By Enoch AKUFFU-DJOBI (PhD)
In today’s corporate environment, financial statements serve as the cornerstone of stakeholder decision-making. However, the increasing use of impression management techniques in financial reporting raises concerns about the authenticity of these disclosures.
While the primary aim of financial statements is to provide a true and fair view of a company’s performance and position, impression management can distort this objective, leading stakeholders—especially investors, lenders, and regulators—into making decisions based on skewed information.
This raises a fundamental question: Does impression management enhance communication or obscure the truth?
Understanding Impression Management in Accounting?
Impression Management Theory, rooted in sociology, examines how individuals and organizations consciously or unconsciously shape the perceptions others hold about them.
In the realm of accounting, this involves the strategic presentation of financial data to create a favorable image, attract investment, secure loans, or enhance market reputation. While transparency and accuracy are the cornerstones of ethical accounting, impression management walks a fine line between legitimate strategic communication and potential manipulation.
The Attribution Theory in Accounting
At the heart of impression management in accounting lies the Attribution Theory, which examines how individuals or organizations explain the causes of events, particularly successes or failures. In financial reporting, this theory helps to understand how entities present their performance to stakeholders.
When companies perform well, their financial reports often emphasize internal factors—strong leadership, effective strategies, robust governance system or innovative practices.
Conversely, during periods of poor performance, organizations may attribute unfavorable outcomes to external factors such as market volatility, regulatory changes, geopolitical risk or economic downturns. This selective disclosure influences how stakeholders perceive the organization’s management and future prospects
Crafting the Narrative: A Double-Edged Sword
Impression management in financial reporting as indicated, refers to the strategic presentation of information to shape stakeholders’ perceptions favorably. Companies employ various techniques, such as emphasizing positive metrics, using persuasive narratives, and even manipulating accounting figures within legal bounds.
Supporters of impression management argue that it helps organizations frame their stories effectively, focusing on strengths and long-term potential. For example, during Ghana’s recent economic turbulence, some banks (names withheld) used optimistic language in their annual reports to maintain depositor confidence, highlighting resilience and forward-looking strategies. Such efforts can prevent undue panic and stabilize markets.
However, critics argue that these practices can mislead stakeholders, presenting a facade of stability or success while concealing underlying vulnerabilities.
Impression Management in Ghanaian Accounting Practices
Ghana’s growing economy, driven by sectors like mining, banking, telecommunications, and manufacturing, provides a fertile ground for impression management in accounting. Discussed below are some practical examples illustrating how Ghanaian companies may engage in impression management:
- Selective Disclosure in Annual Reports
Example: A leading Ghanaian mining company reports robust future project pipelines in its annual report, emphasizing potential revenue streams. Simultaneously, it downplays current operational losses by consolidating expenses under general categories.
Impact: Investors receive an optimistic outlook, potentially boosting stock prices and attracting investment, even if the present financial health is tenuous.
- Creative Accounting in Revenue Recognition
Example: A prominent bank in Ghana accelerates the recognition of interest income by classifying certain fees as interest, thereby inflating its profitability figures for the fiscal year.
Impact: Enhanced profit reports can improve investor confidence and lead to higher market valuations. However, this practice may mask underlying financial issues that could surface in future periods.
- Graphical Manipulation in Financial Statements
Example: A telecommunications company presents its revenue growth using bar charts with inconsistent scales, making year-over-year growth appear more substantial than it truly is.
Impact: Visual enhancements can create a misleading impression of consistent and strong growth, influencing investor decisions and market perceptions positively.
- Timing of Financial Disclosures
Example: A manufacturing firm delays the disclosure of significant liabilities until after meeting its quarterly targets, thereby presenting a healthier balance sheet during performance reviews.
Impact: Short-term positive financial appearances can secure bonuses, favorable loan terms, and maintain investor trust, even if long-term liabilities remain unaddressed.
Ethical and Regulatory Concerns
The ethical implications of impression management cannot be overlooked. When does strategic presentation cross the line into deception? In some cases, companies that collapsed in Ghana’s banking sector had reported glowing financial health just months before their downfall. This indicates that impression management, if unchecked, can facilitate financial misrepresentation, eroding public trust in financial systems.
While regulators like the Securities and Exchange Commission (SEC) in Ghana and international standards such as IFRS advocate transparency, enforcement mechanisms often lag. Auditors also face challenges in detecting subtle forms of impression management, particularly when they fall within legal boundaries.
Why It Matters in Ghana
Impression management in accounting holds profound implications for Ghana’s economy:
Investor Trust: Consistent manipulation can erode investor confidence, making it harder for companies to attract capital.
Regulatory Oversight: The Ghanaian regulatory bodies, such as the Financial Reporting Council (FRC) and the Ghana Stock Exchange (GSE), must vigilantly oversee accounting practices to prevent deceptive reporting.
Market Stability: Misleading financial information can lead to market volatility, affecting not just individual companies but the broader economic environment.
Balancing Act: Transparency vs. Strategic Communication
While impression management is not inherently unethical, its misuse can lead to significant consequences. Ghanaian companies must strike a balance between presenting their financial health attractively and maintaining honesty and transparency. Adhering to international accounting standards, such as the International Financial Reporting Standards (IFRS), can help mitigate the risks associated with impression management.
The Role of Stakeholders
Regulators: Strengthening enforcement mechanisms and conducting regular audits can deter manipulative practices.
Auditors: Independent and thorough auditing is crucial in ensuring the accuracy of financial reports.
Investors: Cultivating a discerning approach to financial statements, beyond surface-level numbers, can protect against misleading information.
Management: Emphasizing ethical accounting practices fosters long-term trust and sustainability.
Conclusion
Impression Management in accounting underscores the delicate interplay between perception and reality in financial reporting. In Ghana, as companies navigate growth and competition, the temptation to manage impressions through accounting practices is ever-present.
However, fostering a culture of transparency and accountability is essential for sustainable economic development. By understanding and addressing the nuances of impression management, Ghanaian businesses can build stronger, more trustworthy relationships with their stakeholders, ensuring long-term success and stability.
(Enoch is a Chartered Accountant / Certified Banker with a deep passion for accounting, banking, and governance. His expertise spans both education and practice reflecting a commitment to research and knowledge sharing. He can be reached via [email protected]). Contact: +233244201383.
