Directors’ report disclosures: the need for guidelines on form and content

Abstract

Issue: The South African Auditing Practice Statement 3 (Revised November 2015) (SAAPS 3), Illustrative reports issued by the Independent Regulatory Board for Auditors (IRBA) with the aim of providing practical guidance on expressing an opinion on financial statements. SAAPS 3 states that the nature of the directors’ report, combined with the absence of suitable criteria by which the report may be evaluated, has the effect of excluding the directors’ report from the scope of the auditor’s opinion on the full set of related financial statements. However, drawing from the requirements of the Companies Act 2008, auditors are required to express an opinion on the directors’ report because it constitutes part of the complete set of annual financial statements . Purpose: This paper investigates which companies currently disclose what in their directors’ report. The study is done to determine if the disclosure items within the directors’ report are not enough criteria to be considered for evaluation of the reports during an audit of financial statements. The study also investigates what the perceptions of the users of financial statements are regarding which disclosures they perceive to be important in the directors’ report. The purpose is to assess the need for conceptual guidelines on the disclosure and to propose a disclosure framework with suitable criteria developed from the findings of the study. The aim is for the framework to assist in resolving the issue arising from SAAPS 3, which excludes the directors’ report from the audit and to allow for an audit on the directors’ report. Design/methodology/approach: Data are collected and analysed using a multi-phase approach. Firstly a qualitative method (thematic content analysis) was used to collect data on what companies are including in their director reports. Secondly data on users’ perceptions of director report disclosures were collected using an online questionnaire. Findings: The findings show that the directors’ report as separate report and directors’ report together with the corporate governance report disclosure patterns as well as the governance structure are similar for all entities. The similarities in the reports exist even when listing; industry and size differences are taken into account, so the differences have no impact on the disclosures. The similarities result from companies implementing international disclosure patterns combined with local disclosure patterns. Companies take their cues from their peers resulting in mimetic isomorphism. Given the presence of the isomorphic forces which drive consistency on the types of disclosures for the directors’ report, there appears to be criteria which can be used for the directors’ report evaluation and therefore a disclosure framework is proposed.