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ACCOUNTING & TAXATION ♦ Volume 3♦ Number 2 ♦ 2011




Abdulkareem Alzarouni, National Bank of Abu Dhabi

Khaled Aljifri, United Arab Emirates University

Chew Ng, Griffith University

Mohammad Iqbal Tahir, Griffith University


The purpose of this paper is to examine the usefulness of financial reports to users in the United Arab Emirates (UAE). It is an attempt to find out whether current practices satisfy users’ needs of information and the extent to which these needs have been satisfied by the current disclosure practices of UAE companies. A survey questionnaire was used to explore whether the financial reports published by UAE firms were relevant to the needs of their users and to identify the disclosure items they perceived as important. Of the 512 questionnaires distributed to major external users of financial reports, 404 were returned. The results indicate that users in the UAE consider corporate annual reports to be the most important source of information. However, the level of corporate financial disclosure in the UAE does not provide sufficient information to the users. In fact, it meets only 61% of the needs reported by external users of financial reports. The users also nominated several areas of concerns, including delays in the availability of annual reports, the lack of creditability of financial information, and the non-accessibility of financial reports.

JEL: M4, M41 KEYWORDS: Corporate financial disclosure, information needs, user groups, usefulness, UAE firms, annual reports


T he usefulness of corporate financial reports and the perception of various user groups about these reports have been the subject of a number of previous studies (Anderson, 1981; Most and Chang, 1979; Abu-Nassar, 1993; Anderson and Epstein, 1995; Abu-Nassar and Rutherford, 1995 and 1996; Ho and Wong, 2001; Naser and Nuseibeh, 2003; Al-Shayeb, 2005; Naseret al., 2006; Alattar and Alkhater, 2007; Chatterjee, 2007; Chatterjee et al., 2010). However, few of the studies on the attitudes and perceptions of user groups of corporate financial reporting focus on the Gulf Cooperation Council (GCC) countries, or member countries such as the United Arab Emirates (UAE).

Since its establishment as an independent country in December 1971, UAE has adopted an open economy strategy which makes it arguably one of the fastest growing countries in the world (Offset, 2003).

Although the UAE government realised the need to set up an official securities market, their main focus during the first three decades of federation had been to build a national economy and infrastructure. In the absence of an official securities market, investors were forced to conduct their trading over the counter (OTC) through UAE banks.

In 1998, many investors suffered substantial financial losses as there was no official securities market to monitor stock market practices. The market capitalisation in August 1998 rose to US$64billion and four month later it fell almost 50% to US$34billion. The Governor of the UAE Central Bank attributed these losses to insufficient financial disclosures made by these companies (Gulf Newspaper, 18 October, 1998).

17A. Alzarouni et al | AT ♦ Vol. 3 ♦ No. 2 ♦ 2011

Adequate financial disclosure is essential to maintain an efficient financial market system (Kothari 2001;

Jenkins 2002; Gao, 2008), and this requires the availability of transparent and complete information. If financial disclosure is inadequate or, in most cases, weak as found by Al-Shayeb (2003), identifying perceptions and needs of the main users of corporate financial reports are essential to our understanding of the UAE financial reporting environment. The importance of empirically examining corporate financial disclosure in the UAE is to identify areas where efforts to improve the disclosure regulatory regime can be concentrated. Few research studies have addressed financial reporting disclosure in the UAE, and to date no comprehensive study has been conducted to examine this important issue.

The main purpose of this paper, therefore, is to examine whether the UAE firms disclose information that different user groups perceive as important. Healy and Palepu (2001) acknowledge that financial reporting and disclosure will continue to be a rich field of empirical inquiry. Hence, findings of this study are also likely to have comparative benefits for researchers and users of corporate financial reports in other countries.


The importance of corporate disclosure lies in the assumption that there is a positive relationship between increased disclosure and the efficiency of national financial markets (Barrett 1977). This efficiency is achieved when information about the securities traded in that market is accessible to market participants at relatively low cost, and the prices of securities being traded incorporate all the relevant information which can be acquired (Dixon & Holmes 1991). Thus, the ability of the financial markets to accurately reflect the value of a company is influenced by the quality of disclosure. Although other sources may be used by firms to communicate and disclose their information, corporate annual reports are considered the main source of information for most external users (Knutson 1992; Alsaeed 2005). The corporate annual reports play an affirmative role (Al-Mulhim 1979) by providing their users with the required information and helping them to predict future cash flows for their investments. In addition, corporate annual reports communicate and shape the reality of the entity in the public mind (Coy & Pratt 1998).

Given the importance of corporate annual reports as a primary source of information for most external users, the adequacy of disclosure in these reports needs to be considered (see for example Buzby, 1974b;

Al-Mulhem, 1997; Hookset al.,2002; Alsaeed, 2005; Chatterjee, 2007). Also, while there is a wide range of different user groups who are interested in the information disclosed in corporate annual reports, there is no agreement on whether these reports should serve the needs of all users (Canadian Institute of Chartered Accountants, 1988; Abu-Nassar, 1993; Wallace, 1987; Accounting Standards Board, 1991; Ho and Wong, 2001; Meek and Thomas, 2004; and Vinten, 2004). Moreover, disclosing all possible information is arduous as it involves costs in preparing, auditing and disseminating the information. Also businesses may suffer serious consequences if they disclose sensitive information (Page, 1984; OwsusAnsah, 1998; Naser and Al-Khatib, 2000).

The needs of users and the role of corporate disclosure in decision making processes are controversial issues, as they are not known with any degree of certainty (Benjamin and Stanga, 1977; and Schipper, 2007). In its report, the AICPA Special Committee on financial reporting (1991) mentioned that increased competition and rapid advances in technology are resulting in changes in the reporting schema adopted by firms, with consequent changes in the extent to which to the needs of users of financial reports are met.

By failing to satisfy the information needs of users, financial reporting will be left behind in a rapidly changing environment, and may become irrelevant.

Several previous studies have concluded that there is a low level of financial disclosure in corporate reports in relation to the needs of different user groups (Buzby, 1974a and 1974b; McNally et al., 1982;

Wallace, 1987; Arabia: Al-Mulhem, 1997; Bartlett and Chandler, 1997; Al-Hussaini, 2001; Naser, 18 ACCOUNTING & TAXATION ♦ Volume 3♦ Number 2 ♦ 2011 Nuseibeh, and Al-Hussaini, 2003; Mirshekary and Saudagaran, 2005; Ngangan et al., 2005; Chatterjee, 2007). Different users of corporate annual reports are likely to have different objectives and therefore have diverse information needs. Schneider et al. (1994) reported a lack of agreement between those who prepare annual reports and those who use them in developed countries in terms of the relative importance of various items reported. The evidence suggests that preparers do not place the same value on information as users do, with users placing a higher value on the free flow of information. Interestingly, users from developed and developing countries rate the importance of disclosure items differently (Ngangan et al., 2005).

In summary, disclosing all information may be overwhelming and not practical. The relevance of information to users’ needs, its reliability, and the costs of gathering and publishing it, are the most important factors in determining the quantity and quality of information that should be disclosed in corporate annual reports. Those who prepare corporate annual reports should disclose information that meets user needs, by identifying user groups and their purposes in using financial information for decision making.


A survey questionnaire was used to explore whether the financial reports published by UAE firms were relevant to the needs of their users and whether the items included in the disclosure were those that the users perceived were important. This instrument has been used in prior studies to obtain insights on respondents’ views of various annual report disclosures (Ho and Wong 2001; Hooks et al., 2002;

Prencipe, 2004; Tooley et al., 2010). It is considered a practical and efficient means of collecting data on perceptions of respondents especially when a large number of respondents are involved.

Questions asked in the survey instrument were focused around three themes: What is the most important source of information for users? Do corporate annual reports meet the needs of users? What are the most important items that users look for in corporate annual reports? Construction of the questionnaire for this study was based on an extensive review of the literature and similar questionnaire surveys that had previously been conducted in other countries, especially in developing countries (Abu-Nassar and Rutherford, 1995 and 1996; Al-Hussaini, 2001; Ho and Wong, 2001; Ngangan et al., 2005; and Mirshekary and Saudagaran, 2005; Alattar and Alkhater, 2007; Chatterjeeet al., 2010). Additional comments and feedback were obtained from UAE auditors.

The questionnaire is divided into three sections. Section one is concerned with the demographic profile of participants. Section Two aims to evaluate the current corporate reporting practices in the UAE from the perspective of participants. Subjects were asked the extent to which they use corporate annual reports in their decision making, their rating of importance for various sources of information, and the reason for using other sources of information. Participants were asked to identify issues that might affect their use of annual reports in the UAE. They were then asked to evaluate the extent to which they rely on the following seven sections of annual reports: management report; auditor’s report; statement of financial position (Balance Sheet); income statement; statement of changes in equity; statement of cash flow; and notes to financial statements. Moreover, subjects were asked to evaluate the difficulty, reliability, and relevance of the information included in these sections. Finally, participants were asked to indicate the reasons why they might not use annual reports to inform their decision making.

The final section of this research instrument focuses on participants’ perceptions of the level of importance of each of the selected information items in annual reports. A list of items of information that might be included in annual reports published by UAE firms was provided. Respondents were asked to examine each information item and assign a weight to it (using the 5-point Likert scale), reflecting its

–  –  –

importance in their decision making. The objective of this method was to develop an index indicating the perceived importance of items for most user groups.

The selection of the information items for inclusion in the survey was based on items used in previous studies (Wallace, 1987; Cooke, 1989; Ngangan et al., 2005; and Mirshekary and Saudagaran, 2005), especially those conducted in the region such as Saudi Arabia, Jordan, and Kuwait, which are similar to the UAE in terms of their socio-economic and political systems (Abu-Nassar, 1993; Al-Mulhem, 1997;

Al-Hussaini, 2001; Naser and Nuseibeh, 2003; Alattar and Alkhater, 2007).

One hundred and thirty two items of information were included in the initial list, which was discussed with three senior auditors from three large audit firms in the UAE to ensure the relevance of the items to the socio-economic environment of the UAE (Ho and Wong, 2003). This consultation process resulted in a reduction of the list to 84 information items. Table 1 provides a breakdown of these items.

Table 1: Details of Information Items within the Annual Report

–  –  –

The final draft of the questionnaire was prepared and reviewed several times and then was pilot-tested and distributed to a group of different users (individual investors, institutional investors, bank credit officers and brokers). Positive feedback was received with some comments and suggestions, which were considered and incorporated to develop the final version of the questionnaire. Also, Cronbach’s alpha was calculated to test the reliability of the instrument (Judd et al., 1991; Abu-Nassar and Rutherford, 1995).

The alpha value for all scales was above 0.7, which indicates that the scales, in general, have good internal consistency and reliability (Huck and Cormier, 1996).

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