This study investigates compliance with voluntary underlying profit-reporting guidelines in Australia. Underlying profits are a modification of the statutory profit figure, arguably to reflect the result for ongoing business activities. Such profit figures are known by many names, including ‘pro-forma earnings’, ‘alternative earnings’ and ‘adjusted earnings’. It is argued that adoption of voluntary underlying profit-reporting guidelines promotes higher disclosure quality by increasing transparency and consistency. In accordance with Legitimacy and Institutional Theories, disclosure quality is expected to have a positive association with the extent of social pressure to which a firm is subjected. Extent of social pressure is proxied by three attributes: general public exposure due to firm size, firm political exposure in the media and legitimacy of the firm’s industry. In the analysis, quality is measured according to degree of compliance with the seven AICD/FINSIA underlying profit principles. We examine how social pressures, which companies face due to their size, industry, and media exposure, determine the level of disclosure quality.
To test the hypotheses developed in this study, we use a proportional stratified random sample of 50 ASX listed companies that reported a non-statutory profit figure within their annual earnings announcements for the financial year ended 2010. We find that high quality disclosure is primarily associated with political pressure in the media. However, no support has been found for the hypothesis that firms subject to a greater visibility due to their size increase reporting quality. Further, it appears that industry legitimacy does not play a significant role in determining firm legitimacy. Divergent from evidence on emerging industries, the absence of this association may be interpreted as reflecting that the importance of industry legitimacy to company legitimacy is a unique phenomenon applying to companies in new industries and not mature industries. Finally, results reveal that signaling superior performance and strong corporate governance may yield alternative explanations for underlying profit quality.