Abstract
In light of the recent corporate scandals in South Africa's previously unflawed reputation for
ethical governance, greater attention must be given to the quality of current financial
reporting disclosure. Both academics and practitioners contend that the rise in financial
statement manipulation is due to the increase in judgement and estimation employed in
financial statement preparation. Given the severe effects that corporate scandals can have,
it is critical to conduct research to identify any red flags that may signal an impending
corporate failure.
The objective of this study was to determine whether there were trends of inadequate
disclosure in significant judgements and estimates for a sample of companies involved in
corporate scandals compared to those that were not involved. The sample consisted of three
companies implicated in corporate scandals and three other companies with no such history
in the past decade. The financial statements of these companies were analysed using a
disclosure checklist that targeted the areas of inadequate disclosure highlighted in the
Johannesburg Stock Exchange (JSE) Proactive Monitoring Reports. Additionally, the quality
of the disclosure was evaluated to assess whether the information presented was useful to
stakeholders.
The results emphasised that there was minimal distinction in the level of disclosure between
entities that had been involved in corporate scandals and those that had not. Rather, the
study identified specific areas where adequate disclosure was lacking across most of these
companies. Of particular concern was the incomplete and inadequate disclosure of the
significant judgements and estimates involved in the preparation of the financial statements.
In addition, the study highlighted deficiencies in the disclosure requirements of impairment
of non-financial assets and valuation of assets and liabilities, as the disclosure standards
were not adequately met. On the other hand, both the goodwill and the recoverability of the
deferred tax assets were adequately disclosed. The study's results made a valuable contribution to the current understanding of the
disclosures involved in financial reporting. This information was of particular interest to
financial statement analysts and other stakeholders who had a vested interest in ensuring
compliance with the International Financial Reporting Standards (IFRS). The study's
recommendations provided actionable steps that could be taken to detect early signs of noncompliance.
This study further filled a gap in the existing literature by providing a critical
analysis of the adequacy of disclosures regarding judgements and estimates in South Africa.
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This was of particular significance since some of the most prominent corporate scandals in
recent years had encompassed the manipulation of financial statements.
Keywords
• Significant judgements and estimates
• Fraud
• Financial statement manipulation
• Financial reporting
• IFRS
• Corporate scandals