The Evolution of Consolidated Financial Reporting Can Be Explained By Contracting Cost Variables - Essay Example

R G Walker in his article ‘The Influence of Regulation on the Publication of Consolidated Statements states “Many recent contributions seeking to explain why accounting practice is what it is have sought to explain the history of accounting or auditing practices in terms of a narrow set of hypotheses involving only economic variables. At the extreme, some researchers have titled their studies as examining the ‘determinants’ of economic choices (Hagerman and Zmrjewski, 1979; Lekme and Page, 1992; Aitken and Loftus 1994; Whittred and Zimmer, 1994)”

Studiers carried by Whittred n 1987 have in fact mistook to analyze the set of amended rules of the Sydney Stock Exchange which was evidently an optional norm. However regulatory requirements since 1921 have progressively encouraged the presentation of the consolidated statements. A meager number of companies have voluntarily presented consolidated statements of their own under the regulatory influence.

Statutory requirements were found influential than listing rules of the stock exchange leading a vital role in disseminating knowledge about the techniques of consolidated statements through the seminar, professional literature, and public examinations.

Whitted's study further highlights the speculative assumptions of data where high levels of debt were assumed to mean there had been incidents of contractual arrangements between lenders and beneficiaries as minimum agency cost. The study albeit failed to explain the use of consolidated statements based on cost variations.

Many of the practitioners were not familiar with the techniques of consolidations even when the Institute of Chartered Accounts and the Australian Society of Accountants made their first pronouncements on the subject of consolidation in 1946 and 1956 respectively. The accounting literature hereafter included more discussions about the virtues of consolidated statements as a means of reporting to a range of stakeholders. Nevertheless, changes in regulations were associated with the changes in practices in accounting education. This hypothesis yields evidence of a mere causal relationship between accounting writers and their regulatory practices.

Doubtlessly consolidation evolved in the demand of necessity for monitoring performance in compliance with the contracts between the firms and their suppliers of debt and equity capital aimed at reducing agency cost.

The characteristic difference of early consolidators with more subsidiaries than non-consolidators disappeared in 1950 following the introduction of tax incentives. Institutional requirements were ruled out by the sample selection criteria promoting the growth of holding company form and thus it gradually established the necessities towards the descending towards the extent of the political cost. G. Whittred gives us a solid ground of its existence as follows

According to Clifford W Smith as described in the Incentives for Unconsolidated Financial Reporting says “ We provide a positive analysis of Firms decision to report the operations of a financial subsidiary on a consolidated versus unconsolidated basis.”

The more interdependent the parent-subsidiary activities, the more likely the subsidiary’s operations are on a consolidated basis of reporting. Such interdependencies emerge for three primary factors: operational, informative, and financial interdependencies. Hence, we can treat the firm’s consolidation decision as to its organizational structural decision. Evidence indicates that a firm is more likely to report the performance of a financial subsidy on a consolidated basis. On the other hand, firms employ unconsolidated reporting to understand the fixed claims on their balance sheets.

While testing the interdependence hypothesis the details of the firm’s written contracts are more important rather than employing less specific particulars such as size, debt, equity, and their proportion. Firms must employ other off-balance sheet financing methods such as operating leases and unfunded pension liabilities in order to profile unconsolidated reporting.