Vol. 10(8), pp.

89-94, August 2018

DOI: 10.5897/JEIF2017.0840
Article Number: 2E3906857991
ISSN: 2006-9812
Copyright ©2018
Author(s) retain the copyright of this article Journal of Economics and International Finance
http://www.academicjournals.org/JEIF

Review

The Importance of financial reporting to capital market

development in Ghana
Williams Abayaawien Atuilik* and Hussein Salia
Department of Accounting, School of Business, Heritage Christian University College, Amasaman – Accra, Ghana.
Received 25 March, 2017; Accepted 10 July, 2018

The finance literature suggest that investment decisions are largely influenced by the quality of
corporate financial information released by firms in their financial statements, and that capital market
participants use corporate financial information released by firms for investment decisions. Factors
that influence the development of capital markets in developing markets include: appropriate legal and
regulatory framework, effective securities exchange commission, an active stock exchange market,
availability of accurate and reliable information about firms’ financial performance and position. An
improved financial reporting environment that produces accurate and high-quality financial reports on a
timely basis contributes significantly to the development capital markets in developing economies. It is
therefore important that the Institute of Chartered Accountants Ghana (ICAG), regulator of accounting
practice in Ghana should strengthen its regulatory role to ensure that accountants in Ghana helping
generate financial information for firms listed on the Ghana Stock Exchange are sufficiently
knowledgeable and skilled in matters regarding financial reporting and provide financial reports guided
by sound reporting ethics and the principle of integrity.

Key words: Accounting standards, capital markets, financial reporting.

INTRODUCTION

Extensive research has been done in the finance market hypothesis theories, signaling models, capital
literature and the results suggest that investment asset pricing theories, and theories on dividend policy
decisions made by investors are partly influenced to a (Frank and Goyal, 2003; Larcker and Lys, 1987; Malkiel
large extent by corporate financial information released and Fama, 1970; Myers and Majluf, 1984; Sharpe, 1964;
by firms, and so capital market participants such as Skinner, 2006). All these important theories suggest that
brokers and investors tend to follow closely the release of stock prices change in response to knowledge of a
corporate financial information by corporate entities (Ball number of financial variables obtained from corporate
and Brown, 1968; Lev, 1989; Myring, 2006; Habib, 2008; financial information. Some of the important variables that
Acquah-Sam and Salami, 2014). The corporate finance are obtained from corporate financial information include
literature is replete with a number of theories, including: earnings, dividends, cash flow projections, net assets,
pecking order theories, arbitrage pricing theories, efficient returns on investments, levels of debt among others.

*Corresponding author. E-mail: atuilik@yahoo.com.

Author(s) agree that this article remain permanently open access under the terms of the Creative Commons Attribution
License 4.0 International License
90 J. Econ. Int. Finance

These variables are either reported in the financial financial reports they publish. The financial reports often
statements or are derived from information contained in comprise: financial statements, management discussion
the financial statements. The purpose of this paper is to of those financial statements and other regulatory filings.
address the role of financial information in capital market Some firms engage in additional voluntary
development and use this as basis to argue the need for communication, such as management forecasts, analysts‘
ensuring improved quality of disclosures in financial presentations, other corporate reports and press releases
statements. on key issues. Some publish these reports in hard copy
and file same with the regulators while other firms
additionally post all this information on their web sites.
Factors that influence the development of capital There are also some disclosures about firms provided by
markets information intermediaries, such as financial analysts,
industry experts, and the financial press. There is a
The capital market refers to interactions among firms or preponderance of evidence in the finance literature
organisations with funding needs and investors with indicating that capital market participants depend on
surplus funds for investments whereby firms raise debt financial information to make various decisions (Agyei-
and equity capital for their operations, and investors Mensah, 2013; Bernard, 1992; Bernartzi et al., 1997;
make funds available to firms either in the form of debt or Bhattacharya, 1979; Fama, 1965; Fama, 1970;
equity investments at a return. In highly developed capital Gnanarajah, 2015; Kothari, 2001).
markets, firms are able to raise debt or equity capital from It has been suggested that no perfect stock market
the market much easily and investors are able to place exists anywhere in the world, and that most stock
their surplus funds much easily. The converse is the case markets exhibit weak form market efficiency (Hasanov
for less developed capital markets where it is difficult for and Omay, 2007; Magnusson and Wydick, 2002). Weak
firms to raise capital and those who have surplus funds form efficiency imply that the market uses historical
do not have readily available channels for placing those corporate financial information in making investment
funds for productive ventures. There are a number of decisions. The implication is that through the financial
factors that may possibly influence the level of reports and disclosures prepared by accountants for
development of capital markets. According to Osei (1998) firms, capital market participants are provided with
and Gnanarajah (2015), the appropriate legal and information that forms a basis for making fair decisions
regulatory infrastructure, such as an effective Securities regarding stock prices in order to make and execute
Exchange Commission, an active stock exchange reasoned investment and financing decisions. There is
market, and the availability of accurate and reliable overwhelming evidence from the literature that argues
corporate financial information about firms‘ financial that market participants including, regulators, creditors,
performance and financial position are key influencers of and the investing public often rely on corporate financial
the level of development of the capital market. Thankfully, information to value stock prices and make investment
Osei (1998) observed that there seems to be appropriate decisions (Appiah-Kusi and Menyah, 2003; Bennard,
and effective legal and regulatory structures in Ghana to 1992; Chambers and Renman, 1984; Fama, 1965; Fama
promote the development of the Ghanaian capital market. et al., 1969; Gnanarajah, 2015; Habib, 2008; Healey and
What was found to be a problem is non-reflection of all Palepu, 2001; Holthausen and Larcker, 1992; Osei,
available financial information on stock prices (Salami 2002). What this means is that steps need to be taken to
and Acquah-Sam, 2013). Embedded in this problem is ensure that firms prepare their financial statements in a
the question of the reliability of the financial information credible manner. This has implication for the regulation of
generated by firms listed on the Ghana Stock Exchange. the practice of accountancy in Ghana.
It is in this regard that it is necessary to take steps first to The regulators of accountancy practice must ensure
improve the credibility of the financial information that persons who prepare the financial statements of
generated by firms listed on the Stock exchange, and firms are qualified to do so, and do actually prepare the
then to ensure that the financial information available is financial statements of firms in line with appropriate
actually used by investors to make investing decisions. standards. The questions that beg for answers are: Does
Generating reliable financial information by firms listed on the regulator of accounting practice in Ghana ensure that
the Ghana Stock exchange is thus a necessary step only qualified persons are engaged to prepare financial
towards uplifting Ghana‘s capital market. statements for firms listed on the stock exchange? Do the
firms use the appropriate standards to prepare their
financial statements? Are the financial statements of
The role of financial information in capital markets listed firms audited by qualified accountants in line with
development appropriate standards for auditing? It is only when these
questions are answered in the affirmative that that one
Firms usually provide financial information through the can begin to expect quality corporate financial information

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 Atuilik and Salia 91

from listed firms that should subsequently induce high collaboration with SEC (and other regulatory bodies)
quality capital market decisions. mandated all listed companies in Ghana to adopt the
Nyor (2012) asserts that financial statements prepared International Financial Reporting Standards (IFRSs) as
using global financial reporting benchmarks help their financial reporting framework since 2007. It is
investors better equip and appreciate risk associated with important that financial reports presented by firms
decisions about flows of economic capital. This is communicate corporate performance accurately and
confirmed by the findings that market participants use reliably. Barton (2005) and Agyei-Mensah (2013)
financial information to make general investments suggested that for financial information to be useful, they
decisions to reduce financial risks and optimize returns must possess the characteristics of relevance, reliability,
on investments (Healey and Palepu, 2001; Onulaka, comparability, and understandability. One mechanism for
2014). From the foregoing, one can only conclude that ensuring improved financial reports is the adoption of
the disclosure of reliable financial information by International Financial Reporting Standards (IFRSs) by
corporate entities is a ―sine qua non‖ for the development reporting firms. The need for improving financial reporting
of the capital market. Against the background of the with particular respect to firms listed on the Ghana Stock
critical role of quality financial information in the Exchange is more urgent against the findings that the
development of capital markets, it is critically important to Ghana Stock Exchange exhibits weak form market
improve the quality of the financial disclosures by listed efficiency (Ntim et al., 2007; Osei, 1998; Salami and
firms through improved financial reporting. The question Acquah-Sam, 2013).
is, how can this be done? This can be achieved by
requiring listed firms to report in line with approved
accounting standards and ensuring strict compliance by Advantages of adoption of IFRS
the regulator of the practice of accountancy.
The adoption of IFRS by reporting entities present
tremendous advantages. Epstein and Jermakowicz
Accounting standards (2010) and Onulaka (2014) argued that convergence
facilitates the free flow of capital across boundaries as it
Accounting standards prescribe the accounting treatment eliminates accounting risk and reduces listing
for financial transactions and the minimum disclosure requirements and costs on international stock exchanges.
requirements with respect to those financial transactions. Marfo-Yiadom and Atsunyo (2014) advanced a similar
Having a standardized set of prescriptions for purposes argument, that financial statements presented in
of reporting eliminates arbitrariness and opportunities for compliance with IFRS facilitate the integration of
manipulation in terms of reporting and consequently international markets. They argued that IFRS-based
improves the quality of financial reports. Hail et al. (2010) financial statements are often more appealing to the
argued that high-quality accounting standards lead to international audience due to the higher level of
improved financial reporting which in turn leads to comparability and quality. Given that national domestic
improvement in corporate decision making. It is thus accounting standards are harmonized with the IFRS, the
expected that the application of Financial Reporting likelihood of any unfamiliar national domestic accounting
Standards (IFRSs) should lead to improved financial standards will be eliminated. Wyatt (1989) also found
reporting. that convergence of Generally Accepted Accounting
Principles (GAAP) with IFRS yields a number of benefits
including: ―increased cross- border financing; emergence
Improving Financial Reporting of true multinational companies; a heightened willingness
to cooperate across borders to enhance national,
According to Kothari (2000), the rise in the volatility of regional and even global economic strength; an
stock returns across the globe in the past couple of years awareness by securities regulators around the world of
has been of concern to many commentators and has led the necessity for comparable data‖ (p. 108). Epstein
to the questions as to whether greater transparency in (2009) confirms that ―there is certainly empirical research
financial statement information could reduce volatility and evidence to support the notion that uniform financial
produce more accurate stock valuations? And whether reporting standards will increase market liquidity,
more transparent financial statements of financial decrease transaction costs for investors, lower cost of
services firms (for example, banks) could improve lending capital and facilitate international capital formation and
and credit evaluation decisions and contain the risks of a flow‖ (p. 31). There are however some challenges in
banking crisis? These issues are of central interest to all implementing IFRSs in the form of the cost to migration,
market participants and, in particular, to the Securities the problem of change, the need to close the knowledge
and Exchange Commission (SEC). It is for these reasons gap between existing reporting regime and IFRSS, and
that Institute of Chartered Accountants Ghana (ICAG) in keeping up with constant changes in IFRSs. The benefits

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92 J. Econ. Int. Finance

seem to outweigh the disadvantages. the ‗facts behind the figures‘ regime encouraged by the
Ghana Stock exchange adds to the timeliness of
information available to market participants. As
The Ghana’s experience Chambers and Renman (1984) suggest, the timeliness of
availability of financial information to capital market
Recognizing the important role of quality financial reports participants is critical to capital market development.
in the development of the capital market in Ghana, ICAG Similarly, Abedana and Gayomey (2016) found that
being the body responsible for regulating the practice of timely publication of financial information significantly
accounting in Ghana made a number of interventions enhances the quality of accounting numbers and their
towards promoting good financial reporting practices in value relevance to investors, thereby impacting positively
general. on capital markets. The extent to which listed companies
According to Assenso-Okofo et al. (2011), in January should provide interim reports is another important issue
2007, the ICAG, in collaboration with other Regulatory in the discussion on disclosure requirements. The annual
Bodies -Bank of Ghana, National Insurance Commission, reporting regime where financials are released annually
and Securities and Exchange Commission- launched the is on its way to becoming less useful and in its place, is
adoption of IFRS in Ghana. By this adoption, all Public quarterly reporting regimes. The main critique on
Interest Entities [PIEs] (the banks, insurance companies, mandatory quarterly reporting regimes from a practical
listed companies and profit-oriented state-owned point of view, however, is the disproportionate costs
enterprises) are required to apply IFRS as their financial associated with the higher reporting frequency, which
reporting framework. The adoption of IFRS was led by according to opponents, is not compensated by potential
ICAG with great support from the Regulatory Bodies benefits (especially for smaller firms). For example,
mentioned above. It is gratifying to note that as at end of Ozturk (2008) has identified high costs including cost of
April 2013, all the listed entities had adopted IFRSs as sponsoring staff attending conferences and seminars,
the framework for preparing and presenting their financial organizing in-house training, personnel cost for preparers
statements. and auditors of financial statements that are IFRSs
Agyei-Mensah (2013) analysed the pre-adoption and compliant, as the major hindrances to frequent reporting.
post adoption financial statements of firms listed on the
Ghana Stock Exchange and concluded that all firms had
substantially complied with the reporting requirements of The way forward
the adopted IFRSs framework. He concludes also, that
there was significant improvement in the quality of Having adopted IFRSs, one critical issue that needs the
information in the financial statements of listed firms after attention of listed firms is compliance with the recognition,
the adoption of IFRSs. It thus be concluded that the measurement and disclosure requirements of the IFRSs.
adoption of IFRSs by listed firms has resulted in the Listed firms need to train their reporting accountants on
presentation of more credible financial statements, the IFRSs. Audit firms also need to insist that the
consequently leading to increased investor confidence in financial reports of their clients, especially those listed on
the Ghanaian capital market. the stock exchange are in compliance with the
ICAG has also introduced audit Quality Assurance requirements of IFRSs. In this regard, the joint efforts of
Monitoring unit (QAM) to ensure that auditors apply the ICAG, SEC, the Stock Exchange and other regulators at
appropriate auditing standards; the International ensuring compliance cannot be over emphasized.
Standards on Auditing (ISAs) and require their clients to The findings of the SMPs survey conducted by ICAG in
comply with IFRSs as the framework for financial 2016 (ICAG, 2017) reveals that accounting practitioners
reporting. The introduction of the QAM unit is an who practice in the Small to Medium Size practice firms
important step aimed at fulfilling ICAG‘s regulatory need a lot of support to improve the quality of practice.
obligation. The results from a survey conducted by the Most of the practitioners requested support from ICAG in
ICAG in 2016 ON Small Medium Size Audit Practices the form relevant CPDs that provided current updates on
(SMPs), confirmed by the reports of QAM, indicate that IFRSs, provision of implementation frameworks for
all of the listed companies on the Ghana Stock Exchange IFRSs, regular and increased quality assurance and
are audited by one of the Big Four audit firms (ICAG, monitoring service by QAM to support small firms to
2017). This imply availability of high quality resources for improve their practices, regular reviews of firms to weed
the conduct of the audit of listed firms. out non-qualified firms that practice illegally. Whiles as
These interventions are expected ultimately to improve has been noted already, the SMPs do not audit the listed
the quality of financial disclosures by listed firms and firms, accountants that work for the listed firms share
hence provide more accurate and reliable information to similar characteristics and have some influence on the
capital market participants for decision making. The quality of financial reporting of the listed firms. It is
quarterly publication of financial statements supported by therefore important that ICAG as regulator pay more

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 Atuilik and Salia 93

attention to the work of QAM and possibly expand the working for firms listed on the Ghana Stock Exchange.
ambit of QAM to oversee the work of accountants in
industry. This will ensure that accountants are well
resourced and motivated to keep proper books of CONFLICT OF INTERESTS
accounts, prepare appropriate and credible financial
statements from those books of accounts in compliance The authors have not declared any conflict of interests.
with relevant standards.
Perhaps a reporting regime that should be considered
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