Financial reporting quality: an exploratory study of small-and mid-cap entities listed on the JSE

Abstract

The fundamental challenges small-and mid-cap firms are facing in producing high-quality financial statements: High-quality financial statements are becoming increasingly difficult to prepare as business and the IASB’s standards evolve and become increasingly complex. This may leave small-and mid-cap firms vulnerable to being ill-equipped to produce high-quality financial statements based on their limited resources and dependencies. Minimal research has focused on the components that contribute to attaining high-quality financial statements at small-and mid-cap firms. The research that has focused on this has been predominately centered around large-cap firms, while little attention has been allocated to that of the small-and mid-cap firms. Small-and mid-cap firms comprise the majority (in number) of the companies listed on the JSE and contribute a significant portion of growth and employment to South Africa. It is important to address this gap in research so that structures can potentially be put into place to support these companies and aid their success. An exploratory qualitative research method was employed due to the limited availability of prior research. Data was obtained through semi-structured, open-ended interviews with senior financial executives at small-and mid-cap JSE listed entities. Further interviews were conducted with auditors, regulators, and academics in relation to their interactions and perceptions of the financial reporting quality at small-and mid-cap firms. It appears that small-and mid-cap firms may be disadvantaged by the limited resources they have access to. If so, this tends to adversely affect their ability to implement effective corporate governance and particularly obtain financial management with high expertise, adversely affecting the quality of their financial statements. Conversely, there are factors that may contribute to decreasing the challenges they face. Small-and mid-cap firms often have finance teams with longer tenures and inherently less complex processes and reporting. This allows staff to understand the business intrinsically, facilitating with the financial reporting process