Behavioral Aspects of

Accounting
Information Reporting
and Communication
By Group 5
Group 5

04 13 25
I Wayan Mastra Komang I Kadek Cesin Dwi
Adi Candra Andrian Utama Murthi Prayoga
Putra
 Behavioral Aspects of Accounting
Information Reporting and
Communication

Behavior Aspects of Communication of

Reporting Requirement Accounting Information

1. Reporting Dilema 1. Communication Dilema

2. Reporting 2. Communication Theory
Requirement 3. Model of Communication
3. How Reporting 4. Lasswell’s Model
Requirement Affect 5. Variabel of Impact in
Behavior Accounting Communication
4. Effect of Reporting 6. Implications
Requirement
5. Assessing the Effects
on Senders
 01
Reporting Dilema
Sue Cranston, a plant manager, is confronted with a new
reporting requirement from headquarters regarding the race
and sex of job applicants. With unclear origins and purposes,
she worries about implications, especially as preliminary data
show a higher proportion of minority and female applicants
than selections. Unsure of her next steps, Cranston debates
whether to monitor hiring more closely, challenge the
requirement, or risk being perceived as overstepping her
managers' roles. She also fears being scapegoated if data
issues arise, leaving her pondering the cause of skewed
statistics and potential consequences.
 02
Reporting
Requirements
Reporting requirements compel individuals or groups to
provide information, crucial for managing organizations
and making informed decisions.

Understanding how reporting

requirements influence behavior is
essential due to their widespread use
and resource consumption.
 03
How Reporting
Requirements Affect
Behavior
 Reporting requirements, which are common in management
and accounting, can influence the behavior of those who must
report. Reporting requirements impact behavior in various
ways, similar to other organizational measurement methods
like audits and direct observation, each with its own specific
effects.

Anticipation of Information Use Attention Directing

1. Senders' Predictions of Recipients' Use Reporting requirements can prompt

2. Incentives/Sanctions behavior change even if the sender doesn't
expect a recipient reaction. Information
3. Timing tends to draw attention to related areas,
4. Iterative Response Strategies influencing behavior.
 04
Effects of Reporting
Requirements
 Financial Accounting Social Accounting

The SEC, FASB, and FERF recognize the impact
of reporting requirements on corporate conduct
and are increasingly considering these effects
in standard-setting processes.
Most research focuses on the effects on
recipients, as external social accounting is
voluntary.

Tax Accounting Management Accounting

Behavioral tax accounting is an Management has the authority to impose

underexplored area, but it's sensitive due to various internal reporting requirements on
reporting requirements. Tax reporting is
complex and challenging for many subordinates, covering financial, operational,
taxpayers. social, or combined aspects.
 Assessing The Effects On Senders 05

There are several methods to assess the effects of reporting requirements on

information senders. The simplest and most accessible is deductive
reasoning, which involves considering how the requirement might influence
managers' behavior by putting yourself in their position. This method is quick,
inexpensive, and can be done before implementing a reporting requirement.

Another approach is to ask reporters directly

about their behavior through surveys. These can
be composed of specific or open-ended questions
and administered in person, by phone, or via mail
05 Assessing The Effects On Senders
The most reliable method is to
observe behavior in controlled
experiments where the only variable
that changes is the reporting
requirement. This ensures a clear
link between the requirement and
any behavioral changes.
In natural settings, behavior can be
measured through quasi-experimental
field studies, which allow for some
control and manipulation of variables,
thus providing a compromise between
certainty and relevance

These methods rely on available data

and observations but can be
complicated by other simultaneous
changes that may influence behavior.
 Communication Dilemma 06

David Anderson, a junior partner at Arnold, Fenner, and Winston

(AF&W), faced a significant career setback due to a series of
communication breakdowns. Assigned to prepare a financial
analysis for MEGA, a high-tech division planning a
reorganization, Anderson worked diligently with his team. He
submitted the report to both MEGA's corporate headquarters
and the local division manager.

However, the local division was unaware of the reorganization

plans, leading to severe criticism from his superiors. The
memo from Dawn Jones failed to specify that the report was
confidential, and there was a lack of communication during the
project. MEGA found the report unclear, resulting in the loss of
the client for AF&W. This situation underscores the critical
need for clear and ongoing communication to avoid such
issues. Solutions and recommendations for improvement will
be discussed at the end of the chapter.
07 Communication Theory

1 This chapter focuses on the communication of technical

materials, such as financial reports, and aims to help
accountants meet clients' expectations in tasks like
financial reporting, auditing, and management consulting

2 The core of accounting is the communication of

information with financial or management implications.
Therefore, being an effective accountant requires being an
effective communicator. Business information must be
presented clearly, concisely, and accurately to meet user
needs
 Communication Theory 07

Communication is the exchange of information between two or

more systems within a common environment. These systems
can be individuals, organizations, animals, or machines.
Information is defined as patterned matter or energy that
reduces uncertainty about future behavior

In accounting, financial information is exchanged to predict an

organization’s future operations and assist in decision-making
and control. This chapter reviews theories and research on
communication relevant to the transmission of accounting
information. It emphasizes the fidelity of information exchange
and communication effectiveness, offering general
recommendations to maximize the likelihood of effective
communication and accurate reporting of accounting data.
08 Models Of Communications

1 Communication has evolved from various academic disciplines

in both the humanities and sciences. These range from rhetoric,
speech, English, journalism, law, and linguistics, to social
sciences. Communication intersects all these fields, focusing on
the process and effects of information exchange.

2 To organize the many communication theories, we start with

different models of the communication process. These models help
identify variables and their relationships, providing a framework for
understanding communication. Models are abstract representations
of theories, serving as classification systems to categorize relevant
parts of communication processes. They help define the scope of
communication and structure its components
 09
Variabeles of Impact in
Accounting Communication
Variabeles of Impact in Accounting Communication
Source
Two aspects of the source that influence the
communication process :
• Source Credibility :Authority,
Trustworthiness, Dynamism
• Source-Receiver Similarity : Demographic
Similarities, Cognitive Similarities
Channels
Communication channels are tools for disseminating
information, and Schramm (1973) differentiates
channels based on six dimensions: Influenced by the
five senses, Feedback Opportunities, Receiver
Control, Type of Message Coding, Multiplicative
Power, Message Preservation

Messages
The five message elements that need to be considered in
communication are: 1) content, 2) organization or structure, 3)
code, 4) treatment, and 5) message elements such as words,
sentences, paragraphs, numbers, statistics, tables and graphs
• Message Organization :Climax, Anticlimax, Middle
• Message Treatment: Accounting information must be
presented repeatedly to improve understanding and
retention.
Variabeles of Impact in Accounting Communication
Receivers
In communication, pay attention to recipient factors such as demographics,
culture, attitudes, knowledge, behavior and social environment. The
similarity between recipient and source strengthens the effectiveness of
communication.
• Audience Analysis : Understanding your audience helps design
effective messages and choose the right channels.
• Network Analysis : Organizational communication structures are
analyzed through the flow of information between individuals, small
groups, or organizations.

Feedback
Feedback is the recipient's response to an initial message, enabling an
exchange of ideas and ensuring understanding, rather than just a one-way
spread of information. Barnett (1979) recommends a cybernetic approach to
technical communication, which actively involves users and integrates
feedback mechanisms. Feedback from users during planning helps determine
the content and function of the report, and recipients should be asked for
feedback after the report is distributed.
 10
Implication
Implication

The communication environment affects

accounting by generating "noise" that reduces
the clarity of information. Noise, or interference,
is always present and can come from a variety of
sources such as noisy channels or unclear
messages. If interference is significant,
communications can be improved through
redundancy.
Organizational Communication
In formal organizations, communication plays
an important role in accounting, especially for
managerial aspects. Formal organizations
function as information processing systems,
enabling the coordination of member activities
through communication that fulfills three main
functions:
1. The operational, production or task-
related function
2. The socio-emotional or maintenance
function
3. The adaptive or innovative function
Information Load
The effectiveness of communication in an organization can be disrupted by
information load, both shortages and excesses. Information overload leads to
inattention to important messages, stress, and decreased performance.
Techniques to reduce this include postponing less important tasks and
designing work around the employee's information processing capacity.

• Outcomes of Communication Practices

Communications audits evaluate employee satisfaction with an
organization's communications practices and may include business
knowledge as well as demographic data.
 11
Review
Artikel
Title
Do words reveal the latent truth? Identifying communication patterns of corporate
losers
Author
Rahul Kumar, Soumya Guha Deb, Shubhadeep Mukherjee
Journal
Journal of Behavioral and Experimental Finance
 Area of Interest
The area of interest of this research is the analysis of
the communications of companies that have
experienced performance declines and how they
compare to their peers. The study explores
communication patterns through various public
documents such as earnings releases, management
discussions, account notes and independent auditors'
reports, and analyses the sentiments contained in
these communications.

[page 2]
 Phenomena
The phenomenon that is the focus of this research is the
communication patterns of companies that have experienced
a long-term decline in performance. This research attempts to
understand how the communication patterns of these
companies differ from their peers that have not experienced
significant performance declines. By analysing various public
documents such as earnings releases, management
discussions, account records, and independent auditors'
[page 1] reports, this study aims to identify the sentiments contained in
corporate communications and whether there are significant
differences in communication patterns between companies
that have experienced performance declines and those that
have not.
Theoritical Foundation
[page 2]
Decades of research into predicting financial health
have yielded various models like Altman's Z-Score
and Ohlson's logit model. These studies categorize
into univariate, risk index, MDA, and conditional
probability models. Advanced techniques include
the KMV model and hazard models like
Shumway's. Piotroski's F-SCORE method and
Kumar and Ravi's review of bankruptcy prediction
models are notable. Despite advancements,
concerns about data manipulation have led to
exploration beyond numerical data into narrative
disclosures for hidden signals.
[page 2]
Textual analysis of financial data uses natural
language processing and machine learning to
extract qualitative information from sources like
corporate disclosures and media articles. While
past studies show the predictive power of linguistic
information in financial markets, few focus on
identifying distress signals or communication
patterns of underperforming firms. This study aims
to fill this gap by analyzing linguistic indicators in
public disclosures of underperforming firms to
identify potential distress signals.
 Methodology
• The study employs a quantitative and textual approach to
identify and analyze firms with negative net worth, divided
into three main parts: sample construction, analysis of public
reports, and text mining.
• Initially, all 5150 firms listed on the NSE and BSE were
assessed for their financial health over the past five years,
resulting in a sample of 564 firms with an average negative
net worth.

• Comparative analysis included an equal number of

benchmark firms selected based on similarity in size,
leverage, and age.
• Public communications, such as Annual Reports,
Management Discussion and Analysis, Accounting Reports,
and Independent Auditor Reports, were analyzed using text
mining techniques, including sentiment analysis and thematic
analysis.
DATA AND METHOD

DESIGN RESEARCH
The study employs a combination of quantitative and textual
analysis methodologies to identify and analyze financially
distressed firms (referred to as "losers") and their more stable
counterparts ("peers").

SAMPLE
The initial selection begins with all 5150 firms listed on NSE and BSE,
examining their financial health in terms of net worth over the last five
years to avoid selection by chance. From these, 564 firms with a
negative net worth averaged over the five-year period are identified.
This sample is further refined to 157 firms that reported negative net
worth consecutively over the five-year period. To focus on significantly
distressed firms, the sample is narrowed down to 95 firms with a net
worth less than -100 million INR.
DATA AND METHOD
DATA
This process ensures a rigorous selection of "loser" firms with a
consistent negative net worth. To create a control group, the same
number of benchmark "peer" firms are identified. These firms are from
the same industry and are similar in size, leverage, and age but have
positive net worth. The selection is done using propensity score
matching, ensuring that the peer firms are the most similar to the loser
firms based on the specified criteria.

DATA PROCESSING
The data processing involves text mining and sentiment analysis.
Texts from the ER, MDA, NTA, and IAR reports are processed by
removing stop words to focus on content words and converting the
text into a "bag-of-words" structure. Sentiment analysis is then
performed using R packages "SentimentAnalysis" and "syuzhet,"
utilizing sentiment libraries
Result
• The research findings demonstrate significant differences in communication
patterns between corporate losers and their peer groups across various
documents such as Earnings Reports (ER), Management Discussion and
Analysis (MDA), Notes to Accounts (NTA), and Independent Auditor's
Reports (IAR).
• Sentiment analysis reveals that peer groups generally exhibit positive
sentiment scores, while losers show negative sentiment scores.
Specifically, peer groups have higher mean sentiment scores in ER, MDA,
NTA, and IAR compared to losers.

• Using dictionaries like General Inquirer (GI), Henry (HE11), and Loughran–
McDonald (LM12), the study conducts detailed sentiment analysis,
revealing statistically significant differences in sentiment scores, word
counts, and uncertainty between loser and peer groups. Emotional valence
analysis of ER indicates that loser firms display significantly lower positive
sentiment and higher negative sentiment compared to their peers.
• Thematic analysis uncovers distinct themes in communication, with losers
focusing on declining performance and compliance issues, while peer
groups discuss margin enhancement, digital innovation, and financial
decision-making.
 Conclusion
It is eviden that loser firms have a negative tone of
communication, and the discussions hovers around issues or
concerns encompassing business. On the other hand,
benchmark firms have quite positive tone and outlook about
the present and future performance.
The researchers' findings revealed some interesting insights.
1. Researchers observed that when a company was
expected to perform well, the tone and theme of its
reports remained positive using optimistic vocabulary
and compared with a less optimistic and more
conservative tone when expecting worse financial
performance.
2. It is important to note that annual reports (except audit
reports) are self-reports of a company and therefore such
documents are bound to have biases, thereby providing a
rosy picture of the future roadmap of a company.
Recommendation
This study highlights that words may reveal more than
numbers, and even lenders should learn the art of extracting
incremental information from text documents. As such, this
research unveils the latent information in texts to
incrementally benefit the decision-making ability of market
onlookers and regulatory authorities.
The findings from this research can help design early
warning measures of problems in companies based on
qualitative information contained in company annual reports.
Researchers extracted and analyzed the text information tone
of companies' annual reports by measuring positive and
negative sentiments in annual reports without using any
accounting information.
Further Researches

1. Researchers have carried out lexical analysis on the

annual report subsection; it can be extended to the entire
document with advanced computing engines.
2. The time period can be expanded, and we can explore
communication patterns at the best times when company
performance is experiencing a decline.
THANKS
By Group 5