Educating the individual private shareholder as a means of reducing the accounting expectations gap

Abstract

Financial statements provide the main source of information available to companies in order to communicate financial information with the private individual shareholders. However findings by Nicolette Attard (2006) reveal that private shareholders, in the absence of a good accounting knowledge base, find it very difficult to grasp the exact meaning of the financial statements. This lack of understandability of the annual accounts creates the phenomenon of the financial statements gap. The aim of this study is to investigate the reason of the existence of the financial statement expectations gap in Malta and to test whether public education is a viable method to reduce this gap. To this end, a survey was conducted amongst individual shareholders of a listed manufacturing company. A focus group was also organised for shareholders who attended the BOY Investors' Sessions. Finally in-depth interviews were held with the various bodies singled out by shareholders as having a duty to educate them. Findings show that actual understanding increases as accounting knowledge increases. This implies that public education could be used as a means of reducing the financial reporting gap. It also emerged that private shareholders are also willing to shoulder their share of responsibility. In fact only 1.04% of the private shareholders do not want to be educated by any form of educational media. This calls for certain bodies such as the MFSA to issue guide books either in print or electronic format and organise sessions to help investors understand better the financial statements issued by the company in which they have invested.