Reducing complexity in financial reporting is desirable, and will

allow the exercise of professional judgement. Rules should never

take precedence over sound accounting principles

The word complexity is used to describe something intricate to

comprehend; putting this definition in the context of financial reporting
complexity; complexity can be described as the intricacy experience by
the investors/audience of financial reporting. There are two causes of
complexity in financial reporting, those caused by the intricacy in
commercial transaction, and those that were initiated through the fault of
the financial reporting standards setter, via regulations (ACCA, 2009).
Qualifying

the

purpose

of

financial

reporting

insinuated

that

the

information in financial reporting must be understood by the targeted

audience for the message to be appreciated (Rutherford, 2013); the lack
of understanding of the content of financial reporting by the investors will
inherently have some effect on the accuracy of the decision being made
based on the report. Thus, it aroused the question of how accounting
complexity affect managers financial misreporting; Dechow and Dichev
(2002), research based on the mistakes theory argues that complexity
causes managers to make more mistakes and exercise poor judgment. For
example, on complex transaction, preparer are more likely to err when
applying standards, thereby increasing the likelihood of misreporting. As a
result of making error, many preparers will instinctually throw everything
into

the

disclosures

(Hoogervorst,

2013),

to

avoid

been

caution;

consequentially investors now face with the problem of information

overloading. Another theoretical assumption on the issue of financial
reporting complexity is the manipulation theory, this theory suggests
that managers will manipulate financial information to their advantage
when accounting rule is complex, in so doing, creating uncertainty for the
audience of the report usually the investors.

The issues of financial reporting complexity mostly revolves around the

rule and compliance subjectivity; rule such as the one governing revenue
recognition varies depending on the country GAAP standard, even within a
country, preparer of financial reporting always find ways around the set
guidelines provided by the standard setter. For example, Tesco revenue
recognition in relation to how it recognised its rebates from suppliers, on
this issue Spence (2014) argues that the manner at which Tesco recorded
the rebate revenue is a common practice in the retail industry, however,
Mr. Rogers Sainsbury's finance director cited in the telegraph (2014) said
accounting for rebates and commercial revenues was very objective
and clearly defined by a set of rules and regulations", dismissing
comments that it was a "subjective process". The two arguments thus
bought a spotlight on the complexity of revenue recognition in financial
reporting. The inconsistency in GAAP standard across countries and the
lack of comprehensive guidance combined with the complexity in some
transaction has resulted in a large number of errors in the area of
recognition of revenue (Sondhi and Taub, 2006); on the issue of
complexity and the inconsistency in revenue recognition disclosures,
Tanya Branwhite in a press release to the Telegraph stated: The veracity
of that information cannot be vouched for and what one company says is
underlying profit may not be at all the same in definitional terms as
another companys view of underlying profits. . without a consistence
means of verification, managers could easily manipulate financial
information at the detriment of the investors; this notion was affirmed in
the study sponsored by FASB in 1981, the research findings concluded
that managers sometimes wittingly try to structure leases differently (as
operating lease) to avoid incurring additional liabilities; in the aftermath of
the Enron crises in United State, Sarbanes-Oxley Act specifically mandate
the SEC to review the concept of principle-based accounting; after the
review, the SEC rejected the idea of a principles-based only although
recommended the adoption of an objective oriented principles-based
approach to promote the exercise of professional judgement, to minimise
complexity and also enhanced the quality/faithful representation of

financial reporting. Addition to SEC proposal, in October 2002 the FASB

delivered a Proposal on the adoption of the Principles-Based Approach to
U.S. Standard Setting.
As noted by many observers, complexity in financial reporting is mostly
entrenched on the approach adopted by the preparer and the GAAP
standard in used.

According to the FASB, the demand-driven nature of

financial market and the complexity in accounting standards has resulted

in the exclusions to principles in the standards and increases the amount
of explanatory (footnote) and application guidance provided by the FASB
and others for applying the standards, thus making financial reporting
cumbersome (FASB, 2002, pp. 23).

could lead to situations in which professional judgments, made in good

faith, result in different interpretations for similar transactions and events,
raising concerns about comparability.
Comparability may be seen as especially important in an international
environment, as there is the danger that local accountants and regulators
arrive at differing views on the interpretation of contentious accounting
issues.
As Schipper (2003) points out, rules are likely to proliferate as accountants
ask for guidance that, they hope, will protect them from criticism and
lawsuits.
Detailed rules and authoritative guidance also serve standard setters and
regulators objective of reducing the opportunities of managers to use
judgments to manage earnings (and of auditors to have to accept that
practice). Standard setters can be and must show that they are active
standard setters. Thus, they may tend to overproduce standards and to
write detailed rules covering almost any conceivable situation.

After the aftermath of the Enrol scandal

Enron lied about its profits and stands accused of a range of shady dealings,
including concealing debts so they didn't show up in the company's accounts.

http://news.bbc.co.uk/1/hi/business/1780075.stm

Financial accounts are supposed to provide investors and stakeholders with an

understanding of the operating performance of the business

This suggests that investors can completely process the pension

information that has already been recognized in income, but fail to fully
impound the valuation impact of pension liabilities disclosed only in
footnotes
The Perils of Pensions: Does Pension Accounting Lead Investors and Analysts Astray?
Marc Picconi
The Accounting Review, Vol. 81, No. 4 (Jul., 2006), pp. 925-955
Published by: American Accounting Association
Article Stable URL: http://www.jstor.org/stable/4093156

For example, many preparers will err on the side of caution and throw
everything into the disclosures. They do not want to risk being asked by
the regulator to restate their financials.
The risk is that annual reports become simply compliance documents,
rather than instruments of communication

underlying profit may not be at all the same in definitional terms as another
companys view of underlying profits.

Lawrence, A., 2013. Individual investors and financial disclosure. Journal of

Accounting and Economics, 56(1), 130 147.

Rutherford, B. A. (2013). A genre-theoretic approach to financial reporting

research. The British Accounting Review, 45(4), 297-310.
Hoogervorst, H. (2013). Breaking the boilerplate. IFRS Conference,
Amsterdam.

Sondhi, A. and S. Taub, 2006. Miller Revenue Recognition Guide. CCH

Incorporated.

Dechow, P., and Dichev, I., 2002. The quality of accounting and earnings:
The role of accrual estimation errors. The Accounting Review 77
(Supplement): 35-59.

ACCA, 2009
http://www.accaglobal.com/content/dam/acca/global/PDFtechnical/financial-reporting/tech-ms-com.pdf

Crawford Spence
https://www.accountancylive.com/tesco%E2%80%99s-travails-awkward-revenuerecognition-issue

Mr. Roger.
http://www.telegraph.co.uk/finance/newsbysector/epic/tsco/11132545/Tescoaccounting-questioned-by-Sainsburys.html

Leon Gettler
http://www.charteredaccountants.com.au/News-Media/Charter/Charterarticles/Reporting/2011-08-Call-for-financial-report-overhaul.aspx

Cox, C. 2005. Remarks Before the 2005 AICPA National Conference on

Current SEC and PCAOB Developments. Speech given by the SEC
Chairman, Washington D.C., Dec 5.
http://www.sec.gov/news/speech/spch120505cc.htm.
Herz, R. 2005. Remarks Before the 2005 AICPA National Conference on
Current SEC and PCAOB Developments. Speech given by the FASB
Chairman, Washington D.C., Dec 6.
http://www.iasplus.com/usa/0512aicpaherz.pdf.
Peterson, K. 2008. Accounting complexity and misreporting: manipulation
or mistake?
Working paper, University of Oregon
Businessweek online herz
http://www.businessweek.com/stories/2002-08-18/its-like-when-someonerobs-a-bank

http://www.charteredaccountants.com.au/News-Media/Charter/Charterarticles/Reporting/2011-08-Call-for-financial-report-overhaul.aspx

http://books.google.co.uk/books?
id=uTr1Vh87p6kC&pg=PA69&dq=Financial+reporting+preparer+judgeme
nt&hl=en&sa=X&ei=Ils4VJqmEYze7AaKrIHgDg&ved=0CE8Q6AEwBw#v=o
nepage&q=Financial%20reporting%20preparer%20judgement&f=false
Sondhi and Taub (2006) summarize the problems with revenue recognition
when they write: The lack of comprehensive guidance, in combination
with the variety and complexity of revenue transactions, has resulted in a
large number of financial reporting errors in the area of revenue

recognition. Revenue recognition can be complex because of uncertainty

about both standards and transactions.