7.2 Perceptions of key actors on the use of financial reporting information and the impact
7.2.2 Perspectives on the use of financial reporting information: dominance of tax
The Greek state has traditionally intervened more in the economy, while many of the powers associated with the accounting profession derive their effectiveness from the state’s coercive abilities. Although the state has its own interests, it also shares the interests of the ruling class in defending long-term capital accumulation, and so carries out ideological, political and economic reforms that are aligned with the aims of market-based economies. Through the adoption of IFRSs, a part of the binding regulations imposed at EU level, the state promulgates such imperatives. Yet, different state interests and needs are reflected on the national accounting regulations leading to different accounting policies.
In order to understand the changes, that have taken place as a result of IFRSs adoption at a micro level, it is vital to gain an insight into the perceptions of individuals and organisations on the role and objectives of accounting within the Greek business context. Even though, shifts in the rationale behind the role of accounting have occurred through the implementation of the European Directives in the 1980s there are still competing perspectives covering what accounting is and should be. These perceptions reflect the idiosyncrasies of the organisation and structure of the economy at a national level, as well as, the imperatives in the dominant discourse regarding the conceptual underpinnings of financial reporting.
The definition of the nature of financial reporting appears to be a major issue that has not been resolved (this is also true for the IASB) as major debates focus, for example, on whether the objective of accounting should be stewardship or decision-usefulness. The prevailing criterion for the IASB, in promulgating its project of harmonisation, has been based on the premise that financial accounts should reflect the IASB’s international conceptual framework
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as directed towards a single purpose; the provision of useful information to decision-makers, particularly to investors in capital markets. The stewardship role of financial statements, i.e.
directors’ accountability to shareholders, is acknowledged as a subset of decision-useful statements for resource allocation purposes. These two concepts have a common axis, as the stewardship objective aims to assess management’s competence and the adequacy of compensation, providing shareholders with sufficient information to make decisions.
Nevertheless, the rationale and objectives of current financial reporting remain narrow and exclude alternative purposes, such as providing an information system that guides production and the fair allocation of resources in order to confront inequality and poverty in a given society.
The meaning that different interviewees ascribe to accounting and financial reporting varies.
Traditionally, accounting in Greece was rules-based and stewardship was recognised as the main purpose of financial statements. Accounting practice based on accounting conventions, such as conservatism and historical costs dominate accounting practice in Greece. The shift of the decision usefulness aim of financial reporting towards providing information for resource allocation purposes to the business community took place prior to IFRSs adoption and was introduced (at least de jure) when the 4th and 7th European accounting Directives came into effect.
The perceptions of the role and purpose of reporting financial statements were considered to be separated into two camps, based on the different prevailing business mentalities of companies’ administration. The first, which is consistent with the decision-usefulness rationale, and the second, according to which financial reporting is regarded as a legal requirement by the state to serve tax purposes, are described by interviewees as a necessary evil. For smaller companies which form the backbone of the Greek economy, published accounting results do not appear to play an important role in the management of companies, as, due to their simpler structure and transactions owner-managers acquire this information easily and in a more timely manner. The idea of keeping a notebook (in Greek ‘tefteri’) with the basic accounts of the company (e.g. sales, loans and other liabilities) is common. In this sense, accounting is equated with book-keeping rather than financial reporting. However, according to most interviewees this is the prevailing mentality for the majority of companies, whether they are considered Small and Medium-sized Entities (SMEs) or larger companies.
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‘The smaller a company is the more managers tend to control everything by themselves;
sometimes they reach a point where they ignore accounting, thinking that the information they keep in their minds is more important than that provided by accounting.’ [AUD4]
Financial reporting also includes tax accounting. In cases of conflict between accounting treatments prescribed by the GGAP and tax laws, companies choose to report their results in accordance with the provisions of tax laws that came into effect under different governments.
‘Business, generally, don’t want to pay much for taxation, and so, they may want to show the lowest possible profits. But, they also want the highest possible profits in order to preserve their loans and to become eligible for business grants from the state. It is particular; they are not satisfied either way.’ [AUD4]
‘There is confusion about what an accountant is. The accountant’s role in Greece is to go to the Tax Office, or the IKA [Idrima Koinonikis Asfalisis, the equivalent of Social Security Institute] in order to pay fines or try to get away with something. If you have ‘connections’
with people from the tax authorities you are the best accountant in Greece.’ [AUD1]
The importance attributed to financial reporting or book-keeping practices is determined by a cost-benefit analysis, while preparers are more oriented towards the satisfaction of regulator’s requirements. As most of the companies are small and family-owned, they choose to apply systems that save time and effort and offer maximum benefit. This observation is consistent with studies conducted on companies of a similar size in other national contexts (Macías &
Muiủo, 2011). Preparers seemed unwilling to spend funds on supportive facilities, accounting software and, generally, on the operation of their financial reporting systems.
‘Companies focus on production, because having a good product and high sales brings money directly, whereas supportive services, such as accounting do not bring money to the company. Financial reporting requirements are not their priority, they don’t try to advance their accounting systems in order to make them more sophisticated and to provide better information for decision making.’ [AUD2]
‘Small companies regard accounting as a necessary evil. But the majority of the companies are small and medium-sized and very few are listed. Their mentality is that if they have nothing to gain from accounting they will not pay attention to it’. [ACD2]
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The tendency of preparers to avoid following financial accounting standards to the letter (both the GGAP and the IFRSs), and the prevalence of the tax regulations are considered a key limitation of financial reporting practice in Greece. Interviewees criticise general perceptions about accounting; viewing these as a set of technical rules that need to be followed, rather than a set of concepts and principles that are used as a guide allowing for the discretion and professional judgement of preparers aimed at satisfying investors’ needs.
According to some interviewees, financial reporting is equated with coding and code memorising:
‘Accountants in Greece have the impression that accounting is coding. There should be some summary accounts, but too much coding is ridiculous. An accounting system with a basic coding system that could be updated every 5 years and that would follow and adapt to the developments of IFRSs would be ideal for Greece.’ [AUD1]
The tax-dominated rationale to financial accounting is condemned and defined as an obsolete approach, detrimental to entrepreneurship and the economic growth of companies. One company managing director went as far as to describe this tax-oriented attitude as the outcome of a lack of education and a sign of the lower intellectual level that hinders Greek companies from applying a Western type accounting framework and practice. This comment illustrates a common perception and acknowledgment among key users and preparers that the shift to the IFRSs is considered a superior alternative to local accounting practices that promote economic growth and which are in line with an appeal for modernisation. The key presumption is that financial statements should serve as a source when obtaining information about a company for decision-making purposes. In this sense, annual reports should communicate information in order for users to make predictions about the future, to take investment decisions, and as a means of acquiring an authentic understanding of the company’s performance.
‘In Greece the GGAP is regarded as accounting, namely entering numbers in a software programme in a codified manner. The GGAP however, is a tool. Financial reporting is what IFRSs advocate, that is, recognition, measurement, presentation and disclosure. Accounting has nothing to do with taxation.’ [ACT2]
The operational links between financial reporting and tax accounting remain strong and are important for both publicly listed and private companies, even since the adoption of the IFRSs which is in line with the work of Tzovas (2006) and Bellas et al., (1998). According to
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some interviewees’, although the tax regulations prevail over the choices and options available to financial reporting preparers, these links have tended to weaken, since Greek taxation practice differs from the IFRSs requirements. The competing purposes of financial reporting are directly linked to the interventions of the State though taxation and the structure of the economy, and comprise a recurrent theme establishing the source of interviewees’
perceptions, and the discussion that follows.