We have all pondered the same question: ‘Is it really worth it?’ Well, Dr Sushma Vishnani decided to find out. As an India-based chartered accountant, she spent much of her time producing and auditing financial statements. But did all her hard work make a difference to investors?
After analyzing the impact of balance sheet, income and cash flow statements on the stock performance of 24 Indian blue chips, the answer was clear: the value relevance of financial reporting per se is almost nil.
‘Indian investors tend to be short-term-oriented, speculative and guided by psychological factors,’ explains Vishnani, a faculty member at the Jaipuria Institute of Management. ‘It appears they do not trust financial data to be true and transparent enough to base their stock market decisions on them.’
While India has made great strides in accounting standards, Vishnani says it must go further.
‘We need better investor protection infrastructure and awareness programs on financial statements,’ she maintains. ‘We have exhaustive laws but I haven’t seen any significant legal actions taken against cheating managements or auditors. Only then will financial reporting be an effective communication tool between companies and their investors.’
