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CULTURAL INFLUENCES ON THE INTERPRETATION OF
NON-GAAP FINANCIAL REPORTING MEASURES: AN
ANALYSIS OF INVESTOR AND ANALYST PERCEPTIONS
Student
ID: 100401800
Name: Yogita Monpara
Abstract
Chapter 1: Introduction and
background
highlighted
highlights
the background, aim and
objectives of
the research
this
paper
dissertation
. This research aims to investigate how cultural
differences affect the interpretation of non-GAAP financial reporting measures by investors
and analysts.
Chapter 2: Literature Review
,
the researcher has critically analyzed and reviewed
an analysis
of
the existing literature on the research topic.
Chapter 3: Methodology
.
Qualitative
highlighted the methods adhered by the researcher. In
secondary research, qualitative
information from previously released publications and
journals was gathered. Quantitative analysis and thematic analysis were employed
by the
researcher
to examine the quantitative and qualitative data, respectively and also used a
secondary mixed technique and a deductive research methodology.
In Chapter 4: Results and discussion
, three theme
s
have been generated
from secondary data
analysis
and discussed in detail along with a comprehensive quantitative analysis.
In Chapter 5: Conclusion and recommendations
, the researcher summarized the findings
along with recommendations
.
in order to mitigate them
. Some recommendations
made
for
the
research topic
are as follows: cultural sensitivity in reporting, transparency and disclosure,
regulatory harmonization, engagement with stakeholders etc. moreover, suggestions are given
for future studies in this chapter.
2
Acknowledgement
I want to thank all of my classmates for their unfailing support while I was writing and
editing the research report, including my supervisor.
At each stage, my supervisor
continuously provided insightful criticism to fill in any holes in the study.
In addition, I
deeply appreciate the advice I received from my friends and family, which helped me
complete the study successfully.
Thank You
3
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Table of Contents
Chapter 1: Introduction
..............................................................................................................
6
1.1
Introduction
.................................................................................................................
6
1.2 Research Background
.......................................................................................................
6
1.2
Research Rationale
......................................................................................................
8
1.3
Research Aim and Objectives
......................................................................................
9
1.4
Research Questions
.....................................................................................................
9
1.5
Significance of the Research
.....................................................................................
10
1.6
Structure of the Dissertation
......................................................................................
10
1.7
Chapter summary
.......................................................................................................
10
Chapter 2: Literature Review
...................................................................................................
11
2.1 Introduction
....................................................................................................................
11
2.2 Conceptual literature
......................................................................................................
11
2.2.1 Non-GAAP financial reporting
...............................................................................
11
2.2.2 Use of non-GAAP financial reporting measures by investors and analysts
............
11
2.2.3 Cultural differences
.................................................................................................
12
2.2.3 Conceptual framework
............................................................................................
13
2.3 Empirical literature
.........................................................................................................
13
2.3.1 Cultural differences that affect the interpretation of non-GAAP financial reporting
measures
...........................................................................................................................
13
2.3.2 The ways in which investors and analysts from different cultural backgrounds
interpret non-GAAP financial reporting measures
...........................................................
15
2.3.3 Interpretation of non-GAAP financial reporting measures in different cultural
contexts
............................................................................................................................
16
2.4 Theoretical literature
......................................................................................................
18
2.4.1 Hofstede's Cultural Dimensions Theory
.................................................................
18
2.4.2 The Philippine Financial Reporting Standards (PFRSs)
.........................................
20
4
2.5 Literature gap
.................................................................................................................
21
2.6 Chapter summary
...........................................................................................................
21
Chapter 3: Methodology
..........................................................................................................
22
3.1 Introduction
....................................................................................................................
22
3.2 Research Philosophy
......................................................................................................
22
3.3 Research Approach
.........................................................................................................
23
3.4 Research Design
.............................................................................................................
24
3.5 Data Collection Method
.................................................................................................
25
3.6 Data Analysis
.................................................................................................................
26
3.7 Ethical Considerations
...................................................................................................
27
3.9 Chapter Summary
...........................................................................................................
27
Chapter 4: Results and discussion
............................................................................................
28
4.1 Introduction
....................................................................................................................
28
4.2 Analysis of secondary qualitative data
...........................................................................
28
4.3 Analysis for secondary quantitative data
........................................................................
33
4.4 Results
............................................................................................................................
34
4.5 Discussion
......................................................................................................................
35
4.6 Summary
........................................................................................................................
36
Chapter 5: Conclusion and Recommendations
........................................................................
37
5.1 Conclusion
......................................................................................................................
37
5.2 Linking with research objectives
...................................................................................
37
5.3 Recommendations
..........................................................................................................
39
5.4 Research limitations
.......................................................................................................
40
5.5 Future scope of the research
...........................................................................................
41
References
................................................................................................................................
42
5
Chapter 1: Introduction
1.1 Introduction
In the world of investor and analyst opinions, the meaning and value of non-GAAP financial
reporting metrics have attracted a lot of attention. However,
few studies have
very little study
has
examined how culture affects these interpretations. By investigating the cultural elements
that influence investors' and analysts' views of non-GAAP financial reporting metrics, this
study seeks to close this gap. We may learn more about the multifaceted and complex aspects
of these measurements by examining how cultural differences affect how they are
understood, evaluated, and used. Laying the groundwork for the forthcoming research, the
first chapter of the research here outlines the study's goals, approach, and anticipated
additions to the body of knowledge.
1.2 Research Background
Financial reporting is essential for simplifying communication between companies and their
stakeholders, providing important data for decision-making, and evaluating the financial
success of an organization (Gardi
et al.,
2021). The generally accepted accounting principles
(GAAP) may not always offer a clear picture of a company's financial situation, though.
Companies frequently rely on non-GAAP financial reporting metrics in addition to their
GAAP financial statements to get around this constraint. These alternative computations,
exclusions, and adjustments that are used in non-GAAP measurements are not required by
accounting rules. These non-GAAP measurements are meant to offer more information about
a company's financial performance, liquidity, and potential. Non-GAAP financial reporting
indicators have been carefully examined for potential abuse or misinterpretation, despite the
fact that they can improve the clarity and understanding of financial information. Due to the
subjective nature and lack of standardization of these indicators, they can be impacted by a
variety of variables, including management discretion and cultural variations. Understanding
the influence of culture is vital given the variety of cultural contexts in which investors and
analysts operate in today's globalized financial industry.
Financial reporting is essential for communicating to stakeholders, such as investors and
financial analysts, the financial performance and position of an organization (Wahlen,
Baginski and Bradshaw, 2022). For reporting financial data, generally accepted accounting
principles (GAAP) have historically offered a uniform structure. Non-GAAP financial
6
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reporting metrics, on the other hand, offer new perspectives into the performance of the
organization by eliminating some things that are thought of as non-recurring or non-
operational, and have become more and more popular among businesses in recent years.
Non-GAAP financial reporting indicators consist of measures such as adjusted earnings per
share, EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), and free
cash flow (Lessambo, 2022). The meaning and significance of these indicators might vary
depending on the context, despite the fact that they provide investors and analysts with
relevant information, they are not subject to accounting rules. Culture plays a vital role in
shaping how individuals behave, think, and make decisions. Many studies have emphasized
the impact of culture on different aspects of financial reporting, such as how information is
disclosed, how financial statements are presented, and how corporate governance is practiced
(Visani, Di Lascio and Gardini, 2020). However, there is a lack of research specifically
examining how culture influences the interpretation and effectiveness of non-GAAP financial
reporting measures.
It is essential to comprehend how culture impacts the way non-GAAP financial reporting
measures are perceived and utilized. This understanding aids investors and analysts in making
informed decisions and accurately assessing a company's financial performance. By
acknowledging cultural differences, researchers and practitioners can gain a more profound
comprehension of the contextual factors that influence the interpretation of these measures. In
the context of international financial markets, where investors and analysts operate in a
variety of cultural contexts, the influence of culture on financial reporting is particularly
significant (Pizzi
et al.,
2022). The interpretation and application of non-GAAP financial
reporting metrics can be greatly impacted by cross-cultural differences in communication
methods, information processing, and decision-making conventions. For example, Hofstede's
framework of cultural dimensions, which distinguishes between individualism and
collectivism, power distance, uncertainty avoidance, and long-term versus short-term
orientation sheds light on the differences in cultural values and their potential influence on
financial reporting (Sannino
et al.,
2020). Individualistic cultures could place a higher
priority on metrics that highlight shareholder profit and individual achievement, whereas
collectivist cultures might place greater emphasis on metrics that emphasize the societal
effect of the organization. Furthermore, perceptions of non-GAAP financial reporting
measures may vary depending on variances in power distance. Investors and analysts may
depend more on management's interpretation of non-GAAP measures in high power distance
7
cultures where hierarchical structures and authority play a key role (Taylor and Keselj, 2020).
On the other hand, independent study and inspection of these measurements could be more
important in low power distance cultures.
Additionally, the perception of non-GAAP
financial reporting measures might be impacted by uncertainty avoidance. While cultures
with low uncertainty avoidance may be more receptive to accepting alternative reporting
metrics that allow for greater flexibility and adaptability, cultures with high uncertainty
avoidance may favor measurements that offer a clearer and more predictable perspective of a
company's performance.
1.2 Research Rationale
What is the issue?
The issue being discussed is how non-GAAP financial reporting measures are interpreted and
how useful they are to investors and analysts. Non-GAAP measures offer valuable
information about a company's financial performance by excluding certain items, but their
interpretation can differ depending on the circumstances (Arena, Catuogno and Moscariello,
2021). This brings up concerns about the trustworthiness and comparability of non-GAAP
measures, as well as how they may affect investment decisions and financial analysis.
Why is it an issue?
The significance of non-GAAP financial reporting measures lies in their impact on the
accuracy and transparency of financial information given to investors and analysts (Xiao,
Chan and Chen, 2023). As companies increasingly rely on non-GAAP measures, it becomes
essential to comprehend how these measures are understood and utilized. Inconsistent
interpretations can result in misunderstandings, misinterpretations, and biased decision-
making, potentially distorting investors' views of a company's financial well-being and
performance.
Why is it an issue now?
The issue is especially important at present because of the increasing significance of non-
GAAP financial reporting measures and the worldwide scope of financial markets.
According
to an Audit Analytics study, the proportion of S&P 500 businesses that disclosed non-GAAP
results climbed from around 59% in 2009 to over 95% in 2019 (Maurer, 2019). This
demonstrates how non-GAAP measurements have become more important as businesses try
to provide investors with
other perspectives on their financial performance.
As businesses
8
operate in various cultural settings, it becomes essential to acknowledge the effect of culture
on the interpretation and effectiveness of these measures. Recognizing the impact of culture
on financial reporting is vital in today's interconnected and ever-changing business
environment, where investors and analysts rely on information from companies across the
globe to make investment choices (Hanlon, Yeung and Zuo, 2022).
What does
the
this
research shed light on?
The
This
research sheds light on how culture affects the interpretation and value of non-
GAAP financial reporting measures, particularly in terms of how investors and analysts
perceive them.
The interpretation of non-GAAP measures differs based on cultural nuances,
which in turn affects how stakeholders perceive and make decisions in global financial
markets.
The research intends to shed important light on how culture affects the
understanding, appraisal, and utilization of non-GAAP measurements by examining the
effects of cultural variations
on what?
. The results of this study will increase our
comprehension of the contextual aspects that influence how financial information is
interpreted as well as the accuracy and cross-cultural comparability of financial reporting
practices.
1.3 Research Aim and Objectives
Aim
The aim of this study is to investigate how cultural differences affect the interpretation of
non-GAAP financial reporting measures by investors and analysts.
Research Objectives
To identify the cultural differences that may affect the interpretation of non-GAAP
financial reporting measures.
To examine how investors and analysts from different cultural backgrounds interpret
non-GAAP financial reporting measures.
To assess the interpretation of non-GAAP financial reporting measures in various
cultural contexts.
1.4 Research Questions
The research questions are as follows:
9
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What are the cultural differences that may affect the interpretation of non-GAAP
financial reporting measures?
How investors and analysts from different cultural backgrounds interpret non-GAAP
financial reporting measures?
How are non-GAAP financial reporting measures carried out in various cultural
contexts?
What cultural differences are likely to affect the interpretation of non-GAAP financial
reporting measures?
What are the ways in which investors and analysts from different cultural
backgrounds interpret non-GAAP financial reporting measures?
1.5 Significance of the Research
This research is important because it offers valuable insights into how cultural factors affect
the interpretation of non-GAAP financial reporting indicators. The research contributes to
enhancing the accuracy and comparability of financial reporting practices by illuminating
how culture affects investor and analyst opinions. Investors, analysts, standard-setters, and
legislators need this knowledge to navigate the intricacies of non-GAAP indicators and make
prudent financial decisions in a variety of cultural settings.
1.6 Structure of the Dissertation
Figure 1.6: Dissertation structure
(Source: Created by the researcher)
10
Chapter 1: Introduction
Chapter 2: Literature Review
Chapter 3: Research methodology
Chapter 4: Data analysis and Findings
Chapter 5: Conclusions and
recommendations
1.7 Chapter summary
The chapter emphasizes the importance of understanding how cultural differences impact
how non-GAAP financial reporting metrics are interpreted and applied. Understanding how
culture affects financial decision-making processes is important, especially in global financial
markets, as the background section underlines. The rationale highlights the difficulties in
interpreting and using non-GAAP metrics, the topic's present relevance, and how the study
helps to comprehend cultural effects. Overall, the study intends to fill a need in the body of
knowledge and offer insightful information to those involved in financial reporting and
analysis.
Chapter 2: Literature Review
2.1 Introduction
Secondary data from the existing literature will be analyzed in this chapter. In other words,
ideas and concepts from previously published articles relevant to the research paper in this
chapter will be analyzed thematically. In this study, examine how cultural aspects affect how
analysts and investors understand non-GAAP financial reporting metrics. It wants to identify
the possible ramifications for financial decision-making and reporting
practises
practices
by
investigating the various viewpoints influenced by cultural origins.
2.2 Conceptual literature
2.2.1 Non-GAAP financial reporting
The presentation of financial data by businesses that differs from the accepted Generally
Accepted Accounting Principles (GAAP) is known as non-GAAP financial reporting. These
non-GAAP measurements provide investors and analysts a different perspective on a
company's financial performance by excluding some costs, profits, or losses that management
deems unusual or non-recurring. Non-GAAP measures provide difficulties in addition to
important insights into underlying operational patterns (Black
et al
., 2018). Companies
are able to use them to project a more positive image, which might lead to misunderstandings
or the concealment of financial difficulties. To promote openness and comparability,
regulators have carefully examined the use of non-GAAP metrics. To prevent making
potentially incorrect
judgements
judgments
when evaluating a company's financial
11
performance and health, investors and analysts should use caution when relying on these
numbers and carefully comprehend the justification and changes made.
The research "Cultural Influences on the Interpretation of Non-GAAP Financial Reporting
Measures: An Analysis of Investor and Analyst Perceptions
" investigates the influence of
cultural variables on investors' and analysts' perceptions of non-GAAP financial reporting
measures.
2.2.2 Use of non-GAAP financial reporting measures by investors and analysts
In recent years, investors and analysts have used non-GAAP financial reporting metrics more
often (Christensen
et al
. 2019).
These metrics offer more information about a company's
success than typical GAAP financials do
. Non-GAAP measures may be used by analysts and
investors to have a better understanding of a company's operational effectiveness, future
growth potential, and cash flow forecast. Non-GAAP financial information can provide a
more accurate picture of a company's core earning potential by removing some one-time
costs or non-recurring expenses.
However, there are dangers associated with using non-GAAP measurements
Sherman
et al
.
(2018)
. Inconsistencies and problems with comparability might result from different definitions and
computation techniques used by different firms
Jagtap, Kharazmi and Karniadakis (2020)
.
Furthermore, relying only on non-GAAP indicators might mask underlying financial issues.
To make wise investment decisions, investors and analysts must conduct due diligence by
carefully evaluating the justification for non-GAAP adjustments and comparing them to
GAAP financials (Taylor and Keselj, 2020). To promote accuracy and openness in the use of
non-GAAP measurements, regulatory authorities like the SEC offer guidance.
In-depth analysis titled "Cultural Influences on the Interpretation of Non-GAAP Financial
Reporting Measures: An Analysis of Investor and Analyst Perceptions" examines the
connection between investors' and analysts' use of non-GAAP financial reporting measures
and cultural influences on their interpretation.
2.2.3 Cultural differences
The distinct norms, values, beliefs, behaviours, and practises that exist among various social
groups, communities, or nations are referred to as cultural diversity (Othman and Ibrahim
Fouda, 2022). These variations may be seen in a variety of facets of life, including
12
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communication styles, social relationships, religious beliefs, family structures, and methods
of working and making decisions. Societies benefit from cultural variety by gaining access to
diverse viewpoints, customs, and information.
In today's globalised society, in particular, these disparities can sometimes result in
misunderstandings, tensions, and difficulties. Cultural sensitivity and knowledge are crucial
for promoting respect and understanding amongst people with various cultural origins
(American Occupational Therapy Association, 2020). Societies have the potential to promote
tolerance, intercultural communication, and an embracing of the richness of human variety by
acknowledging and valuing cultural differences. Understanding cultural differences is
essential for fruitful partnerships in international business, diplomacy, and cooperation as
well as for building amicable relationships.
Investors' and analysts' interpretations of non-GAAP financial reporting metrics are
significantly influenced by cultural variations. This investigation investigates how various
cultural viewpoints affect accounting and financial reporting practices.
2.2.3
Conceptual
framework
Figure 2.2.3: Conceptual framework
(Source: Created by the researcher)
13
CULTURAL
INFLUENCES
INTERPRETATION OF
NON-GAAP FINANCIAL
REPORTING MEASURES
2.3 Empirical literature
2.3.1 Cultural differences that affect the interpretation of non-GAAP financial reporting
measures
According to Guillamon-Saorin, Isidro and Marques (2012), managers often employ
impression management techniques to conceal the recurrent nature of some non-GAAP
adjustments, despite the fact that non-GAAP measurements are useful to capital markets.
Investors view this combination as opportunistic and penalize businesses for engaging in such
conduct. The market often reacts favorably to non-GAAP changes, but investors frequently
overlook those that come with heavy impression management
Knechel (2021)
. In situations
with knowledgeable readers of financial statements and more investor protection, the
response is more significant. If investors are able to recognize and comprehend such
statements, the study contends that tight regulation may not be required. For European
regulators looking to create efficient regulatory solutions, the results provide insightful
information.
Visani, Di Lascio and Gardini (2020) stated that institutional and cultural variables have an
impact on how Non-GAAP Financial Measures (NGFMs) are used and disclosed in the
worldwide oil and gas business. The study, which examined 1,731 quarterly press releases
from 120 companies, discovered that while restrictions on NGFM disclosure and adoption of
International Financial Reporting Standards (IFRS) boost their utilization, a strong
institutional framework decreases the possibility of employing NGFMs. It's interesting to
note that the transparency of the changes is badly impacted by the existence of a rule on
NGFMs. The substance of the modifications is also decreased by a robust judicial framework.
In terms of cultural variables, institutional values have a greater influence on the adoption of
NGFMs than cultural factors, but reduced uncertainty avoidance and long-term orientation
boost transparency. The intricate interaction between institutional and cultural elements in the
disclosure of NGFMs in the oil and gas sector is clarified by these findings.
On the other hand, Arena, Catuogno and Moscariello (2021), observed over two decades of
non-GAAP reporting research, looking at the goals, contexts, roles, and non-GAAP statistic
kinds that are employed. The widespread use of non-GAAP reporting is frequently a result of
the inadequacies of financial statements as a source of prognostic data. GAAP measurements
are modified by managers to forecast future performance and lessen information asymmetry.
This optional adjustment, nevertheless, has the potential to deceive investors and lessen the
14
comparability and transparency of accounting data. Concerns about the deceptive impacts of
non-GAAP measurements have prompted regulatory bodies to take action. By organizing the
scholarly discussion on non-GAAP metrics and highlighting potential topics for more
research, the report adds to the body of knowledge. Understanding the situations where non-
GAAP metrics are informative rather than opportunistic may help practitioners, standard-
setters, and regulators make decisions based on the best available data.
Marques (2017), stated that non-GAAP earnings have been proven to be more useful than
GAAP earnings in a variety of settings, including nations where non-GAAP disclosures are
mandatory, voluntary but regulated, or not regulated. However, it also outlines scenarios in
which these disclosures may mislead investors. To address this risk, corporate governance
processes are critical in preventing managers from using non-GAAP metrics arbitrarily.
Strong board monitoring, independent audit committees and honest communication with
investors are all examples of effective corporate governance practices that may assist ensure
that non-GAAP disclosures are handled responsibly and give significant insights into a
company's performance. Corporate governance systems can improve the dependability and
usefulness of financial reporting for investors and stakeholders by encouraging prudent use of
non-GAAP measurements.
2.3.2 The ways in which investors and analysts from different cultural backgrounds
interpret non-GAAP financial reporting measures
Henry, Weitz and Rosenthal (2020) offered useful insights on big, publicly listed firms'
disclosure of non-GAAP earnings and the impact of the 2010 change in Regulation G and S-
K on corporate reporting behavior. Following the liberalization of the Regulation G
standards, the number of corporations reporting non-GAAP results increased significantly,
according to
Henry, Weitz and Rosenthal (2020)
the data
(which data?)
. Furthermore, the
study identified eight prevalent kinds of GAAP earnings adjustments, with the majority of
these changes tending to enhance non-GAAP net earnings, indicating a potential bias towards
displaying a more favorable financial image. Furthermore, corporations with greater market
capitalizations are less likely to publish non-GAAP results, implying that larger organizations
may prefer to adhere to GAAP rules to ensure consistency and comparability in financial
reporting. Overall, the results of this investigation highlight the importance of regulators
actively monitoring and addressing non-GAAP earnings reporting to maintain openness and
dependability in company financial statements.
15
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On the other hand, Macchioni, Prisco and Allini (2022) argued that businesses that use the
same Big Four audit firm or operate under the same legal system publish more comparable
non-GAAP statistics. This suggests that the presence of similar audit firms or legal systems
has a positive and substantial relationship with the amount of comparability in non-GAAP
disclosures. This shows that common auditing practices or regulatory contexts may lead to a
more standardized approach to non-GAAP reporting, perhaps improving transparency and
permitting meaningful comparisons across organizations. Overall, this study adds to the
literature on accounting comparability and emphasizes the role of auditing practices and legal
regimes in improving non-GAAP measure comparability. It is useful for policymakers,
standard setters, and practitioners who want to enhance financial reporting practices and
promote better openness and comparability in the global financial scene.
According to Ranasinghe, Unda and Wright (2022), board gender diversity is important in
fostering high-quality non-GAAP disclosures. The study used two fundamental indicators to
assess financial reporting accuracy in non-GAAP disclosures: consistency and comparability.
Gender-diverse boards were found to be more effective in maintaining consistency and
comparability of non-GAAP financial information presentation. This finding has significant
significance for investors since it suggests that firms with diverse boards are more likely to
deliver credible and transparent non-GAAP information. As a result, investors can have more
trust in comprehending the information presented through non-GAAP reporting, resulting in
more educated investment decisions.
On the other hand, Dercks (2017), argued that CEOs are rewarded using non-GAAP
performance indicators. This shows that non-GAAP measures are important in calculating
CEO remuneration, suggesting their relevance in company decision-making and performance
evaluation. The study also demonstrates that a good corporate governance framework has a
significant impact on the usage of non-GAAP performance indicators in CEO remuneration.
A higher chance of CEO compensation based on non-GAAP indicators is connected with
improved corporate governance. This means that firms with strong corporate governance
practices are more likely to integrate non-GAAP measurements into their pay plans, probably
because these metrics are thought to give a more accurate depiction of CEO performance.
Taylor and Keselj (2020) highlights the impact of unregulated non-GAAP metrics on SEC-
filed financial reports. The study evaluates the emotion of financial filings using lexica such
as General Inquirer, QDAP, Henry, and Loughran-McDonald to determine the effects of non-
16
GAAP metrics on different categories of investors - regular investors and financially skilled
investors. When non-GAAP measure phrases are eliminated, the aggregate sentiment of the
sample reduces dramatically, according to the findings. This demonstrates the potential for
non-GAAP metrics to obscure information and mislead investors, particularly those with no
formal financial experience.
2.3.3 Interpretation of non-GAAP financial reporting measures in different cultural
contexts
Fox (2015), cites a case study on financial analysts' use of non-GAAP earnings metrics in
firm financial reporting.
According to Fox (2015), this
is a case study on the usage of non-
GAAP earnings measurements in company financial reporting by financial analysts.
It looks
at how a public firm prepares its financial reports and calculates pro forma earnings as well as
how financial results are shared with analysts and how they use this data in valuation models.
It uses a qualitative case study methodology and draws on social studies of finance and
grounded theory. It provides insight into how networks of individuals, instruments, ideas, and
practices are involved in financial cognition. By offering a thorough analysis of the complete
financial reporting process and examining financial cognition in capital markets, it advances
accounting research.
On the other hand, Le, Shan and Taylor's (2020) analysis of CEO compensation in the
Australian banking sector, focuses primarily on the use of non-GAAP financial indicators in
establishing variable remuneration. Examining the use of both financial and non-financial
performance criteria, the paper examines the suggestions made by APRA to regulate
compensation arrangements. The data show that big financial organizations frequently use
self-defined non-GAAP measurements, which may provide debatable results. The use of non-
GAAP indicators raises questions about their accuracy in determining CEO compensation
since it makes comparisons and transparency difficult. The study's findings call for careful
examination of the suggested improvements since they raise the possibility that there is more
subjectivity involved in deciding CEO compensation that has been previously acknowledged.
According to Black
et al
., (2017), rules (SOX and Reg. G) have an influence on manager-
adjusted non-GAAP earnings statistics that are voluntarily disclosed in earnings press
releases in the United States. Prior research revealed that while some managers may
misrepresent operating outcomes, others may utilize adjusted measures to reflect sustainable
core profitability. After taking into account post-regulation aggressive non-GAAP reporting
17
practices, the analysis concludes that there has been a general decline in this type of
reporting. Investors are concerned because some companies continue to utilize non-GAAP
exclusions in potentially deceptive ways. It adds to the body of knowledge by examining
certain non-GAAP exclusions utilized by managers, examining evidence of the restrictions'
long-term consequences, and providing insights into management motivations and behavior.
On the other hand, COLLIN (2019), argues that cultural variables influence investor, analyst,
and other financial statement users' opinions towards non-GAAP disclosures. It is critical to
recognize the effect of cultural norms and values on how financial information is seen and
utilized when evaluating non-GAAP financial reporting metrics in different cultural contexts.
Non-GAAP measurements may be used more frequently in organizations with a high level of
uncertainty avoidance and a short-term focus because they give a feeling of stability and
immediate performance indicators. As a result, knowing cultural subtleties is critical in
understanding the motives for using non-GAAP measurements and their influence on
decision-making. The research of COLLIN (2019) provides light on the varied nature of non-
GAAP financial reporting and emphasizes the significance of taking cultural context into
account when analyzing its ramifications for global financial markets.
Ibrani, Faisal and Handayani (2019) have investigated the fraud diamond theory (FDT)
causative elements for non-GAAP earnings management. According to the findings, pressure
is the most powerful motivator for fraud, since it leads individuals to pursue personal benefit
and hunt for possibilities to manipulate profits. Capability has also been found as a key
contributor to fraud. However, rationalization has no statistically meaningful impact. Only
the audit committee's independence and the number of audit committee meetings are found to
prohibit non-GAAP earnings management among the proxies for opportunity. The audit
committee's size and competency did not indicate considerable support for minimizing
earnings management practices.
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2.4 Theoretical literature
2.4.1 Hofstede's Cultural Dimensions Theory
Figure 2.4.1: Hofstede’s Cultural Dimensions
(Source:
(Bruin, 2019)
Created by the researcher
)
Geert Hofstede, a Dutch social psychologist, created the Hofstede's Cultural Dimensions
Theory, a framework that sheds light on how culture affects behavior and beliefs in various
countries (Sent and Kroese, 2022). Six cultural aspects are identified by the theory to aid in
comparing and contrasting cultural norms and behaviors between different countries. The
Power Distance Index (PDI), Individualism vs. Collectivism (IDV), Masculinity vs.
Femininity (MAS), Uncertainty Avoidance Index (UAI), Long-Term vs. Short-Term
Orientation (LTO), and Indulgence vs. Restraint (IND) are these aspects.
The Power Distance Index gauges how much a community is willing to tolerate hierarchical
institutions and unequal power distribution (Huang
et al.
2022). The debate between
individual aspirations and the common good is explored in Individualism vs. Collectivism.
The study of masculinity and femininity looks at how genders differ in terms of roles and
ideals. The Uncertainty Avoidance Index measures how well-tolerated ambiguity and
uncertainty are in society. Assessing a culture's emphasis on long-term planning or quick
outcomes is done using the Long-Term Orientation vs. Short-Term Orientation scale. Last but
19
Hofstede's
cultural
dimensions
Hofstede's
cultural
dimensions
Power
distance
Power
distance
Individualis
m vs
collectivism
Individualis
m vs
collectivism
Masculinity
vs
femininity
Masculinity
vs
femininity
Uncertainty
avoidance
Uncertainty
avoidance
Long vs
short term
orientation
Long vs
short term
orientation
Indulgence
vs restraint
Indulgence
vs restraint
not least, Indulgence vs. Restraint assesses a society's propensity for suppressing or satisfying
impulses.
Understanding organizational behavior, cross-cultural relationships, and global commercial
practices have all benefited from Hofstede's theory (Valverde-Moreno
et al.
2020). People
and organizations may modify their tactics and communication techniques to promote fruitful
international partnerships and reduce misunderstandings by acknowledging and respecting
these cultural characteristics.
Hofstede's cultural theory offers a framework for comprehending how cultural values and
conventions influence how non-GAAP financial reporting indicators are interpreted
Muthoka
and Soon (2020)
. It sheds insight on the disparities in investors' and analysts' interpretation
and evaluation of these indicators across various cultural settings, assisting in the
identification of how different cultural factors influence investor and analyst opinions.
2.4.2 The Philippine Financial Reporting Standards (PFRSs)
Figure 2.4.2: Philippine Financial Reporting Standards 1
20
(Source: Scribd, 2023)
The Philippines has implemented a set of accounting rules and guidelines known as the
Philippine Financial Reporting rules (PFRSs) for use in financial reporting (Apat, De Villa
and Ibarra, 2019). The International Financial Reporting Standards (IFRS), published by the
International Accounting Standards Board (IASB), serve as the foundation for the PFRSs.
The PFRSs were adopted and put into effect in the Philippines by the Financial Reporting
Standards Council (FRSC). To encourage uniformity and comparability in financial reporting
practices, the FRSC makes sure that the PFRSs are in accordance with the IFRS.
The quality and openness of financial reporting in the Philippines have greatly increased as a
result of the adoption of the PFRSs (Isidro, Nanda and Wysocki, 2020). A standardized and
trustworthy framework for evaluating a company's financial performance and situation has
been made available to stakeholders, such as investors, creditors, and regulators.
The recognition, measurement, presentation, and disclosure of financial transactions and
events are all areas that are covered by the PFRSs. The Philippine accounting standards are
kept current with global best practices by being routinely updated to coincide with any IFRS
modifications. All entities in the Philippines are required to comply with the PFRSs,
encouraging uniformity and comparability in financial reporting throughout the nation's
commercial environment.
A foundation for uniform financial reporting is provided by the Philippine Financial
Reporting Standards (PFRS). The PFRS can provide as a basis for bringing different
perspectives among investors and analysts into alignment when taking cultural factors into
account when assessing non-GAAP financial statistics. Companies can improve openness and
comparability while minimising any cultural biases in the interpretation of financial reporting
by following the PFRS rules
Bakr (2020)
.
2.5 Literature gap
The literature gap in the research pertains to the insufficient exploration of how specific
cultural dimensions impact the interpretation of non-GAAP financial reporting measures.
Limited studies exist that comprehensively analyze the interplay between culture and
financial reporting practices, highlighting the need for further investigation in this area. A
large section of the collected articles was having generic measures of non-GAAP financial
reporting.
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2.6 Chapter summary
This chapter utilizes the existing literature to investigate how cultural factors affect analysts'
and investors' comprehension of non-GAAP financial reporting metrics. It highlights how
crucial cultural sensitivity and understanding are while making financial decisions. The
review also emphasizes the requirement for regulatory guidance, as well as any possible
difficulties and dangers related to adopting non-GAAP measurements. The evaluation
highlights the lack of thorough research on sustainable supply chain procedures and entrance
strategies for global markets. Overall, it offers insightful information on how cultural
variations and financial reporting standards interact.
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Chapter 3: Methodology
3.1 Introduction
The methodology chapter outlines the systematic approach employed to address the research
objectives. It clarifies the research design, data gathering strategies, and analytical
approaches, assuring the study's rigor and validity. This chapter serves as a crucial foundation
for generating reliable and insightful findings.
3.2 Research Philosophy
A positivism research philosophy has been utilized in this research. Positivism is a research
philosophy founded on the idea that through scientific procedures, one may arrive at
objective knowledge. It places a strong emphasis on the investigation and explanation of
events using empirical data and methodical observation. Positivism is a research philosophy
that emphasizes objectivity and has the capacity to generalize findings to broader
populations. Positivism makes replication and verification of results easier by utilizing
measurable data and standardized techniques, which raises the credibility of research findings
(Alharahsheh and Pius, 2020). Additionally, this strategy promotes objectivity among
researchers, minimizing the impact of individual biases on the research. The positivist
approach to research is organized and methodical, which encourages accuracy and clarity and
permits precise interpretations and theoretical advancement. Overall, positivism promotes the
development of a solid scientific basis and the expansion of knowledge across a number of
disciplines.
Justification
The researcher was able to gather empirical data
including cultural context (high/low
individualism), non-GAAP metrics comprehension
,
data standardization level, and cross-
cultural impact on metrics interpretation
,
from a variety of cultural contexts because of
positivism's dedication to objectivity, which reduced subjectivity and improved the validity of
the study. The researcher may confidently compare and contrast results by using
standardized data gathering procedures and systematically applying non-GAAP financial
reporting metrics across various cultural settings. Second, the positivist approach makes it
easier to generalize findings. The researcher can make inferences about how cultural factors
affect the understanding of non-GAAP financial reporting metrics across larger populations
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by putting an emphasis on measurable data and making systematic observations. As a result,
the study is more significant and helps advance ideas of cross-cultural financial reporting.
The positivist philosophy also promotes the study's replication so that other scholars can
confirm its findings. Insights that can help guide decision-making in the global business and
financial landscape are supported by this validation, which increases the credibility and
dependability of the research findings.
3.3 Research Approach
The researcher has used a deductive research approach in the research. The deductive
research approach involves creating a specific theory or hypothesis, followed by planning a
study to evaluate it using empirical data. It begins with a broad assumption before moving on
to particular observations or predictions (Young
et al.,
2020). Adopting a deductive research
strategy has several significant benefits. First off, this approach clarifies and concentrates the
research process. Streamlining the inquiry, the researcher can frame the study to gather
pertinent evidence that immediately answers the research question by starting with a well-
defined hypothesis. In addition, thorough theory testing is made possible by deductive
reasoning. This method's inherent unambiguous cause-and-effect correlations make it easy to
identify the causal connections between variables, supporting or disproving
hypotheses. Moreover, the deductive approach promotes objectivity and transparency. To
gather and analyze data, researchers may utilize predetermined criteria and
standardized procedures, which minimize the possibility of subjectivity and bias.
Justification
The researcher's investigation into the
particular
cultural impacts on how non-GAAP
financial reporting indicators are interpreted has been clearly focused because of the
researcher's use of a well-defined hypothesis as a starting point. By using this strategy, the
researcher was able to organize the research to gather pertinent data and create methods that
would be suitable for testing the developed hypothesis. The deductive approach also made it
easier to thoroughly test theories. The researcher was able to methodically investigate the
influence of several cultural aspects on financial reporting practices by developing cause-and-
effect correlations between cultural elements and the perception of non-GAAP
measurements. As a result, it is now clearer how cultural factors affect financial reporting in a
variety of contexts. Additionally, the researcher was able to preserve neutrality and openness
throughout the investigation because to the deductive technique. The researcher reduced
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possible bias by following predetermined criteria and standardized procedures, assuring the
objectivity of the results. The deductive research approach has also made it possible to
generalize findings. The verified cause-and-effect connections found through deductive
reasoning have a wider range of applications and may be used to guide financial reporting
practices in different cultural contexts.
3.4 Research Design
This research has employed a descriptive research design. A descriptive research design is a
style of research methodology that strives to provide a precise and in-depth description of a
phenomenon or a group's characteristics without changing any factors
.
. It entails gathering
information from surveys, observations, or secondary sources,
organizing it, and then
synthesizing it to derive insightful conclusions. A descriptive research design has several
benefits that are important.
First and foremost, this method enables researchers to get an in-depth understanding of the
topic being investigated. Researchers can study many facets and dimensions of the
phenomena by providing a thorough description, resulting in a more comprehensive
understanding. Second, descriptive research works effectively for examining difficult or
obscure subjects. It works as an exploratory tool, giving the groundwork for more research
and hypothesis building (Siedlecki, 2020). Additionally, this design makes it easier to spot
trends, patterns, and connections between variables. Researchers might find important links
that might not be obvious in a more constrained study by employing statistical analysis. The
descriptive research design is frequently practical and economical. It is simple to put into
practice in practical contexts, and data gathering techniques may be changed to fit the needs
of the research project.
Justification
The descriptive research design enabled the researcher the chance to gain an in-depth
understanding of the cultural elements that affect how non-GAAP financial reporting metrics
are interpreted.
The researcher obtained thorough information on cultural norms, attitudes,
and beliefs around financial reporting in various cultural contexts by employing
questionnaires and fieldwork
. The identification of cultural trends and variances in financial
reporting practices across areas has been made possible by this extensive and detailed
information. Furthermore, the descriptive design was a crucial tool for exploratory research.
Due to the understudied nature of cultural implications on non-GAAP measure interpretation,
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this approach allowed the researcher to examine this complicated topic and establish the
foundation for further study and hypothesis building. The results of this study can serve as a
springboard for more research into certain cultural aspects and how they affect accounting
procedures. The descriptive research design also made it easier to spot patterns and
relationships between cultural characteristics and non-GAAP financial reporting practices.
Significant links were shown using statistical analysis, revealing insight on the manner in
which cultural environments influence financial reporting choices and procedures. The
descriptive research design's affordability and practicality also made it possible for the
researcher to effectively gather data from many cultural contexts. As a result, the study's
focus is widened, and a more thorough and varied investigation of cultural impacts on
financial reporting is produced.
3.5 Data Collection Method
The researcher has used a secondary mixed method in the research. As a part of this, both
qualitative and quantitative data were collected
from the existing literature
and were analyzed
critically to form meaningful and feasible findings. This strategy incorporates current
qualitative and quantitative data from diverse sources in the context of secondary research to
provide a more thorough grasp of the study issue (Hendren
et al.,
2023).
Researchers can examine the underlying causes, drives, and perspectives of individuals or
groups connected to the study topic using secondary qualitative data. This information can be
acquired via focus groups, interviews, or open-ended survey replies and provides important
context and meaning for the quantitative findings. The availability of secondary quantitative
data, on the other hand, enables statistical analysis to find patterns, correlations, or trends in
the data and offers numerical information (Dawadi, Shrestha and Giri, 2021). This
information, which might originate from surveys, government documents, or databases, gives
the study issue a larger perspective. Researchers can triangulate their findings by using both
qualitative and quantitative secondary data, which strengthens the reliability and validity of
the study findings. A more thorough examination of the phenomena being studied and a
deeper study of complicated research topics are made possible by this mixed-method
approach, which results in a more thorough and nuanced knowledge of the subject at hand.
Justification
The researcher was able to explore the cultural differences and irrational viewpoints
associated with financial reporting practices because to the incorporation of secondary
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qualitative data. The researcher got deeper understanding of the underlying causes and
motives guiding non-GAAP financial reporting interpretations by accessing preexisting
interviews, focus group talks, or open-ended survey results from various cultural settings.
This qualitative information provided a background for understanding how cultural factors
affect financial reporting choices across different geographic areas by utilizing accurate
statistical information. The inclusion of secondary quantitative data provided numerical
support for the qualitative conclusions. The researcher gained deeper insights into the
frequency and patterns of non-GAAP reporting practices across diverse cultures by using pre-
existing surveys, government documents, or databases. The quantitative data's statistical
analysis revealed correlations and patterns that supported the qualitative findings and allowed
for a more thorough evaluation of the research topic.
In order to further strengthen the overall research outcomes, the researcher cross-validated
qualitative and quantitative data; this was made possible by the mixed-method technique.
This convergence of data sources increased the findings' robustness and believability,
lowering the risk of bias, and boosting the accuracy of deductions. The researcher was also
able to get around some of the drawbacks of employing just one method thanks to the mixed-
method strategy. By utilizing both qualitative and quantitative secondary data, the research
was able to take advantage of each approach's advantages and produce a more comprehensive
and well-rounded knowledge of the cultural impacts on non-GAAP financial reporting
indicators.
3.6 Data Analysis
The researcher has utilized quantitative analysis and thematic / content analysis for analyzing
the quantitative and qualitative data, respectively.
To investigate causal linkages, create predictions, and acquire understanding of intricate data
patterns, quantitative analysis is often utilized in a variety of sectors, including economics,
the social sciences, and business.
Thematic
/ content
analysis is a research methodology used to systematically analyze and
interpret the content of textual, visual, or audio materials. To find patterns, themes, and trends
within the material, the data must be coded and categorized. Researchers utilize content
analysis to learn more about the frequency of particular beliefs, attitudes, or actions in the
material under study (Vaismoradi and Snelgrove, 2019)
(This is just a description of thematic
analysis)
. This method is frequently used in social sciences, media studies, and marketing
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research to comprehend public opinion, analyze media portrayals, or measure communication
efficacy. A methodical, objective technique to examine vast amounts of data and make sense
of information from many sources is through content analysis.
Justification
By quantifying the connections between cultural variables
such as individualism-collectivism
orientation, power distance perception, and communication style preference.
and
And
the
understanding of non-GAAP measurements, the chosen methods of analysis have aided the
researcher significantly to form accurate and reliable research findings. It enabled the
identification of
relevant
variables and their effects by providing a statistical knowledge of
how different cultural characteristics influence financial reporting practices across various
areas. By methodically examining qualitative data from sources
including interviews and
survey answers
,
content / thematic analysis helped the researcher find recurrent themes and
patterns pertaining to cultural impacts on financial reporting. It improved comprehension of
the intricate cross-cultural accounting phenomenon by revealing subtle insights into the
underlying causes and motives behind non-GAAP reporting interpretations.
3.7 Ethical Considerations
To preserve the integrity and credibility of the study, the researcher has followed ethical
norms to prevent any possible damage, deceit, or prejudice when collecting, analyzing, and
reporting data. The issue of plagiarism was considered, and the researcher made sure to
acknowledge the original authors throughout the research paper.
3.9 Chapter Summary
The given chapter outlines the research design, data collection, and analysis methods
employed to explore cultural influences on non-GAAP financial reporting measures, ensuring
rigor and credibility in the study.
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Chapter 4: Results and discussion
4.1 Introduction
This study investigates the impact of cultural factors on investors' and analysts' understanding
of non-GAAP financial reporting metrics. Cultural values, communication styles, trust,
financial literacy, and regulatory regimes are investigated as influences on how stakeholders
from various cultural backgrounds interpret and analyze financial information. The findings
reveal considerable differences in the understanding of non-GAAP measures across cultures.
Non-GAAP measurements are sometimes viewed skeptically by stakeholders from
transparency-focused cultures, while those that value flexibility may find them beneficial
indications of a company's performance. This report emphasizes the significance of knowing
cultural subtleties in financial communication for multinational corporations looking to
develop confidence and trust with stakeholders all around the world.
4.2 Analysis of secondary qualitative data
4.2.1 Theme 1: Cultural differences affecting the interpretation of non-GAAP financial
reporting measures
Figure 4.2.1: Non-GAAP financial measures and metrics
(Source: Deloitte United States, 2023)
The use of non-GAAP financial measurements in US capital markets is rigorously monitored
by the SEC. The SEC staff provided revised guidelines in December 2022, offering instances
of deceptive measurements and clarifying when a non-GAAP measure is more prominent
than a GAAP number. Furthermore, corporations encountering difficulties as a result of
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COVID-19 and geopolitical events may consider non-GAAP adjustments, but must follow
SEC standards and disclosure criteria (Deloitte United States, 2023).
In today's globalized economy, multinational firms frequently confront the issue of providing
financial information to stakeholders from varied cultural backgrounds that is both true and
intelligible (Andriof
et al.,
2017). Non-GAAP (Generally Accepted Accounting Principles)
financial reporting metrics are an important component of financial communication because
they enable organizations to provide financial information that goes beyond regular
accounting requirements. However, due to cultural variations, these metrics might be
interpreted differently, thus leading to miscommunication, misunderstandings, and poor
decision-making.
Individuals' views towards financial reporting practices are heavily influenced by cultural
norms and values (Vitolla
et al.,
2019). Some cultures may place a heavy emphasis on
transparency and conformity to standardized accounting rules, whilst others may tolerate a
more flexible and subjective approach to financial reporting. These cultural differences might
influence how people perceive and understand non-GAAP measurements, impacting their
faith in the presented financial data.
Furthermore, language limitations might make it difficult for stakeholders from diverse
linguistic backgrounds to grasp non-GAAP measurements. Financial phrases and ideas are
difficult to translate effectively while retaining their original meaning, which can lead to
misinterpretations or misrepresentations of financial data.
Another important consideration is the level of financial knowledge among stakeholders.
Higher financial literacy cultures are possibly better at understanding non-GAAP
measurements and making educated judgements based on this knowledge.
Different cultural attitudes towards risk and uncertainty can also impact how non-GAAP
measurements are received (
Visani, Di Lascio and Gardini, 2020). Some cultures may be risk
averse and favor cautious financial reporting, whilst others may be more open to aggressive
reporting that emphasizes growth and prospective rewards.
To reduce the influence of cultural variations on the interpretation of non-GAAP financial
reporting metrics, international firms must use communication methods that promote
transparency and clarity (Fridson and Alvarez, 2022). Extensive explanations of non-GAAP
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measures, their calculation methodologies, and the reasoning behind their usage can improve
stakeholders' comprehension and trust.
4.2.2 Theme 2: The ways in which investors and analysts from different cultural
backgrounds interpret non-GAAP financial reporting measures
Figure 4.2.2: The evolution of the literature on non-GAAP reporting
(Source: Arena, Catuogno and Moscariello, 2020)
This picture frames the evolution of the research field on non-GAAP reporting over the three
research periods. Non-GAAP indicator research has grown over time, reflecting their
extensive use across industries. The initial emphasis was on the implications of non-GAAP
disclosure for financial reporting users. The focus of study in the second phase switched to
incentives for preparers to limit opportunistic usage (Arena, Catuogno and Moscariello,
2020).
When evaluating non-GAAP financial reporting metrics in the global financial environment,
investors and analysts from varied cultural backgrounds face a variety of obstacles. Non-
GAAP measures, which give extra insights beyond traditional accounting standards, might be
interpreted differently depending on cultural norms, financial knowledge, risk perceptions,
and investing choices. Understanding how these aspects influence investors' and analysts'
perceptions and decision-making is critical for successful financial communication and
educated investing strategies.
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Investors and analysts interpret non-GAAP financial reporting metrics based on cultural
conventions and beliefs (Schroeder, Clark and Cathey, 2022). Non-GAAP measures are
sometimes viewed skeptically by cultures that place a significant premium on openness and
adherence to standardized accounting procedures, preferring to depend entirely on GAAP-
based numbers. Non-GAAP measurements, on the other hand, may be seen as useful
indications of a company's performance in cultures that respect flexibility and adaptation. As
a result, it is critical for businesses to consider their stakeholders' cultural origins and adjust
their communication to their individual preferences.
Financial literacy levels are also important in interpreting non-GAAP indicators (Leung and
Veenman, 2018). Investors and analysts from high-finance-literacy cultures are more likely to
grasp the subtleties of non-GAAP measurements and incorporate them into their analysis.
Individuals from less financially literate cultures, on the other hand, may fail to understand
the significance of these measurements, perhaps leading to erroneous investment decisions or
inaccurate assessments of a company's financial health.
The perception of risk and uncertainty differs between cultures and can impact how non-
GAAP financial reporting measures are interpreted (Knechel, 2021). Furthermore, the
investing preferences of investors from various cultural backgrounds might influence how
non-GAAP indicators are interpreted. Non-GAAP measurements that emphasize a company's
strategic initiatives and growth potential, on the other hand, may be more appealing to
cultures with a long-term investment mindset.
Companies must participate in honest and thorough financial communication to overcome
these difficulties. Providing extensive explanations of non-GAAP indicators and their
importance in analyzing business performance can help to overcome cultural barriers and
improve investor and analyst comprehension.
4.2.3 Theme 3: Interpretation of non-GAAP financial reporting measures in various
cultural contexts
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Figurer 4.2.3: Non-GAAP financial measures
(Source: www.youtube.com, 2023)
The Canadian Securities Administrators (CSA) issued CSA Staff Notice 52-306 (Revised)
Non-GAAP Financial Measures on January 14, 2016, which included revisions to IAS 1
Presentation of Financial Statements relating to extra subtotals included in financial
statements.
Non-GAAP financial reporting metrics are interpreted differently in different cultural
situations (Marques, 2017). Multinational firms operating in various countries have distinct
problems since stakeholders from different cultural backgrounds see and analyze these
measures differently. In a globalized corporate world, understanding these discrepancies is
critical for successful financial communication and developing confidence with stakeholders.
Cultural Values and Norms:
Cultural values and norms have a significant impact on how
people from various cultures comprehend financial information (Warrick, 2017). Some
cultures are fond of standardized accounting standards and tight adherence to regulatory
requirements, which lead to a more skeptical attitude towards non-GAAP measurements.
Communication styles:
The manner in which financial information is conveyed can have a
big influence on how it is interpreted (Bonvillain, 2019). Companies must communicate non-
GAAP measurements with complexity since indirect and nuanced communication strategies
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may be common in various cultures. A plainer presentation of financial facts, however, gets
valued by cultures that place a high importance on straightforward and transparent
communication.
Transparency and trust:
In financial reporting, trust is a key component. Non-GAAP
financial measurements have been widely accepted in societies where there is a strong level
of confidence in organizations and authorities (JANIN and DISLE, 2020). Transparency is
crucial in these situations because it may assist establish confidence and trust by clearly
outlining the justification for employing non-GAAP data.
Regulatory Environment:
The regulatory environment, which differs from nation to nation,
has an impact on how businesses record and disclose financial information (Fasan and Mio,
2017). Non-GAAP measurements may be subject to strict laws in some nations, which
mandate that businesses adhere to certain rules and reveal reconciliations to GAAP measures.
Financial literacy and education:
Stakeholders' interpretations of non-GAAP measurements
vary depending on cultural differences in financial literacy levels (Arena, Catuogno and
Moscariello, 2021). Higher financial literacy in a culture may result in a better
comprehension of difficult financial concepts and a better ability to evaluate non-GAAP
indicators. Companies may address this by making non-GAAP measurements understandable
to stakeholders by offering instructional materials and explanations.
4.3 Analysis for secondary quantitative data
Understanding how investors and analysts from various cultural backgrounds perceive and
analyze financial information requires an examination of cultural impacts on the
interpretation of non-GAAP financial reporting metrics. The influence of cultural values,
communication styles, trust, financial literacy, and regulatory settings on the understanding of
non-GAAP measures is investigated in this study. The research intends to offer insight on the
problems and possibilities that multinational firms confront in successfully conveying
financial data to stakeholders worldwide by exploring the interaction of these aspects.
Companies utilize non-GAAP financial measurements to illustrate their financial
performance, position, or cash flows by altering GAAP data. S&P 500 corporations
typically reported adjusted profits and adjusted EPS in the first quarter of 2020, with 77% of
companies adopting these measurements (Randewich, 2023). Furthermore, 29% of
corporations utilized EBITDA or Adjusted EBITDA in their financial reporting, while 28%
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reported free cash flow. These non-GAAP measures enhance standard GAAP reporting by
providing investors with additional information (Thecaq.org, 2020).
The analysis of each publication's bibliographic data indicates that the oldest source
examined was published in 2003, and the most current in 2019. The majority of the
publications came out after 2010.
Figure 4.2.4: Non-GAAP reporting in the current standard practice
(Source: Arena, Catuogno and Moscariello, 2021)
The trend in the figure demonstrates that the number of publications is gradually growing,
with the largest number of articles published in 2017. As a result, it appears that the issue is
growing increasingly essential and popular among researchers (Arena, Catuogno and
Moscariello, 2021).
4.4 Results
The study of cultural impacts on the perception of non-GAAP financial reporting metrics
discovered considerable differences in how investors and analysts from various cultural
backgrounds view and analyze financial data. Cultural values, communication styles, trust,
financial knowledge, and regulatory contexts were recognized as important factors impacting
non-GAAP metric interpretation. Non-GAAP metrics were considered as effective indicators
of a company's performance by stakeholders from cultures emphasizing transparency and
conformity to conventional accounting norms, while those emphasizing flexibility and
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adaptability were skeptical. Furthermore, cultures with higher financial literacy had a
superior knowledge of non-GAAP indicators. Overall, the study stressed the significance of
cultural sensitivity in financial communication for global corporations.
4.5 Discussion
The text's main points concern the impact of cultural factors on the understanding of non-
GAAP financial reporting metrics. Several critical concerns have been identified:
Various Interpretations:
Cultural norms and beliefs influence how individuals understand
non-GAAP data. Different cultural origins result in different views of financial information,
which can lead to misconceptions or misinterpretation.
Language Barriers:
Language constraints might make it difficult for stakeholders from
various language backgrounds to correctly grasp non-GAAP measurements. Financial data
gets misinterpreted or misrepresented as a result of translation issues.
Disparities in Financial Literacy:
Different cultures have differing degrees of financial
literacy, influencing stakeholders' capacity to fully grasp complicated financial concepts and
non-GAAP measurements.
Risk Attitudes:
Cultural attitudes towards risk and uncertainty influence how non-GAAP
measurements are received. Risk-averse cultures may favor cautious financial reporting,
whereas risk-tolerant cultures may be more open to aggressive reporting emphasizing future
growth.
Transparency and Trust:
Trust is critical in financial reporting, and cultural variables impact
stakeholders' confidence in the financial facts given. Transparent communication of non-
GAAP measurements can boost stakeholders' trust in the presented data.
Regulatory Environment:
Non-GAAP reporting is governed by different legal frameworks in
different countries, which may affect how international organizations present and disclose
non-GAAP data.
Non-GAAP Reporting objective:
The objective of utilizing non-GAAP metrics is able to alter
over time, with a potential move towards opportunistic usage during particular periods.
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Challenges of Globalization:
Multinational enterprises operating in multiple cultural
contexts face difficulties in delivering financial information that is relevant and intelligible to
stakeholders from various backgrounds.
4.6 Summary
This chapter here has investigated how cultural variables influence investors' and analysts'
understanding of non-GAAP financial reporting metrics. Cultural effects, according to the
report, play a key role in defining how individuals from various backgrounds perceive and
analyze these measures, resulting in differing interpretations and decision-making processes
in the global financial scene.
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Chapter 5: Conclusion and Recommendations
5.1 Conclusion
It can be concluded that, this research has uncovered the profound impact of cultural factors
on individuals' and stakeholders' perception and interpretation of financial information. This
study aims to delve into the intricate ways in which cultural nuances, including national
values, societal norms, and accounting practices, shape the understanding and decision-
making process surrounding non-GAAP financial reporting measures. The findings of this
research demonstrate that cultural differences play a pivotal role in influencing the
perception, trust, and utilization of non-GAAP financial metrics across diverse regions and
countries.
The findings of the research demonstrate that cultural contexts significantly influence how
heavily non-GAAP financial data are weighted. Stakeholders often give greater weight to
measures that are related to sustainable growth and environmental responsibility in societies
that place a high emphasis on long-term harmony and stability. On the other hand, cultures
that place more emphasis on immediate success and individual performance tend to give
indicators like profits before interest, taxes, depreciation, and amortisation (EBITDA) a
higher priority. The study reveals how cultural norms affect how non-GAAP financial
reporting practises are seen. Employing non-GAAP measurements may be seen in certain
cultures as an attempt to provide a more favourable picture to stakeholders, which can breed
suspicion and mistrust. On the other hand, stakeholders may view non-GAAP indicators as a
way to evaluate a company's true performance in cultures that value adaptation and
flexibility. The study also emphasises how cultural beliefs affect accounting procedures and
how they affect how non-GAAP financial measures are interpreted. The computation and
disclosure of non-GAAP metrics may be impacted by differences in accounting rules and
laws among nations. As a result, these variations may result in discrepancies in transparency
and comparability, which in turn may influence stakeholders' decision-making.
5.2 Linking with research objectives
Objective 1: To identify the cultural differences that may affect the interpretation of non-
GAAP financial reporting measures
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The link between Theme 1 and Objective 1 is established by examining the impact of cultural
factors on the perception and understanding of non-GAAP financial metrics.
The objective of
this research is to evaluate how cultural variations affect how non-GAAP financial reporting
measures are interpreted.
This study looks into these cultural quirks to learn more about how
particular elements of distinct cultures affect stakeholders' attitudes and
behaviors toward non-GAAP financial data. The investigation
has
will
look into things like
national values, social conventions, accounting procedures, and viewpoints on financial
reporting in various cultural contexts. By examining how cultural differences affect how non-
GAAP financial measurements are interpreted, theme 1 serves this purpose. Through a
comprehensive examination of different cultural backgrounds, this theme will explore and
highlight important elements that influence the interpretation and decision-making
surrounding non-GAAP metrics. In cultures that prioritize caution and long-term stability,
stakeholders may lean towards metrics that emphasize sustainable growth and corporate
social responsibility.
The various cultures analyzed include
societies with a collectivist
orientation that place importance on stability, societies with an individualistic orientation that
prioritize growth, and culturally diverse environments that influence attitudes towards non-
GAAP financial data, accounting practices, and stakeholder preferences.
.
On the other hand,
in cultures that prioritize immediate success and individual performance, metrics like
EBITDA may hold greater importance. Additionally, this theme could reveal how cultural
norms shape the level of trust and skepticism towards non-GAAP measures, potentially
impacting investment choices.
Objective 2: To examine how investors and analysts from different cultural backgrounds
interpret non-GAAP financial reporting measures
The connection between the theme and the objective is based on Theme 2, which provides
detailed insights and analysis necessary for achieving Objective 2. By studying how investors
and analysts from different cultures interpret non-GAAP financial reporting measures,
researchers can draw important conclusions about the impact of cultural diversity on financial
decision-making. Objective 2 aims to investigate the perceptions and interpretations of non-
GAAP financial reporting measures by investors and analysts from diverse cultural
backgrounds. By focusing on this objective, researchers can examine how cultural differences
influence the decision-making processes of stakeholders with different cultural values, norms,
and beliefs. This examination of various perspectives allows for the identification of potential
variations in the importance attributed to specific non-GAAP measures, the level of
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skepticism or trust towards these metrics, and their influence on investment decisions. Theme
2, on the other hand, explores the diverse perspectives of investors and analysts with different
cultural backgrounds in interpreting non-GAAP financial reporting measures. It delves into
their cognitive processes, biases, and cultural influences that shape their understanding and
assessment of these metrics. For example, it uncovers how investors from individualistic
cultures prioritize metrics that highlight individual company performance, whereas those
from collectivist cultures may attach greater importance to measures related to social
responsibility and community impact. Therefore, theme 2 and objective 2 is interlinked.
Objective 3: To assess the interpretation of non-GAAP financial reporting measures in
various cultural contexts
Theme 3 explores the influence of cultural contexts on the interpretation of non-GAAP
financial reporting measures. This investigation involves analyzing how cultural values,
norms, and accounting practices shape stakeholders' perceptions and decision-making
processes regarding non-GAAP metrics. The goal of this theme is to uncover the specific
ways in which diverse cultural backgrounds impact the importance placed on different non-
GAAP measures, the level of trust in these metrics, and the overall utilization of such
information. Objective 3 integrates with Theme 3 by focusing on the comprehensive
evaluation of non-GAAP financial reporting measures within different cultural environments.
This objective aims to analyze and assess the influence of cultural variations on stakeholders'
interpretation and utilization of non-GAAP metrics. Through empirical research and data
collection from diverse cultural settings, Objective 3 aims to offer valuable insights into the
specific cultural factors that impact the understanding and adoption of non-GAAP financial
information. Therefore, theme 3 in interlinked with objective 3.
5.3 Recommendations
Based on the research findings regarding how cultural factors influence the way non-GAAP
financial reporting measures are understood and used, there are several recommendations that
can be made to improve the comprehension and utilization of these metrics in different
cultural environments.
Cultural Sensitivity in Reporting:
Companies that operate in different cultural environments
should show respect for those cultures by being culturally sensitive in their financial
reporting practices. They should customize the way they present non-GAAP measures to
match the cultural values and preferences of their stakeholders. By offering clear explanations
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of why certain metrics are used and how they align with the company's long-term objectives,
companies can promote better acceptance and comprehension.
Transparency and Disclosure:
Transparency and disclosure are extremely important in
financial reporting as they help to establish trust with stakeholders. It is essential for
companies to be open and transparent about the methods they use to calculate non-GAAP
metrics. This involves providing reconciliations to the most comparable GAAP measures and
offering explanations for any adjustments made. By standardizing the disclosure of non-
GAAP measures on a global scale, it becomes easier to compare data and reduce the
influence of cultural biases.
Investor Education:
The comprehension of non-GAAP indicators can be improved by using
investor education programs to overcome cultural differences. Investors and other
stakeholders can be better informed about the importance and limitations of non-GAAP
measurements with the help of cooperation between businesses, financial institutions,
regulatory agencies, and trade groups. Unaffected by their cultural origins, people can
improve their investing decisions by increasing their financial literacy.
Regulatory Harmonization:
To establish universal agreement in accounting and reporting
standards for non-GAAP financial measures, international governments and standard-setters
should collaborate. This cooperation can promote consistent practices and effectively resolve
inequalities between jurisdictions. By doing this, it will make cross-cultural comparisons
easier and reduce misunderstanding for investors and other interested parties.
Adaptation to Local Norms:
While it is important for companies to standardize their
practices, they should also acknowledge the importance of adapting to local norms and
regulations. By understanding cultural variations, companies can adjust their reporting
methods to meet local expectations, while still maintaining transparency and accuracy.
Engagement with Stakeholders:
Engaging with stakeholders from diverse cultural
backgrounds can provide valuable perspectives on their preferences and concerns regarding
non-GAAP financial reporting measures. Organizations can employ methods like surveys,
focus groups, and interviews to collect feedback and enhance their reporting practices based
on this input.
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5.4 Research limitations
The study's results may not apply to all cultural contexts worldwide because of the specific
cultural settings
and sample
used. The research might have focused on a particular group of
investors and analysts, which may not fully represent the diverse cultures around the world.
To improve the research's external validity, a more diverse sample from different
geographical and cultural backgrounds could be included. In addition to this, the study here
has employed a secondary data collection approach, which is inferior to its primary
counterpart.
5.5 Future scope of the research
The future potential of the research involves broadening the study to include a wider and
more varied group of participants from different cultural backgrounds. Furthermore,
additional research could examine how specific cultural aspects, such as individualism versus
collectivism or power distance, affect how non-GAAP metrics are interpreted. Long-term
studies could also be carried out to observe how cultural influences change over time,
providing insights into the evolving dynamics of financial reporting practices in an
increasingly globalized world. In addition to this, a primary research approach would be
considered.
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A. Accounting education
B. Tax accounting
C. Auditing
D. Accounting research
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Which fundamental characteristic of requires that financial statements are prepared in a similar way year after year?
Select one:
a. Faithful representation
b. Understandability
c. Comparability
d. Relevance
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Use of IFS across the world has provided a high quality set of standards that has aidedglobal comparability of financial statements for both existing and prospective investors.Is this statement true and if so why.
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We often hear about the importance of financial statement analysis. Given the various statements prepared and all the information included therein, the question becomes which of the financial statements should get a closer review and why?
Explain what the basic financial statements are and what is the purpose of each statement.
Within the different statements, in your opinion what is/are the key areas of information to focus on and why? Be specific as to the importance of your selection.
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Identify the following statements and match it with the one of the qualitative characteristics of financial statement.
Submitted Answers
Prompts
Choose a match
The information provided to user to determine the
company's growth or future potential
Neutrality
The financial Statements most be produced within a certain
period that users can take advantage of information to make
Predictive Value
informative decision.
Financial Statement is complete, neutral and free of material
O Faithful represented
statement, it means that it is..
Timeliness
The information provided in the financial statement should
not be biased to specific group of users.
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Financial Inclusion in Banking
Directions for Future Research:* Suggest areas where further research is needed to achieve a more inclusive financial system.
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Summarize the impact of foreign exchange rates on the company’s financial statements. What risks do foreign exchange rates pose?
Provide academically supported example(s) in your response.
What are the two methods used to translate financial statements and how does the functional currency play a role in determining which
method is used? Provide academic support in your response. Compose a hypothetical example to demonstrate the translation process using the two methods. Ensure all information is entered
accurately.
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Technology overview: What’s interesting about your inquiry topic? Present an inquiry topic outline that introduces the topic to a non-technical audience.
Use this question to answer
Fintech platforms: finance platforms, opportunities, and risks?
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Describe the users of audited financial statements and the decisions that they need to make based on reliable information. Please use the illustration below to help you answer this question.
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Which of the following BEST describes Financial Condition Analysis (FCA)?
Group of answer choices
it mainly uses financial information in analysis
it is a daily assessment of financial performance
it evaluates the costs and benefits of financial analysis
it assesses the impact of socioeconomic/organizational factors on financial condition
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Is the WACC set by investors or by managers and how (with theoretical concepts)?
Please provide well explained and detailed answer without plagiarism
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Related Questions
- Answer the following question and provide detail examples to support your answer. Analyze and make an assessment of the International Accounting Standard Board's (ASB) Conceptual framework 2018 by highlighting its strength and flaws. Afterward, state how would improve it in order to further enhance the relevance and reliability of financial reporting. 2. a) Define the concept of research methodology in the context of accounting theory. Discuss the consequences of choosing an incorrect research methodology in accounting research, highlighting the strengths and limitations of quantitative and qualitative approaches to accounting research. b) Evaluate the role of accounting theories in guiding research in the field of accounting. Discuss how different accounting theories, such as agency theory, positive accounting theory, and institutional theory, influence research questions, hypotheses formulation, and empirical analysis are from each other, highlighting their strengths and…arrow_forwardsarrow_forwardMultiple choice: 1. This qualitative characteristic requires at least two items. A. Timeliness B. Comparability C. Verifiability D. Understandability 2. It is the process of objectively evaluating evidence and expressing an opinion regarding the correspondence between management’s assertions and established criteria. A. Accounting education B. Tax accounting C. Auditing D. Accounting researcharrow_forward
- Which fundamental characteristic of requires that financial statements are prepared in a similar way year after year? Select one: a. Faithful representation b. Understandability c. Comparability d. Relevancearrow_forwardUse of IFS across the world has provided a high quality set of standards that has aidedglobal comparability of financial statements for both existing and prospective investors.Is this statement true and if so why.arrow_forwardWe often hear about the importance of financial statement analysis. Given the various statements prepared and all the information included therein, the question becomes which of the financial statements should get a closer review and why? Explain what the basic financial statements are and what is the purpose of each statement. Within the different statements, in your opinion what is/are the key areas of information to focus on and why? Be specific as to the importance of your selection.arrow_forward
- Identify the following statements and match it with the one of the qualitative characteristics of financial statement. Submitted Answers Prompts Choose a match The information provided to user to determine the company's growth or future potential Neutrality The financial Statements most be produced within a certain period that users can take advantage of information to make Predictive Value informative decision. Financial Statement is complete, neutral and free of material O Faithful represented statement, it means that it is.. Timeliness The information provided in the financial statement should not be biased to specific group of users.arrow_forwardFinancial Inclusion in Banking Directions for Future Research:* Suggest areas where further research is needed to achieve a more inclusive financial system.arrow_forwardSummarize the impact of foreign exchange rates on the company’s financial statements. What risks do foreign exchange rates pose? Provide academically supported example(s) in your response. What are the two methods used to translate financial statements and how does the functional currency play a role in determining which method is used? Provide academic support in your response. Compose a hypothetical example to demonstrate the translation process using the two methods. Ensure all information is entered accurately.arrow_forward
- Technology overview: What’s interesting about your inquiry topic? Present an inquiry topic outline that introduces the topic to a non-technical audience. Use this question to answer Fintech platforms: finance platforms, opportunities, and risks?arrow_forwardDescribe the users of audited financial statements and the decisions that they need to make based on reliable information. Please use the illustration below to help you answer this question.arrow_forwardWhich of the following BEST describes Financial Condition Analysis (FCA)? Group of answer choices it mainly uses financial information in analysis it is a daily assessment of financial performance it evaluates the costs and benefits of financial analysis it assesses the impact of socioeconomic/organizational factors on financial conditionarrow_forward
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