Financial reporting challenges of small- and medium-capitalisation JSE-listed companies

Abstract

Purpose: The purpose of this article is to explore the financial reporting challenges faced by small- and middle-capitalisation (small- and mid-cap) companies listed on the Johannesburg Stock Exchange.

Design/methodology/approach: Fourteen interviews with auditors, academics, preparers and regulators were conducted and analysed using open, axial and selective coding.

Findings/results: Findings reveal that resource constraints, a lower ability to attract and retain talented staff, less interest from auditors and a perception that small- and mid-cap entities’ financial statements are irrelevant, lead to tick-box attitudes towards financial statement preparation. These challenges are partially mitigated by the smaller size and less complex operations of these entities, where less expert accounting knowledge is required and staff feel valued due to their ability to be involved in the entire business and key decision-making, reducing staff turnover and increasing their knowledge of the business.

Practical implications: The findings of this research help to complete exchange regulators’ and standard setters’ understanding of the perceived complexity and impact of accounting standards. This improved understand may inform reforms in the financial reporting space.

Originality/value: Academics, auditors, preparers, regulators and standard setters maintain that accounting complexity in International Financial Reporting Standards is a significant concern. While there are many articles investigating the impact of complexity in large, listed entities, the impact on small- and mid-cap firms remains largely unexplored. This is despite the fact that small- and mid-cap firms are key to driving economic growth, especially in developing countries. This article begins to address this gap in the existing literature.