Purpose

This study aims to examine the association between annual report readability and accounting irregularities in Indonesia. Using 967 firm-year observations over the 2014–2017 period, this paper unable to find evidence that annual report readability is associated with accounting irregularities. The results are robust after using alternate measurements of accounting irregularities proxies and readability indexes. This paper also finds that the corporate governance mechanism and foreign shareholder structure did not moderate the association between annual report readability and accounting irregularities.

Design/methodology/approach

The study uses an archival method with cross-sectional regression of 967 firm-year observations over the 2014–2017 period to investigate an association between annual report readability and accounting irregularities in an emerging market setting. To check the robustness of the results, this paper conducts a battery of robustness tests.

Findings

This paper finds evidence that annual report readability is not associated with accounting irregularities in Indonesia. The results are robust after using alternate measurements of accounting irregularities proxies and readability indexes. This paper also finds that the corporate governance mechanism and foreign shareholder structure did not moderate the association between annual report readability and accounting irregularities. This implies that the readability of annual reports does not have the ability to predict the likelihood of accounting irregularities in Indonesia. It is possible that firms with accounting irregularities will be inclined to voice simpler stories which can counteract the tendency of lies to be linguistically more complex. Indeed, according to the Education First English Proficiency Index, Indonesia is categorized at a low proficiency level. Furthermore, this paper also discovers that the average readability of the management discussion and analysis (MD&A) of Indonesian public listed firms is at an ideal score by having a Fog Index of 13.32. The findings provide valuable insights for stakeholders in using annual reports for their decision-making, especially in an emerging market setting and non-English speaking countries.

Research limitations/implications

It is important to interpret the findings in the context of the limitations of the readability index the authors used. It is argued that Fog Index, Flesch-Kincaid and Flesch Reading Ease have their own limitations as considered inadequate to be used in the context of business and accounting narratives that are adult-oriented and specialist in nature (Jones and Shoemaker, 1994; Loughran and McDonald, 2014). Another caveat relates to the use of proxies for accounting irregularities. The M-Score and F-Score have some limitations in which, among others, were determined without considering the normal level of accruals or period where manipulations were absent (Ball, 2013).

Practical implications

One reason underlying the result is that Indonesian firms, in general, do not consider the complexity of the annual report, particularly MD&A disclosures, as a tool to mask financial reporting irregularities. It is also possible that firms with accounting irregularities will incline to voice simpler stories because it is difficult to be untruthful (Lo et al., 2017). Indeed, according to Education First English Proficiency Index, Indonesia was categorized in low proficiency level and ranked 61st out of 100 countries being surveyed (Education First, 2019). As policymakers, locally and globally, are calling for more simplified reports including a plain English approach, the study can be insightful to their deliberations. It suggests that policymakers need to consider a country’s English proficiency, writing skills, regulatory environment and corporate policy on shaping the complexity and narrative of a firm’s communications.

Originality/value

The study contributes to a scarcity of research that investigates English-written annual reports in non-English speaking countries (Jeanjean et al., 2015; Lundholm et al., 2014). As such, the study findings provide insights related to MD&A in an under-researched area and contribute to improving MD&A not only in Indonesia but also in neighbor countries that share similar social, political and economic characteristics. Also, this study is important for foreign institutions or individuals investing on Indonesian-listed firms. According to Candra (2016), approximately 60% of companies listed in the Indonesia stock exchange are owned by foreign individuals or institutions. They rely greatly on the English texts of annual reports to understand the companies’ financial performance. Moreover, La Porta et al. (2002) asserted that firms with a majority of foreign shareholders (dominantly owned by foreign investors) are more likely to face information asymmetry, primarily due to geographical factors and language barriers.

中文翻译：

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年报可读性和会计违规行为：来自印度尼西亚上市公司的证据

目的

本研究旨在研究印度尼西亚年度报告可读性与会计违规行为之间的关联。使用 2014 年至 2017 年期间的 967 个公司年度观察，本文无法找到证据表明年度报告的可读性与会计违规行为有关。在使用会计违规代理和可读性指数的替代测量后，结果是稳健的。本文还发现，公司治理机制和外资股东结构并未缓和年报可读性与会计违规行为之间的关联。

设计/方法/方法

该研究使用存档方法对 2014 年至 2017 年期间 967 个公司年度观察结果进行横截面回归，以调查新兴市场环境中年度报告可读性与会计违规行为之间的关联。为了检查结果的稳健性，本文进行了一系列稳健性测试。

发现

本文发现的证据表明，年度报告的可读性与印度尼西亚的会计违规行为无关。在使用会计违规代理和可读性指数的替代测量后，结果是稳健的。本文还发现，公司治理机制和外资股东结构并未缓和年报可读性与会计违规行为之间的关联。这意味着年报的可读性不具备预测印度尼西亚会计违规可能性的能力。有会计违规行为的公司可能会倾向于讲述更简单的故事，这可以抵消谎言在语言上更复杂的趋势。事实上，根据教育第一英语水平指数，印度尼西亚被归类为低熟练度级别。此外，本文还发现印度尼西亚上市公司的管理层讨论和分析（MD&A）的平均可读性处于理想的分数，其雾指数为 13.32。研究结果为利益相关者使用年度报告进行决策提供了宝贵的见解，尤其是在新兴市场环境和非英语国家。

研究限制/影响

在作者使用的可读性指数的局限性的背景下解释研究结果很重要。有人认为，Fog Index、Flesch-Kincaid 和 Flesch Reading Ease 有其自身的局限性，被认为不足以用于面向成人和专业性质的商业和会计叙述的背景下（Jones 和 Shoemaker，1994 年；Loughran 和麦克唐纳，2014 年）。另一个警告与使用代理记账违规有关。M-Score 和 F-Score 有一些局限性，其中在确定时没有考虑正常的应计水平或不存在操作的时期（Ball，2013 年）。

实际影响

造成这一结果的一个原因是，印度尼西亚公司一般不会将年度报告的复杂性，尤其是 MD&A 披露视为掩盖财务报告违规行为的工具。有会计违规行为的公司也有可能倾向于讲述更简单的故事，因为很难说实话（Lo et al., 2017)。事实上，根据 Education First 英语熟练度指数，印度尼西亚被归类为低熟练度水平，在接受调查的 100 个国家中排名第 61 位（Education First，2019 年）。由于本地和全球的政策制定者都在呼吁采用更简单的报告，包括采用简单的英语方法，因此该研究可以对他们的审议产生深刻的影响。它表明政策制定者需要考虑一个国家的英语熟练程度、写作技巧、监管环境和公司政策，以塑造公司沟通的复杂性和叙述。

原创性/价值

该研究导致了对非英语国家的英语书面年度报告进行调查的研究稀缺（Jeanjean等人，2015 年；Lundholm等人，2015 年）。, 2014)。因此，研究结果提供了与研究不足的领域中的 MD&A 相关的见解，并有助于改善印度尼西亚以及具有相似社会、政治和经济特征的邻国的 MD&A。此外，这项研究对于投资于印尼上市公司的外国机构或个人也很重要。根据 Candra（2016 年）的数据，在印度尼西亚证券交易所上市的公司中，约有 60% 为外国个人或机构所有。他们非常依赖年报的英文文本来了解公司的财务业绩。此外，La Porta等人。 (2002) 断言拥有大多数外国股东（主要由外国投资者所有）的公司更可能面临信息不对称，主要是由于地理因素和语言障碍。