roles. This can lead to an expectations gap on the part of shareholders and regulators who may not consider the practical realities in which boards operate. This expectations gap compromises the very objective of governance – investor protection.
Originality/value – Based on interviews with investment fund directors, we challenge the control-role theory of investment fund boards of directors. Building on our findings, and following subsequent conceptual engagement with the literature, we differentiate control, monitoring and oversight roles, terms which are often used interchangeably in prior research. We distinguish between the three terms on the basis of the level of influence implied by each.
Design/methodology/approach – The theoretical framework is based on two broad research perspectives on accounting communication: (A) a functionalist-behavioural transmission perspective and (B) a symbolic-interpretive narrative perspective. Eight traditions of communication research are introduced which provide alternative ways of conceptualising accounting communication, namely (1) Mathematical tradition, (2) Socio-psychological tradition, (3) Cybernetic/systems-oriented tradition, (4) Semiotic tradition, (5) Rhetorical tradition, (6) Phenomenological tradition, (7) Socio-cultural tradition, and (8) Critical tradition. Exemplars of each tradition from prior accounting research, to the extent they have been adopted, are discussed. Finally, a typology is developed, which serves as a heuristic device for viewing similarities and differences between research traditions.
Findings – Prior accounting studies predominantly focus on the role of discretionary disclosures in accounting communication in the functioning of the relationship between organisations and their audiences. Research is predominantly located in the mathematical, the socio-psychological, and the cybernetic/systems-oriented tradition. Accounting communication is primarily viewed as the transmission of messages about financial, environmental and social information to external audiences. Prior research is mainly concerned with the communicator (e.g., CEO personality) and the message (e.g., intentions and effects of accounting communication). Research from alternative traditions is encouraged, which explores how organisations and their audiences engage in a dialogue and interactively create, sustain, and manage meaning concerning accounting and accountability issues.
Originality/value – The paper identifies, organises and synthesises research perspectives, traditions, and associated theories from the communication studies literature in the form of a typology. The paper concludes with an extensive agenda for future research on accounting communication.
Design/methodology/approach – Our analysis of information/knowledge exchange, sharing and creation and the resultant conceptual model are based on the following elements: (i) manager-non-executive director information/knowledge, (ii) management-board information/knowledge and (iii) board dynamics and reciprocal processes converting implicit/tacit into explicit information/knowledge.
Findings – Our paper provides new insights into the dynamics of information/knowledge exchange, sharing and creation between managers and non-executive directors (individual level)/between management and boards (group level). We characterise this as a two-way process, back-and-forth between managers/executive directors and non-executive directors. The importance of relative/experienced “ignorance” of non-executive directors is revealed, which we term the “information asymmetry paradox”.
Research implications – We set out key opportunities for developing a research agenda from our model based on prior research of knowledge conversion processes and how these may be applied in a boardroom setting.
Practical implications – Our model may assist directors in better understanding their roles and the division of labour between managers and non-executive directors from an information/knowledge perspective.
Originality/value – We apply Ikujiro Nonaka’s knowledge conversion framework to consider the transitioning from individual implicit personal to explicit shared information/knowledge, to understand the subtle processes at play in boardrooms influencing information/knowledge exchange, sharing and creation between managers and non-executive directors.
Design/methodology/approach – We devise an analytical framework based on practice theory to conduct our review. We examine what audit committees should do (i.e., best practice) versus what audit committees actually do (i.e., actual activities in practice – praxis). Attributes of audit committee members, and the relationship dynamics relevant to their role execution (i.e., practitioners), are considered.
Findings – Research on boards has found that over-emphasis on agency theory’s monitoring role negatively impacts board effectiveness. We invoke other theories in examining what audit committees do in practice. We characterise the role of audit committees as oversight and not monitoring. We question whether, similar to auditing, audit committees are blamist tools or are genuinely orientated towards supporting improvements in organisational management systems. We unpack the ritualistic ceremonial behaviours and symbolic endeavours versus substantive engagement by audit committees. Our analytical framework also considers the “guardianship circle” around audit committees in the form of the key practitioners and their relationships: audit committee members, auditors and senior managers.
Originality/value – Drawing on our analytical framework, we provide directions for further opportunities for research of audit committees.
There were 204 (125) non-compliant companies, 537 (253) Code breaches and 438 (208) explanations for non-compliance, an average of 2.6 (2.0) Code breaches and 2.2 (1.7) explanations per non-compliant company. Although compliance increased over the period examined, explanations were found to be of variable quality. Results suggest that companies need to improve the quality of their explanations if they are to be useful to users, notably location, complexity and specificity of explanations. There are also important questions raised about the work of auditors and their apparent silence. Companies are being encouraged to move towards compliance. We argue that this is against the ‘comply-or-explain’ philosophy which accepts that ‘one size does not fit all.’ Better quality of explanation is more important than compliance and thus companies may be unwittingly heading in the wrong direction.
Design/methodology/approach – We adopt Aristotle’s triangular framework of the rhetorical situation to examine how the writer, the audience, and the purpose of communication interact in the choice of rhetorical strategies used to persuade others of the validity and legitimacy of a claim during a public controversy. Our analysis focuses on the strategies (i.e., moves and their rhetorical realisations) in the form of logos (appealing to logic), ethos (appealing to authority), and pathos (appealing to emotion), with a particular emphasis on metaphor, used to achieve social and political goals. We base our analysis on a case study involving a conflict between Greenpeace and six organisations in the sportswear/fashion industry over wastewater discharge of hazardous chemicals. The conflict played out in a series of 20 press releases issued by the parties over a two-month period.
Findings – All six firms interacting with Greenpeace in the form of press releases eventually conceded to Greenpeace’s demand to eliminate hazardous chemicals from their supply chains. We attribute this to Greenpeace’s ability to harness support from other key stakeholders and to use rhetoric effectively. Results show the extensive use of rhetoric by all parties.
Originality/value – We regard legitimacy construction as reliant on communication and as being achieved by organisations participating in a dialogue with stakeholders. For this purpose, we develop an analytical framework which situates environmental reporting in a specific rhetorical situation and links rhetoric, argument, and metaphor.
We find evidence of dialogism suggesting that CSR communication is an interactive process which has to be understood as a function of the power relations between a firm and a specific stakeholder. Also, we find evidence of intertextuality in the press releases by the six firms which engage in verbal interaction with the stakeholder. We interpret this as linguistic evidence of isomorphic processes relating to CSR practices resulting from the pressure exerted by a powerful stakeholder. The lack of response by ten firms that fail to issue press releases suggests a strategy of ‘watch-and-wait’ with respect to the outcome of the conflict.
Keywords: Dialogism, interaction, intertextuality, CSR communication.
Design/Methodology/Approach – Content analysis is applied to analyse twenty nine definitions of clinical governance from the perspective of the roles and responsibilities of those charged with governance, management and practice.
Findings – The analysis indicates that definitions of the umbrella term ‘clinical governance’ comprise a mixture of activities relating to governance, management and practice which is confusing for those expected to execute those roles.
Practical implications – Consistent with concepts from corporate governance, we distinguish between governance, management and practice. For effective governance, it is important that there be division of duties between governance roles and management and practice roles. These distinctions will help to clarify roles and responsibilities in the execution of clinical activities.
Originality/Value – Drawing on insights from corporate governance, in particular, the importance of a division of functions between governance roles, and management and practice roles, we propose three new definitions to replace the umbrella term ‘clinical governance’.
Key words: Clinical governance, Definitions, Governance, Management, Practice, Roles and responsibilities
Paper type: Conceptual paper
Design/methodology/approach – This paper takes concepts of hubris from the clinical psychology literature and applies them to discourses in CEO letters to shareholders in annual reports. The research comprises a longitudinal study of the discretionary narrative disclosures in the CEO letters to shareholders in eight annual reports, benchmarked against disclosures in the CEO letters to shareholders of the previous and subsequent CEOs of the same organisation.
Findings – Results point to evidence of narcissism and hubris in the personality of the Bank CEO. Over half the sentences analysed were found to contain narcissistic-speak. In 45% of narcissistic-speak sentences, there were three of more symptoms of hubris – what Owen and Davison (2009) describe as extreme hubristic behavior. In relation to CEO overconfidence, only seven (2%) sentences contained bad news. More than half of the good news was attributed to the CEO and all the bad news was attributed externally. The research thus finds evidence of hubris in the CEO letters to shareholders, which became more pronounced the longer the CEO served.
Research limitations/implications – The analysis of CEO discourse is highly subjective, and difficult to replicate.
Originality/value – The primary contribution of this research is the adaptation of the 14 clinical symptoms of hubris from clinical psychology to the analysis of narratives in CEO letters to shareholders in annual reports to reveal signs of CEO hubris.
Keywords Discretionary narrative disclosures, Annual reports, Narcissism, Hubris, CEOs, Social psychology
Paper type Research paper
There is no right answer to each dilemma, although there may be some courses of action that are clearly wrong. The dilemmas are deliberately designed to capture the grey areas in the real world, and to illustrate just how difficult it can be to be a good company director. That said, while there are lots of shades of grey, good company directors need to call black ‘black’ when it is so. It is important that directors stand up and say when certain behaviour is wrong. Particularly in a boardroom scenario, if you believe something is ‘black’ but do not say so, then you risk losing the opportunity for it to be explained. The issue may turn out to be more complicated than at first glance.
The dilemmas cover areas of particular challenge in boardrooms including directors’ fiduciary duties/conflict of interest, the exercise of due care and skill, decision making, behavioural issues, information asymmetry and the conduct of board business.
This is a focussed interdisciplinary compilation of readings which brings together corporate governance and financial reporting, and issues of accountability. It does not comprise a broad coverage of all corporate governance issues. Instead, it takes a narrower perspective, concentrating only on those corporate governance mechanisms influencing financial reporting and accountability.
The papers selected comprise a mixture of theoretical and review articles and original empirical research. The empirical papers primarily consider financial reporting aspects of corporate governance. Financial reporting itself is the focus of much of these papers. However, other governance mechanisms relevant to financial reporting are also considered, especially the role of audit committees, of internal audit, of risk management and the role of external audit. Papers are selected from as wide a variety of journals, and as many non-US journals, as possible.
The Irish Accountancy Educational Trust was established in 1981 by the Institute of Chartered Accountants in Ireland as an independent charitable trust. Its objectives are to promote and facilitate the development of accountancy. The policy of the Trustees is to act as a catalyst for activities which would otherwise not be feasible. The author gratefully acknowledges the generous support received from The Irish Accountancy Educational Trust in respect of this publication. This book would not have been published but for its support.
This is an introductory text. The complexities of many of the topics introduced here are left for more specialist and advanced publications. The book aims to be a concise, practical guide to the basics of doing research in accounting and preparing a research report – usually a dissertation. The primary audience for the book is undergraduate and masters-level students, although PhD students starting off may find some topics useful. Examples, references etc. are taken from the accounting literature, but students in other business disciplines may find some of the material applicable to their subject.
The object of the paper is two-fold:
• Firstly, the paper examines disclosures in profit forecasts and in takeover documents from the perspective of rhetoric and argument to show how managements use accounting information to defend their own position and rebut the arguments of the other side. Persuasion in forecasts, and the verbal jousting and argument between bidder and target managements during contested bids, is considered.
• Secondly, the paper reproduces and discusses examples concerning disclosures in profit forecasts and in takeover documents. This is intended as useful precedent material for practitioners involved in preparing profit forecasts.
This paper reviews financial reporting in profit forecasts, based on a systematic analysis of the disclosure practices in 250 profit forecasts disclosed during 701 public company takeover bids in the UK in the 5 year period 1988 to 1992. There were 74 examples selected from the 250 forecasts to illustrate particular practices which are commented on and discussed in the text. The examples shown do not necessarily illustrate best practice. It is intended that they highlight the wide variety of disclosure-related issues to be taken into consideration in preparing a forecast for publication. It is hoped these examples will act as useful precedent material to be consulted by practitioners involved in preparing profit forecasts for publication in the future.
In selecting material to reproduce, there was particular emphasis on disclosures used by management for rhetorical purposes – to persuade shareholders or to attack the other side in the bid.
The research showed that there was some evidence of strategic information disclosures by management both in the accounting practices employed in preparing forecasts, in the variability of levels of disclosure and the choice of wording used in some disclosures. In particular, the choice of disclosure practices by management may be used to provide protection if the forecast is not subsequently achieved, thus serving management’s own self-interest.
The following recommendations are made to improve reporting practices:
• Specification of minimum levels of disclosure in forecasts would reduce the flexibility in reporting practices which would result in greater consistency between companies in forecast items disclosed.
• The role of the reporting accountants and financial advisors should be expanded to require them to consider and report on the objectivity and consistency of disclosures in takeover documents.
This research investigates one aspect of managerial behaviour during takeover bids - that of disclosure of profit forecasts. As forecast disclosure is largely unregulated in the UK, this can provide valuable insights into managerial voluntary disclosure decisions. This in turn may be helpful in assisting policy makers to develop regulations governing disclosure of forecasts.
Profit forecasts are rarely disclosed by UK managements in routine circumstances (such as in annual reports). However, a substantial number of companies issuing prospectuses, either to raise new capital or during takeover bids, include a profit forecast. This raises the question as to why, in a market generally averse to routine disclosure of profit forecasts, companies involved in takeovers would overcome that aversion and publish their forecasts.
The fact that there is a general culture hostile to routine disclosure of profit forecasts in the UK suggests that companies’ motivation will be to make no disclosure unless there are very attractive or compelling reasons. If disclosure of profit forecasts were a routine feature of company behaviour, a decision to make a forecast in a takeover situation would not require any particularly strong motivation.
Forecasts are normally made during takeover bids to support arguments being put forward by directors. The nature of these arguments will differ depending on whether the bid is agreed (i.e. recommended by target firm directors) or is contested.
The research is based on eleven in-depth interviews with participants in the decision to disclose a forecast in public company takeover bids. Interviews were conducted in 1993 and 1994.
The eleven interviews were carried out as part of a larger empirical research project which examined disclosure of profit forecasts in 701 takeover bids for public companies listed on the London Stock Exchange in the period 1988 to 1992. Interviewees were selected from a wide variety of backgrounds, firm positions and takeover contexts, so that all the relevant issues could be explored. All interviewees were involved in one or more of the 701 public company takeover bids which were part of the research sample. Eleven interviews were deemed sufficient, as a point of saturation (whereby no additional points were coming out of the interviews) had been reached.
The object of the interviews was to gain a better understanding of the disclosure process from those who had participated in forecast disclosure decisions taken during takeover bids. In addition, the interviews provide some background on the strategic issues underlying disclosure.
Interview Findings
Interview responses are analysed by reference to five themes:
• Factors influencing disclosure;
• Motivations for disclosure of forecasts by bidders;
• Motivations for disclosure of forecasts by targets;
• Role of forecasts in defending against hostile bids;
• Information disclosed in forecasts.
Managerial motives to disclose or not disclose a forecast will be influenced by whether the forecast is persuasive in supporting arguments of directors. Many factors influence the disclosure decision. Two are particularly important. Whether the forecast discloses better or worse figures than expected (by say market analysts) is likely to influence the disclosure decision. A separate but related issue is whether forecasts disclose ‘good’ or ‘bad’ news. Various other factors are also considered, including the influence of company characteristics on disclosure.
Motivations underlying management decisions to disclose or not disclose forecasts are likely to be different for bidders and targets. Consequently, bidders’ and targets’ disclosure decisions are separately analysed.
Profit forecasts are issued for the purpose of persuading shareholders to support the arguments of directors. Following this, an interesting question is whether, in fact, they are effective in achieving this objective. There is anecdotal evidence that target companies in contested bids use profit forecasts as a means of fighting off an unwelcome bidder. Views on whether forecasts are effective defence weapons are examined.
Once a company decides to publish a profit forecast, further decisions have to be made on the detailed information to disclose in the forecast. Relevant to their persuasiveness is the amount of information included in forecasts. The factors and motivations underlying the financial items and assumptions in forecasts are also examined.
Factors influencing disclosure - If market expectations of results are inaccurate a forecast is much more likely. Good news forecasts are also more likely, although bad news forecasts may be disclosed in certain circumstances.
Advisors are very influential in the disclosure decision. Variability of earnings and the riskiness of the forecast are also important factors.
Motivations for disclosure of forecasts by bidders - Results show that bidding companies disclose forecasts mainly to support the price of any shares issued during the bid.
Motivations for disclosure of forecasts by targets - Targets companies in agreed bids disclose forecasts mainly to support directors’ recommendations to shareholders to accept the bid, or as a requirement of bidders, who want information discussed during bid negotiations validated in the form of a formal profit forecast reported on by advisors and reporting accountants. Targets in contested bids disclose forecasts to get an increase in offer price or to defeat the bid.
Forecast as a defensive weapon: It is clear that, in most circumstances, forecasts are not effective defence weapons - they are disclosed by only a minority of targets in contested bids. However, where circumstances favour disclosure, most interviewees agreed that a forecast is an effective weapon in a takeover bid.
There was no consensus on what the benefit of disclosure is, although most commentators referred to forecasts in the context of getting an increase in offer price. There was only one mention of a forecast defeating a bid.
Information disclosed in forecasts - Accepting that the amount forecast is most important, interviewees agreed that more detailed forecasts are more credible and provide forecasters with greater protection. Forecasters had a strong preference for including assumptions in forecasts as this offered protection to the forecaster. Users of forecasts were averse to assumptions, recognising that they reduced the reliability and credibility of forecasts, especially non-standard assumptions specific to individual businesses.
Recommendations of the study
The research identified a number of issues relevant to decisions to disclose profit forecasts during takeover bids. Based on the findings of the research seven recommendations are proposed:
• Profit forecasts should not be made mandatory - Investors will interpret the absence of a forecast in the worse possible way and are therefore not disadvantaged by their non-disclosure.
• Companies should keep the market better informed - Companies would not need to disclose forecasts if they disclosed information more regularly to the stock market and ensured that shareholders and analysts are kept informed of company prospects. Regulators should consider requiring quarterly, as well as interim, reports by public companies.
• Companies should adopt consistent disclosure practices for good news and bad news - There is little regulatory control on how good news or bad news is disclosed. There is evidence that good news may be forecast whereas bad news is communicated to shareholders in more qualitative ways. Although desirable, in practice it would be difficult to devise regulations to ensure that good news and bad news is communicated in the same way.
• Dividend forecasts should be reported on in the same way as profit forecasts - In practice many companies make dividend forecasts which are not reported on by reporting accountants and advisors This appears to amount to a forecast ‘by the back door’.
• Directors’ responsibility statements should be included in profit forecasts - Directors should be required to include a responsibility statement in profit forecasts, similar to the requirements of the Cadbury Report (1992) in relation to annual reports. This statement should clarify the division of responsibilities between directors and those reporting on forecasts.
• Disclosures in profit forecasts should be better regulated - Profit forecasts vary considerably in content. It is impossible to completely standardise the content of profit forecasts. However, UK regulations should attempt limit the variability of disclosures in forecasts by specifying a standard minimum level of disclosure to apply to all forecasts.
• There should be better control on disclosure of assumptions - Interview evidence clearly points to manipulation of assumptions in forecasts to protect directors in the event of forecasts going wrong. Directors should distinguish between standard assumptions and those specific to the business being forecast. In addition, directors might include a statement explaining the purpose of the assumptions and outlining the consequences if experience is different from the assumptions.
MCQs have a number of advantages over traditional examination formats. First, they allow the examiner to ask questions on every topic on the syllabus and thus test the candidates range of knowledge. Perhaps more importantly, correction of answers is entirely objective and comparatively easy. Large numbers of scripts can be objectively tested in a short space of time.
Objective tests can also be an effective teaching tool. The topics covered in each chapter are logically sequenced so that as the student progresses through the chapter they build up their knowledge and skills in relation to that topic. In addition, the book emphasises problem areas and attempts to help students avoid common mistakes in financial accounting. Thus the tutor can indicate the correct solution and also explain or seek responses as to why other plausible answers are incorrect to the given statement. Such a process should ensure greater understanding of the topic under discussion.
This book is suitable for students taking introductory financial accounting examinations of the professional accountancy bodies, third level accounting students or other students studying introductory financial accounting courses. The three revision examinations at the end of this book are reproduced with the kind permission of the Institute of Chartered Accountants in Ireland.
Keywords: Governance, school boards, school board members, roles and responsibilities, board effectiveness
The report shows that if the recommendations of the Higgs Report are implemented, many Irish listed companies will need to make considerable improvements for their boards to be judged fully independent. The financial reporting council has adopted the Higgs recommendations (with some modifications) in a Combined, revised Code on Good Governance, which is effective from 1st November 2003.
Many individual non-executive directors failed to meet the criteria for independence for reasons such as previous association through business, auditing or family, years served without re-election or a history as former employees. The report reveals that there remains confusion as to what criteria constitutes an independent director. A number of firms also failed to disclose sufficient biographical information on directors.
Inter-locking directorships where directors are sitting on each other’s boards however, are not as common as might be expected, with only six cases highlighted.
The research was carried out by Professor Niamh Brennan, Academic Director of the IoD Centre for Corporate Governance at UCD, (a joint venture between the IoD and University College Dublin) and Michael McDermott, a consultant and former MBA graduate from UCD. It examined firstly the independence of boards of directors and board sub committees by analysing board compositions as disclosed in annual reports. Secondly it considered the independence of individual non-executive directors by analysing disclosures in annual reports and applying determinants generally regarded as prerequisites for an independent director.