Evolutions in the Financial Reporting Quality: A Comparative Analysis of Romanian Companies Listed on the Bucharest Stock Exchange

Abstract

The permanent evolution of accounting and financial reporting standards, in particular for listed companies, is justified by the need to adapt these standards to economic, societal, financial, institutional and technological developments. The main objective of the standard setters is that the financial statements reflect as closely as possible the reality of the entities they describe. The Romanian financial market (Bucharest Stock Exchange—BSE) has two segments: the regulated market, where, since 2012, IFRS are mandatory for the individual financial statements, and the alternative market AeRo, where the Romanian standards (RAS) are applied. This structure allows us to compare a financial reporting quality (FRQ) score, first, longitudinally (IFRS period 2012–2023 vs. non-IFRS period 2000–2011, for companies listed on the regulated market) and, second, IFRS observations (regulated market) vs. RAS observations (alternative market), for the same period (2012–2023). Following and partially replicating a methodology found in the literature, this study found that FRQ scores over the analyzed periods show us an increase in FRQ in the case of IFRS application, but also a favorable evolution of FRQ score for RAS observation. The evolution of accounting rules (including the transition from RAS to IFRS) is important, but the enforcement of the application of the reporting standards and other factors could have a significant impact on the quality of financial reporting.

1. Introduction

The financial reporting quality (FRQ)—which is dependent on the quality of accounting at the level of the individual entity—is a very prominent theme in the literature. There are tens of thousands of articles dealing with it, from different methodological and even ideological perspectives, in different contexts and in relation to many different events or variables. Following methodological elements found in the literature, this study propose a longitudinal comparison (over two consecutive sub-periods) of the quality of financial reporting in the case of the Romanian listed companies applying IFRS, taking as reference similar firms before the mandatory application of IFRS. On the other hand, this study propose a horizontal comparison—over the same period—of the FRQ indicators of the listed firms applying IFRS with similar indicators reported by other listed firms, but using national accounting rules for the preparation of financial statements (as in Bonacchi et al., 2019).

Romania’s economic and institutional developments have been dramatic over the last 30–35 years, and their impact on accounting rules and practices have been investigated in numerous studies. This study partially replicate a methodology used in the literature (Tang et al., 2016) to analyze the evolution over time of the financial reporting quality of listed Romanian firms.

The Romanian financial market proposes two listing segments—the regulated market and the alternative AeRo market. The accounting rules applied are different: IFRS on the regulated market (starting with 2012) and the Romanian accounting standards (RAS) on the alternative market.

This particular situation of the Romanian financial market allows us to compare—as mentioned above—not only the FRQ evolution of companies on the regulated market—RAS period (2000–2011) vs. IFRS period (2012–2023), but also to compare RAS indicators with IFRS indicators, for the same 2013–2023 period, for the categories of firms on the two listing segments. It is interesting to analyze the quality of financial reporting in Romania and in the context of its belonging to the post-communist Central-Eastern European space, where the (re)creation of institutions and ensuring their proper functioning has a history of little more than 35 years. Difficulties in adapting to the demands of the global economy, coupled with the heavy economic legacy of the communist period, have disrupted and are still disrupting many mechanisms that may seem simple in the situation of developed democratic countries. Along these lines, for example, S. Ahmed (2015) argues that Eastern European countries should make significant efforts to improve reporting transparency and investor protection.

Even before the mandatory application of IFRS in the EU, the transition to International Accounting Standards (IAS, now IFRS) is often seen as resulting in an increase in the quality of financial reporting (Barth et al., 2008) for non-US firms; in this context, IFRS application should be seen as a mix of features of the financial reporting system, including the accounting standards themselves, their interpretation, their actual implementation and enforcement, and the way to deal with litigations that may arise from financial reporting.

We can also take into account cultural or behavioral specific elements. In this respect, Soderstrom and Sun (2007), in a review of the literature on the application of IFRS, note that related studies identify positive effects of IFRS on accounting quality (AQ)/FRQ, but that the effects of this transition are highly dependent on the legal system in each country, the incentives for financial reporting, the national political system, the development of financial markets, ownership and the tax system.

The quality of financial reporting and of the underlying accounting system is an important prerequisite for users to be well informed, so that their decisions are not distorted by elements that they have no other way of knowing and over which they have no control. The full and faithful application of the accounting rules, as well as the financial audit obligations, should ensure an acceptable level of relevance and faithful representation in the financial reports based on accounting data. However, there may be situations where the application of accounting standards may not necessarily be in the ideal sense intended by the standard setters. It is possible, for example, that managers may find incentives in distorting, to some extent, the reported information in order to increase their remuneration, increase their chances of maintaining their positions, improve their levels of operational flexibility and/or control over the entity (A. S. Ahmed et al., 2020). These distortions are not necessarily a simple and natural path—they come with some costs, including increased scrutiny from auditors, loss of reputation or litigation; for these reasons, A. S. Ahmed et al. (2020) assess that managers make financial reporting decisions by weighing their private benefits against the costs incurred if manipulation is identified.

It is interesting to compare the changes in the quality of accounting and financial reporting for different categories of firms: those applying IFRS vs. those applying national rules. It should not be assumed that the latter rules are fixed—no, they change, improve, adapt to the economic and institutional environment, so the comparison should also take these aspects into account. In other words, some of the improvements that can be attributed to the transition to IAS/IFRS could have occurred even without this transition (Barth et al., 2008).

It should not be forgotten that the measurement of the financial reporting quality depends not only on accounting indicators or their relationship with financial markets, but also on economic, cultural, institutional, social variables; Barth et al. (2008) warn us that the results of studies on changes in the quality of accounting and financial reporting cannot be attributed with certainty to changes in accounting rules alone, rather than to changes in the economic and institutional environment. In their turn, Bilal et al. (2023) introduce corporate governance elements into the analysis of financial reporting quality by considering the impact of the educational profile, gender and professional experience of audit committee members on financial reporting quality. Analysing a sample of firms that have switched to IFRS (firms from 22 countries), Halabi et al. (2019) conclude that managers’ choices to engage in earnings management (accrual earnings management or real earnings management) also depend on the informal institutional characteristics (culture and religiosity) in each country.

Also, in the analysis of the effects of IFRS application, the quality of the pre-IFRS rules should be taken into account (A. S. Ahmed et al., 2013). We can consider that the pre-IFRS Romanian rules, harmonized rules and later on in compliance with the European Directives are less complex than IFRS and I can consider this as a sign of lower quality. One justification for this subjective assessment can be found in the comparative dimensions of the two sets of rules: from around two hundred pages for the Romanian rules to several thousand pages for the international ones. To a certain extent, given the (sometimes too) global nature of international standards, it is possible that national standards allow a more accurate reflection of national specificities and a better adaptation to the economic, social and institutional environment than IFRS (Barth et al., 2008).

The objective of our research is to compute financial reporting quality scores and to compare, through these scores, the periods of application of national standards, on the one hand, and the periods of application of IFRS, on the other hand.

The results of our analysis show that, in the longitudinal comparison, the score calculated for the IFRS period shows a much better quality of financial reporting compared to the previous period when the same firms applied national rules. On the other hand, comparing the IFRS and RAS scores for the same period (2012–2023), for firms listed on the regulated market and for firms listed on the alternative AeRo market, respectively, the difference in score in favor of IFRS is much smaller than in the previous comparison. This suggests that IFRS do indeed lead to higher quality, but also that national rules have not lagged behind, but have evolved so that the quality of financial reporting achieved by applying them is high, comparable in the given context with IFRS.

The continuation of the study contains a review of the literature on FRQ, globally, but also with applicability in Romania, followed by the methodology and the sample, and by the results, discussion, conclusions and references.

2. Literature Review

Considering the fact that our study refers to Romanian listed companies, by replicating on their case some methodologies taken from the relevant literature, it is very useful that the literature review is structured in two parts. Thus, I will first provide an overview of the main results reported in the global literature regarding the quality of financial reporting and its evolution, following events such as changes in accounting standards. Second, I analyse the already published studies on the evolution and determinants of the quality of financial reporting in Romanian firms, in particular listed firms.

2.1. Accounting Quality and Financial Reporting Quality in the Relevant Literature

The option of the European authorities for the mandatory application of the IFRS in the consolidated financial statements of the listed European groups, starting with 2005, has paved the way for a much wider use of these standards than before. This event has also been extremely important and fruitful for research in accounting, finance and related disciplines, providing very useful input for various comparative studies. In addition to the obligations initially established under European Union (2002) on the application of international accounting standards, some Member States have extended the application of IFRS to other entities. Thus, in Romania, the year 2012 came with the obligation that IFRS should also be applied in the individual financial statements of companies listed on the regulated market of the BSE (a little more than 60 companies, at that time). As consolidation did not represent a majority presence in Romania (less than 50% of listed companies, in 2012), IFRS individual financial statements of listed firms have become the subject of many research papers.

It is generally considered that the application of international accounting standards (IAS-IFRS) as well as US GAAP is a guarantee for a high financial reporting quality for listed companies. The results reported in various studies generally confirm increases in the FRQ. However, there are divergent findings in the literature and, like Agana et al. (2023), I highlight some of the studies whose results validate/invalidate increases in accounting/financial reporting quality. Thus, among the articles in which the samples analyzed and the institutional contexts from which the observations originated led to conclusions in the sense of an increase in AQ/FRQ, I note:

• Chen et al. (2010) analyze the IFRS application in 15 European countries and find an improvement in the levels of FRQ indicators: less earnings management, less discretionary accruals, better accruals quality; however, the firms analyzed seem to engage more in earning smoothing and also recognize losses later;
• Liu et al. (2011) provide results showing that the mandatory IFRS changeover of the Chinese firms they analyze has lead in a significant increase in accounting quality, characterized by lower earnings management and higher value relevance;
• Houqe et al. (2012), on a sample comprising more than 100,000 observations from 46 countries, find an increase in the quality of reported earnings (a limitation of earnings management, higher value relevance, more prudence) with mandatory IFRS implementation, but only for countries where the law provides strong investor protection;
• Bryce et al. (2015) found that IFRS adoption in Australia did not lead to significant quality increases in accounting and financial reporting;
• Capkun et al. (2016)—for a sample of firms in 29 countries, mostly in the EU—identify decreases in earnings management (in earnings smoothing) for firms that voluntarily adopted IFRS, but increases in this behavior for firms that mandatorily adopted IFRS, comparing the period before 2005 with the period immediately after;
• Dayanandan et al. (2016), analyzing a sample of firms in 35 countries in Eastern and Western Europe and other parts of the world, conclude that IFRS adoption led to an increase in the FRQ, through reduced income smoothing and earnings management, especially in France and Scandinavian countries and less so for German firms and for firms in common law countries; Dayanandan et al. (2016) find a significant increase in the earnings variability in the IFRS period compared to before IFRS, i.e., a decrease in income smoothing;
• Jara Bertin and Arias Moya (2013) find that IFRS improve the relevance and credibility of accounting information, on listed firms in Chile;
• Krismiaji et al. (2016) confirm an increase in the relevance and reliability of accounting information during the IFRS period, for Indonesian firms;
• Turki et al. (2016) identify an improvement in the information content of reported earnings after the application of IFRS, which led to a reduction in the cost of capital, as well as a reduction in errors and dispersion in analysts’ estimates;
• Da Silva Junior et al. (2017) identify a positive effect on accounting quality of the transition of Brazilian firms to IFRS, in terms of value relevance;
• Boolaky et al. (2019), on a range of Asia-Pacific countries, analyse the determinants of perceived accounting and auditing quality following IFRS adoption and find a significant impact of international standards on the quality studied, but with significant variations due to the legal framework, in each country;
• Salah and Abdel-Salam (2019) analyse the impact of IFRS on the quality of financial reporting of Taiwanese listed firms and find that they are less likely to use accrual earnings management during the IFRS period; however, the authors do not identify any differences in timely loss recognition and value relevance;
• Albu et al. (2020), although they do not analyse the quality of financial reporting, process the results of questionnaires addressed to representatives of Big4 auditors in 11 CEE countries and their perception of IFRS application is that, despite the difficulties in applying IFRS, the benefits of IFRS application (comparability, transparency, relevance, attracting foreign investment) outweigh the costs;
• Key and Kim (2020) analyse the implications of the transition to IFRS for Korean firms and find a significant increase in accounting quality;
• in an analysis of Portuguese and Brazilian tax inspectors’ perceptions of the impact of IFRS, Silva et al. (2021) report that the application of IFRS improved the overall quality of accounting information;
• Benkraiem et al. (2022), on the example of non-financial firms listed in Paris, find an increase in the quality of the information environment generated by the transition to IFRS, i.e., an improvement in the faithful representation of the activity and situation of entities;
• Srivastava and Muharam (2022) confirm improved value relevance of earnings and equity of Indian and Indonesian firms after IFRS adoption, with effects on reducing information asymmetry;
• for unlisted Hungarian firms that have opted to apply IFRS, Ramadan and Morshed (2024) reports results indicating a positive and significant impact on financial transparency.

However, the lack of consensus on the effects of IFRS on the quality of financial reporting also compels us to present some of the studies that identify changes that do not go in the direction of a significant increase in the quality of financial reporting following the application of IFRS or IFRS-compliant rules:

• Callao and Jarne (2010) who find, for firms in 11 European countries, for 2 years (2003–2004) before IFRS and two years (2005–2006) with IFRS, an intensification of earnings management after IFRS implementation, given by the increase in discretionary accruals in the period after the transition to IFRS; this increase is confirmed by the existence of a higher discontinuity around 0 of ROA;
• A. S. Ahmed et al. (2013), comparing a significant sample of firms that transitioned to IFRS in 2005 (from 20 countries) with an equivalent number of firms from countries that did not transition (from 15 countries), find a decline in accounting quality after IFRS adoption; the indicators used by A. S. Ahmed et al. (2013) are income smoothing, accrual aggressiveness, timeliness of loss recognition, and meeting earnings thresholds;
• Cameran et al. (2014) identify a decrease in the FRQ for Italian unlisted firms that opted to apply IFRS (more discretionary accruals and slower recognition of losses), compared to firms that remained to continue to apply Italian standards;
• Ferentinou and Anagnostopoulou (2016), while identifying a decrease in accruals earnings management generated by the application of IFRS in Greece, demonstrate that this was accompanied by an increase in real earnings management, which does not lead to an improvement in the information content of financial statements;
• Bakarich (2017) analyses the delisting of some firms from US GAAP and finds that their transition to financial markets where IFRS is applied leads to insignificant changes in reporting quality, while the transition of other firms from US GAAP to other standards than IFRS results in a significant decrease in accounting quality;
• Abdul-Baki and Haniffa (2020) find that, in Nigeria, the adoption of IFRS and the efforts to improve the application of the rules recommended by the World Bank have not led to an increase, but on the contrary, to a reduction in the FRQ, through an increase in earnings management, but also slower recognition of losses and a reduction in earnings persistence;
• Adhikari et al. (2021) find that, in India, the application of IFRS, in the immediate aftermath of this event, led to a decrease in the quality of accounting and financial reporting, through an increase in the level of earning smoothing, an increase in the level of discretionary accruals, a decrease in the sensitivity of the earnings to the incorporation of bad news, as opposed to good news; however, these results improve with time, but that this improvement requires significant efforts in terms of training staff and familiarizing them with the new rules;
• Agana et al. (2023) do not observe improvements in accounting quality after IFRS implementation for a significant number of African firms, and find that even if IFRS aim to increase transparency and comparability of financial reporting, only if the quality of institutions in each country switching to IFRS helps in this regard;
• Hsu et al. (2024) do not find a significant association of earnings quality with IFRS adoption by UK SMEs, perhaps because earlier UK rules were of a very high quality, but also because SMEs have simpler business models.

The indicators for measuring the quality of financial reporting are diverse and different authors can choose more classic or unexpected combinations of these indicators. These indicators refer to (Barth et al., 2008):

• earnings management (EM);
• timely loss recognition (given by the higher frequency of reporting significant net losses);
• the value relevance of accounting information: the explanatory power of net accounting income and equity for prices.

From the literature analyzed in this study, it follows that the EM is almost a constant in assessing the quality of financial reporting. Indicators identifying the earnings management are generally based on (Barth et al., 2008):

• the variation of the net income from one period to another, through which a certain earnings smoothing can be identified: greater such variation is a sign of better reporting quality;
• the variation in the net income related to the change in cash flows (total or operating): here too, a higher level of this indicator is a sign of better reporting quality;
• the correlation between accruals and cash flows: a lower negative correlation between the two indicator is a sign of good reporting quality;
• frequency of small positive increases in net income (managing of earnings towards a target): the quality of reporting increases as small positive increases in net income decrease.

The earnings distributions around the zero threshold is the indicator that Trimble (2018) uses in order to investigate the effects of IFRS on the FRQ. The results reported by Trimble (2018) show that this discontinuity around zero of the reported earnings remains significant after the adoption of IFRS, but that the dimensions of this discontinuity have decreased, and, which suggests moderate growth in FRQ.

Abbott et al. (2016) measures the FRQ only through abnormal (discretionary) accruals identified with Jones’ modified model.

Bakarich (2017) uses three indicators of measurement of AQ/FRQ: absolute normal accruals; the frequency of reporting important losses; the celerity with which accruals are recognized by companies with negative cash flows. A. S. Ahmed et al. (2020) measures the FRQ by the absolute value of abnormal (discretionary) accruals, using two variants of the Jones (1991) model and two other variants of the Dechow and Dichew (2002) model. The same authors verify the robustness of the results by applying two other measures for the FRQ: the existence of restatements of the financial statements after their publication—poor quality indicator—as well as checking the manner in which companies report indicators that reach the level of those estimated by analysts or exceed them by little.

Bryce et al. (2015) also focus on some earnings management indicators to measure the effects on the quality of accounting and financial reporting, namely: total accruals and quality of accruals. Abdul-Baki and Haniffa (2020), for an emerging country—Nigeria—use indicators of earnings management (modified Jones model on discretionary accruals, as well as the abnormal working capital accrual model), but also the timely loss recognition and earnings persistence. The quality of the earnings is used as a proxy for the quality of financial reporting by Almaqoushi and Powell (2021), by accrual earnings management and by the independence of the auditor (measured by the provision of as few non-audit services as possible, changes in audit fees, membership of Big 4, etc., possible highlighting of issues accompanying the clean audit opinion). Bose and Yu (2023) and Cahan et al. (2021) are also based on accruals in the FRQ approximation.

There are studies in which the FRQ does not refer to models that take into account accruals, but are retained as main variables indicators on real earnings management (Bhuiyan et al., 2020).

Tang et al. (2016) calculates a score based on six indicators (see below in the methodology section), interpreting both the total score and each indicator individually.

In general, studies on FRQ related to the transition to IFRS or other changes in accounting rules include samples of firms from several countries: 21 countries for Barth et al. (2008), 11 In Callao and Jarne (2010), 2 in Kabir and Laswad (2015), 15 countries in Chen et al. (2010), 29 countries in Capkun et al. (2016), 35 countries at Dayanandan et al. (2016), 29 countries in Bakarich (2017), 46 countries at Trimble (2018), 26 countries (especially from Asia) in Boolaky et al. (2019); 6 African countries in Agana et al. (2023) etc. As is foreseeable, many studies in a single country are also emerging, which relate to changes in the FRQ following important events such as the application of IFRS: Van Tendeloo and Vanstraelen (2005), Jeanjean and Stolowy (2008), Iatridis and Rouvolis (2010), Liu et al. (2011), Chua et al. (2012), Wan Ismail et al. (2013), Ho et al. (2015), Christensen et al. (2015), Bryce et al. (2015), Burnett et al. (2015), Krismiaji et al. (2016), Ferentinou and Anagnostopoulou (2016), Abdul-Baki and Haniffa (2020), Key and Kim (2020); Benkraiem et al. (2022), Ramadan and Morshed (2024), etc.

The results reported by the studies presented in this literature review are valid for the contexts analysed in each case. It is important to note that different institutional contexts can lead to different results, to different behaviours of the actors involved in the financial markets. For example, Chardonnens and Wallmeier (2024) find different reactions in the USA to the European economic space regarding the discontinuity of reporting earnings around the expected thresholds. Another example of the different effects of applying IFRS is in Ding and Schadewitz (2016) which, comparing the Nordic countries with the Baltic countries, finds that, despite similar regulations on accounting and financial markets, even after the application of IFRS, the two groups of countries have firms whose financial reporting levels are different.

2.2. Some Findings in the Literature on the Financial Reporting Quality in the Case of the Romanian Companies

Romanian companies, especially the listed ones, have been the subject of studies on the financial reporting quality. Different samples were analysed over different periods using variables most commonly found in the relevant literature. Of course the mandatory transition to IFRS, in the individual accounting of the companies listed on the regulated market of the Bucharest Stock Exchange (BSE), was an event that generated many studies in the areas of accounting, auditing or finance. Burcă (2020) offers us a review of the literature in which there are analyses of some quality indicators of financial reporting in the case of listed Romanian companies.

Regarding the transition to IFRS of Romanian companies, I find analyses that confirm that the FRQ increases. Thus, Pășcan (2014) identifies a better value relevance after applying IFRS, just like Mironiuc et al. (2015). Burcă and Nagy (2013) find a decrease in discretionary accruals, as do Brad et al. (2014) or Istrate et al. (2015). Burcă (2020) offers us a score for measuring the quality of financial reporting of the listed Romanian companies, taking into account the value relevance, the faithful representation and the quality of accruals. An analysis for three-year review before the IFRS application obligation and three-year after, is to be found in Gajevszky (2015), for 50 companies listed on BSE. Using the acruals model to approximate the quality of financial reporting, Gajevszky (2015) finds an improvement in accounting quality during IFRS application in relation to the period before these standards.

Given previous research on the impact of changes in accounting standards (particularly the transition to IFRS) on AQ/FRQ, I can hypothesize that we can expect an increase in the quality of financial reporting for listed companies in Romania, both for those applying IFRS and those applying RAS.

3. Methodology and Sample

Hope et al. (2013) warns that there is no universally accepted variables for FRQ measurement, which means that any individual measure can only allow partial assessments, not being able to capture all facets of FRQ. Thus, using scores that take into account several individual indicators, can help to improve the significance of FRQ studies results.

3.1. Financial Reporting Quality Indicators, Proposed by Tang et al. (2016)

For analysing the impact of IFRS on the financial reporting quality, I chose to partially replicate the methodology used by Tang et al. (2016). They calculate a score based on six indicators. Three of these relate to accounting variables and another three relate to financial auditing. The indicators proposed by Tang et al. (2016) are:

• loss avoidance ratio (LAR), as a proxy for earnings management; it is calculated as the ratio between the number of observations with small net profits (between 0 and 1% of the previous year’s assets) on the one hand, and the number of firms with small net losses (between −1% and 0, of the previous year’s assets: the higher the ratio, the more pronounced the tendency to manipulate earnings towards positive ones, even if small; a variant of this indicator, which analyses the discontinuity of the distribution of earnings around expected thresholds, appears in Chardonnens and Wallmeier (2024), which in fact replicates on the European case a methodology used by other authors on American data; also, the tendency towards reporting positive earnings is found in many other studies as an earnings management indicator (El-Helaly, 2016);
• profit decline avoidance ratio (PDAR) established as the ratio between the number of observations with small annual increases in net profit (between 0.000 and 0.005) on the one hand, and the number of observations with small decreases in net profit (between −0.005 and 0.000) on the other hand: the higher the PDAR, the clearer the tendency towards upward earnings management; year-to-year variation in profits is frequently included among earnings management indicators that measure the firm’s propensity towards income smoothing (Lang et al., 2006; El-Helaly, 2016);
• accruals ratio (AR) calculated as total accruals to total assets at the end of the previous year: a high value of this indicator indicates a low quality of financial reporting;
• qualified audit opinion ratio (QAOR): it is the ratio of the number of qualified audit opinions to the total number of audit opinions identified for the analyzed firms; in our case, because there are also modified audit opinions other than qualified audit opinions, I have chosen to calculate the modified audit opinion ratio (MAOR); if we assume that a modified audit opinion arises as a result of a firm’s problematic compliance with reporting standards, we can agree with Tang et al. (2016) who interpret this indicator to mean that the higher its value, the lower the quality of financial reporting;
• non-big four auditor ratio (NBFAR): Tang et al. (2016) derive this indicator by subtracting from 1 the share of firms audited by Big 4 in total firms audited; of course it can be obtained by directly dividing the number of firms audited by non-Big 4 to total firms audited; as for this study, because the number of Big4 is very small, especially in the alternative AeRo market, I opted to consider grouping Big4 with the other auditors affiliated to international networks and to take into account, in the numerator, only the local auditors not affiliated to international networks; thus, I calculate the share of strictly local auditors in the total number of identified auditors (LoAR);
• audit fee ratio (AFR), based on the premise that a high level of audit fees is characteristic of a high audit quality; AFR is calculated as the ratio of audit fees to total assets, for each firm-year.

The same way of measuring the FRQ in Arthur et al. (2019), in analyzing the relationship with the ownership concentration.

In this study, the application of the methodology proposed by Tang et al. (2016) is adapted in the following steps:

• for the calculation of LAR, for each observation, I divided the net profit/net loss of the year to the total assets at the end of the previous year, and I counted, for every year and for total period, the observations with results between 0 and 1% (small profit firms SPF), on one hand, and the observations between −1% and 0 (small loss firms), on the other hand, and calculate the ratio SPF/SLF;
• in the case of PDAR, I calculate, for each observation, the difference between the net income of the year t and the net income of the year t − 1, and divided this difference with the total assets at the end of year t − 1; the results between 0 and 0.005 represent small profit increase (SPI) and the difference between −0.005 and 0 represent small profit decrease (SPD); PDAR = SPI/SPD; result are presented for every year and for total period;
• for the measurement of accruals, as the third aggregate indicator in measuring the FRQ, Tang et al. (2016) use a balance sheet-based approach; this type of approach is widespread in many accruals studies (a centralization of these can be found in Larson et al. (2018). In the present study, the database to which I have access does not provide all the information needed to apply the formula in Tang et al. (2016) or another formula specific to the balance sheet-based approach: I do not have, for example, short-term financial liabilities and the balance of corporate income tax payable. For this reason, I have turned to an older version of measuring accruals as the difference between net income and operating cash flows (Harymawan & Nurillah, 2017; Almaqoushi & Powell, 2021; Dichev & Owens, 2024), although this formula seems to be not highly favored in the literature (Larson et al., 2018; Oh & Penman, 2024). An alternative could be the formula used by Callao and Jarne (2010): total accruals = ∆Customers + ∆Stocks − ∆Suppliers − Depreciation. The calculation of accruals is important for analyzing the FRQ and is used in a large number of studies addressing this topic. It should be said here that, often, the quality of financial reporting is only approximated by output quality indicators, with total or discretionary accruals being very present in the literature in this respect. Ding et al. (2016) also propose a formula by which they calculate and interpret discretionary accruals—I do not have, in the present study, sufficient data to apply the latter methodology;
• MAOR is calculated for each year and for the total period by identifying the number of the modified opinions and dividing it by the number of total opinions;
• LoAR is calculated as the ratio between the number of observations with local auditors to the total number of observations with an identified auditor, for every year and for total period.

The methodology proposed by Tang et al. (2016) retains, as the first three indicators, variables related to the earnings quality. Indeed, studies in the literature often refer only to earnings quality measures (see Ewert & Wagenhofer, 2015) to approximate the quality of accounting, financial reporting and even financial auditing.

Unfortunately, the data I have found—hand-collected from the individual financial statements of listed firms—do not include audit fees, which does not allow us to calculate the sixth indicator. This means that I will ignore it in the analyses proposed in this study. The situation is also present in the sample analysed by Tang et al. (2016) who, in the absence of information on audit fees (for some financial markets), calculated the score based on the first five indicators only. Under these conditions, the relationship between all five indicators and FRQ is inverse, so the higher the individual or aggregate indicator, the lower the quality.

All the calculations were made in MsExcel, by introducing formula that take into consideration the data available, in order to calculate the five indicators.

For each of the top five indicators in the two samples analyzed, the one with the highest level (i.e., the one indicating poor quality in terms of what it measures) is assigned a score of 1, while the population in the other period receives a score calculated as a fraction of 1. Compared to Tang et al. (2016), I have changed the reference, by using a maximum of 1 instead of a maximum of 100. Clearly, a higher aggregate score indicates a lower FRQ for the observations for the period and population analyzed. I have performed these calculations on each year of the periods analyzed—to get an idea of the evolution over time of the indicators, but also on total sub-period/period and population to calculate the aggregate score. However, my results should be interpreted with caution, as I have only identified two groups of comparable items and normalization by assigning a maximum score of 1 may not necessarily represent a high statistical significance. In addition, each of the five indicators is considered to have the same weight in the final score, which may generate some discussion, especially when, in the case of one of the indicators, the individual difference is very large.

3.2. Observations Analyzed

I am making two types of comparisons. First, in line with many of the previous studies, I compare firms listed on the regulated market, in their RAS period (2000–2011) vs. their IFRS period (2012–2023). All the observations refer to ordinary shares of the companies listed on the two segments of the BSE.

Table 1. Observations on the regulated market in IFRS period vs. RAS period.

Year	Standards Applied	Observations	Year	Standards Applied	Observations
2023	IFRS	70	2011	RAS	79
2022	IFRS	71	2010	RAS	78
2021	IFRS	70	2009	RAS	79
2020	IFRS	71	2008	RAS	78
2019	IFRS	69	2007	RAS	79
2018	IFRS	70	2006	RAS	72
2017	IFRS	72	2005	RAS	70
2016	IFRS	75	2004	RAS	70
2015	IFRS	74	2003	RAS	61
2014	IFRS	75	2002	RAS	51
2013	IFRS	77	2001	RAS	45
2012	IFRS	76	2000	RAS	39
Total		870	Total		801

provide the number of these observations.

In the case of firms listed on the regulated market, the number of observations is not very high—specific for the Romanian financial market. Also, the sample is not balanced, i.e., the number of observations in the two sub-periods is different, due to delistings and new listings respectively in the analyzed period; that could be a bias in this research.

Second, I focus on different entities applying different rules over the same period: firms applying IFRS (BSE, regulated market) vs. firms applying RAS (BSE, AeRo market), in their individual accounts, over the period 2012–2023 (

Table 2. Observations on the regulated market in IFRS period vs. AeRO market (RAS) in the same period.

Year	Observations on the Regulated Market		Observations on the Alternative AeRo Market
	N	Standards Applied	N	Standards Applied
2023	70	IFRS	262	RAS
2022	71	IFRS	267	RAS
2021	70	IFRS	278	RAS
2020	71	IFRS	296	RAS
2019	69	IFRS	295	RAS
2018	70	IFRS	298	RAS
2017	72	IFRS	294	RAS
2016	75	IFRS	302	RAS
2015	74	IFRS	304	RAS
2014	75	IFRS	312	RAS
2013	77	IFRS	313	RAS
2012	76	IFRS	312	RAS
Total	870		3533

).

It should be recalled that the data for 2012 were obtained by the Romanian firms listed on the regulated market not by applying IFRS in their current accounting, but by restating the RAS data; this is explained by the fact that the decision of the authorities that imposed the application of IFRS came in June 2012, with application for 2012, without a significant period of preparation for the transition. Even though the number of observations for listed firms is lower in the first part of their RAS period, I have opted to retain all available years to ensure an equal number of years for the RAS period and the IFRS period. This allows us to more easily apply the t-Test for significance of differences. Also, the number of years of the periods compared is important and overcomes the risks that could arise from comparisons carried out in a very short time frame, for example in the transition year. One could also accept the situation with a different number of years, considering that it is present in other studies (e.g., Benkraiem et al., 2022).

The AeRo market is much more accessible to companies, especially smaller ones, which is why it is much more populated than the regulated market.

4. Results and Discussions

I computed the five indicators on the two types of comparisons mentioned in the methodology section. I will present separately the five indicators calculated for each of the comparisons, after calculating the FRQ score on the two categories of observations compared. The latter score might seem less significant, given that only two categories of observations are compared, which somewhat diminishes the explanatory power of the FRQ score.

4.1. Longitudinal Evolution of the Financial Reporting Quality Indicators for the Romanian Companies Listed on the Regulated Market of the BSE

In order to estimate the effects of IFRS on the FRQ, I compared the five indicators in the RAS period with the equivalent levels set for the IFRS period for all listed non-financial companies for which financial statements were available. In

Table 3. Levels of the five indicators in the RAS period (2000–2011) vs. IFRS period (2012–2023).

Year (RAS; IFRS)	Loss Avoidance Ratio (LAR)		Profit Decrease Avoidance Ratio (PDAR)		Absolute Value of Accrual Ratio (AR)		Modified Audit Opinion Ratio (MAOR)		Local Auditor Ratio (LoAR)		Score FRQ
	RAS (2011–2000)	IFRS (2023–2012)	RAS (2011–2000)	IFRS (2023–2012)	RAS (2011–2000)	IFRS (2023–2012)	RAS (2011–2000)	IFRS (2023–2012)	RAS (2011–2000)	IFRS (2023–2012)
2011; 2023	9.5000	8.0000	1.8000	1.5000	1.3503	0.1562	0.2632	0.0857	0.5641	0.4143
2010; 2022	3.0000	8.0000	1.4000	1.3333	0.0865	0.1754	0.3377	0.1143	0.6234	0.4000
2009; 2021	10.0000	2.0000	1.1429	8.0000	0.1079	0.1186	0.3421	0.1765	0.6447	0.4058
2008; 2020	16.0000	7.0000	1.1667	3.5000	0.1431	0.0986	0.3636	0.2059	0.6883	0.4493
2007; 2019	9.0000	7.0000	3.3333	0.3636	0.1425	0.0841	0.2987	0.2464	0.6711	0.4783
2006; 2018	10.0000	3.5000	1.2500	1.5000	0.1303	0.1157	0.3559	0.1857	0.6190	0.4857
2005; 2017	6.0000	1.0000	0.0000	1.3333	0.1697	0.1380	0.4483	0.2222	0.6167	0.5139
2004; 2016	5.0000	4.0000	0.6667	0.8889	0.2448	0.1426	0.4909	0.1892	0.6607	0.4933
2003; 2015	8.0000	10.0000	1.4000	0.6000	0.1318	0.1409	0.4898	0.2432	0.7083	0.5270
2002; 2014	7.0000	9.0000	0.6667	1.5000	0.1604	0.0857	0.5714	0.2568	0.7143	0.4933
2001; 2013	4.0000	14.0000	1.0000	1.1429		0.0877	0.5000	0.2895	0.7222	0.5132
2000; 2012	6.0000	10.0000	n.a. *	n.a. *	n.a. *	n.a. *	-	0.3600	-	0.5270
Total period	8.9286	5.8750	1.2500	1.1935	0.2987	0.1229	0.3856	0.2163	0.6502	0.4762	RAS period: 5.0000	IFRS period: 3.3175
Normalized FRQ Score **	1.0000	0.6580	1.0000	0.9548	1.0000	0.4114	1.0000	0.5609	1.0000	0.7324

* For 2000, we do not have a prior year with data available, so we do not calculate the indicators based on prior period assets; also, for 2012, we do not have a full IFRS prior year with figures (total assets t − 1) to which to report the change in profit/loss and accruals. ** For the highest total indicator, the score is 1.000, and for the indicator with the lowest value, the score is calculated in proportion to the highest. For example 5.8750/8.9286 = 0.6580. I have put in bold the score with the lower value indicating better quality of financial reporting, in total and for each of the five indicators analyzed.

, I have presented the levels by year, but also by total period, for all five relevant indicators that I could calculate.

A first analysis of the data in Table 3 shows that the FRQ score in the IFRS period is significantly lower than in the RAS period for firms listed on the regulated market that had to switch to IFRS in 2012. In fact, for all five individual indicators used to determine the FRQ score, the average value is lower in the IFRS sub-period. This result suggests a clear increase in the quality of financial reporting in the IFRS period (2012–2023) compared to the RAS period (2000–2011). For the audit-related variables, I did not find any data for 2000 and partially for other years, the total number of observations mobilised for this purpose being lower: 1542 audit opinions and 1552 auditors explicitly identified, compared to 1671 observations retained in the calculation.

At first sight, we may attribute the increase in the FRQ to the application of international financial reporting standards. However, as frequently mentioned in the literature, it would be simplistic to limit ourselves to such an explanation. Indeed, over the period analysed, developments in accounting standards have been important, but they have also been accompanied by significant developments in corporate governance, the institutional, economic, fiscal, financial and social environment in which firms have operated. It can be assumed that the 2007 accession to the EU has also had an important effect on the way accounting and financial reporting rules are understood, applied, and audited.

4.2. Difference in the Quality of the Financial Reporting of Companies Applying Different Reporting Standard (RAS vs. IFRS), in the Same Period

The second set of comparisons presented in this study concerns different firms, in terms of rules applied (RAS vs. IFRS), for the same period: 2012–2023. Here again, I have calculated the normalised score for the whole period, but applying the same procedure to the indicators for each year, except for 2012, for which data from the previous year is missing.

As for the total score, IFRS firms appear to have a better quality of financial reporting, although the difference in scores is no longer as evident as in the longitudinal comparison presented in the previous section. Also, whereas previously, all five individual indicators showed better quality during the IFRS period, here, the results are more nuanced. Indeed, IFRS observations bring only three indicators in better position than those in the RAS observations: accruals ratio (AR), modified audit opinion ratio (MAOR) and local auditor ratio (LoAR). An analysis by each indicator would be more useful in interpreting the final score.

In the case of loss avoidance ratio (LAR), the situation seems to be better for firms applying RAS: we have a significantly lower share of observations where firms report small profits compared to firms reporting small losses. It is possible to interpret this result in the sense that IFRS offers more opportunities than RAS for this kind of opportunistic, cosmetic manipulation of reported earnings. However, in addition to the application of IFRS, we must also take into account the fact that firms listed on the regulated market are more exposed, have more sophisticated shareholders and, in general, stakeholders, whose reactions could be more sensitive to the reporting of losses, even small ones. This probably also makes the difference between the scores assigned to the two categories of firms: 0.6544 versus 1.0000.

For the profit decrease avoidance ratio (PDAR), RAS observations also lead to a better FRQ score, although the difference with IFRS firms becomes much smaller than for the previous indicator (0.9548 vs. 1.0000). Here again, I hypothesise that the higher public exposure of firms listed on the regulated market (and applying IFRS) makes them more prudent with respect to year-on-year changes in reported earnings.

Accrual ratio (AR) shows a slightly higher quality for IFRS observations, which—in conjunction with the results for the first two indicators—may suggest that earnings management, if any, is not necessarily done through accruals, but probably through real earnings management techniques.

The share of modified audit opinions is not significantly different between RAS and IFRS observations. However, the regulated market appears to provide a better quality of FRQs in this respect, providing fewer reasons for auditors to express modified opinions in either form.

Finally, the most important difference in individual score between RAS and IFRS observations (AeRo vs. regulated market) appears in the fifth indicator—the local auditors ratio. Even if I put Big4 together with the other auditors affiliated to international networks, it is clear that the weights in the regulated market are almost half of those in the AeRo market. To the extent that we accept that the intervention of a Big4 (but also of another international auditor) is a sign of the quality of financial reporting, the difference between the two segments of the Romanian financial market is significant. There are several possible explanations. Firstly, the size of the firms (much smaller on the AeRo market), in relation to their power to cope with the higher fees of BigN, could orientate them towards local auditors, with somewhat lower fees. Second, I revisit the exposure of firms in the regulated market, firms that may need greater credibility with their stakeholders, credibility that could be enhanced by using an internationally affiliated auditor. Thirdly, firms with (much) more complex activities may operate in the regulated market, which requires the intervention of auditors with specific competences, and it may be easier for internationally affiliated auditors to find partners who qualify for such assignments.

As for the scores calculated for each year of the period analyzed, the situation is balanced: in six of the 12 years, the FRQ score of IFRS firms is better than that of RAS firms. For example, in the period of the COVID-19 crisis (years 2020–2021), firms on the alternative AeRo market have slightly better FRQ scores than firms on the regulated market, which might suggest more intervention by firms exposed to the regulated market in manipulating some accounting figures so that their image on the market does not appear to be too badly affected.

We can also interpret the results obtained and presented in Table 3 and

Table 4. Levels of the five indicators for the regulated market in IFRS period (2012–2023) vs. AeRo market in the RAS period (2012–2023).

Year	Loss Avoidance Ratio (LAR)		Profit Decrease Avoidance Ratio (PDAR)		Accrual Ratio (AR)		Modified Audit Opinion Ratio (MAOR)		Local Auditor Ratio (LoAR)		FRQ Score
	AeRo Market RAS	Regulated Market, IFRS	AeRo Market, RAS	Regulated Market, IFRS	AeRo Market, RAS	Regulated Market, IFRS	AeRo Market, RAS	Regulated Market, IFRS	AeRo Market, RAS	Regulated Market, IFRS	AeRo Market, RAS	Regulated Market, IFRS
2023	2.5333	8.0000	0.8571	1.5000	0.0949	0.0951	0.1569	0.0857	0.8455	0.4143	3.8862	4.0364
2022	2.1333	8.0000	1.2000	1.3333	0.1568	0.1125	0.1815	0.1143	0.8456	0.4000	4.1667	3.8200
2021	2.1176	2.0000	1.4500	8.0000	0.1078	0.1001	0.2060	0.1765	0.8278	0.4058	4.1813	4.2200
2020	2.7059	7.0000	0.7353	3.5000	0.0975	0.0855	0.2180	0.2059	0.8470	0.4493	3.5966	4.3516
2019	5.0000	7.0000	1.3846	0.3636	0.1083	0.0744	0.2405	0.2464	0.8290	0.4783	4.6903	3.5267
2018	5.7000	3.5000	1.2000	1.5000	0.0859	0.0733	0.2096	0.1857	0.8453	0.4857	4.8000	3.9283
2017	4.4167	1.0000	1.0357	1.3333	0.0959	0.1021	0.1775	0.2222	0.8363	0.5139	4.5152	3.8409
2016	4.4000	4.0000	1.1786	0.8889	0.0818	0.0867	0.1895	0.1892	0.8576	0.4933	4.9430	4.2370
2015	3.8824	10.0000	1.3077	0.6000	0.0712	0.1185	0.2698	0.2432	0.8674	0.5270	3.9892	3.9681
2014	4.1765	9.0000	1.3793	1.5000	0.0739	0.0717	0.2530	0.2568	0.8379	0.4933	4.3690	4.5593
2013	4.0000	14.0000	1.3000	1.1429	0.0744	0.0817	0.2716	0.2895	0.8211	0.5132	4.1348	4.5041
2012	7.1667	10.0000	n.a. *	n.a. *	n.a. *	n.a. *	0.2436	0.3600	0.8675	0.5270	n.a. *	n.a. *
Total period	3.8448	5.8750	1.1742	1.1935	0.0932	0.0910	0.2174	0.2163	0.8441	0.4762
Normalized FRQ Score **	0.6544	1.0000	0.9838	1.0000	1.0000	0.9764	1.0000	0.9949	1.0000	0.5642	4.6382	4.5355

* For 2012, we do not have a t − 1 year with complete IFRS figures, to calculate the ratio of the income variation or of the accruals ratio. ** For the highest individual indicator, I assign the value 1, and for the others the score is calculated in proportion to the highest. For example, 3.8448/5.8750 = 0.6544. I have bolded the score with the lowest value and which indicates a better quality of financial reporting, in total and for each of the five indicators analyzed.

in the sense of an evolution of the RAS regulations in order to ensure a good quality of financial reporting. Even if they are less influenced by IFRS, the national regulations (in line with EU Directive 34) seem to allow for good accounting and financial reporting quality, in any case not far from IFRS. This result may seem surprising, especially as the size of RAS is much smaller than the number of pages of IFRS. It is true that in the case of complex businesses, RAS may not provide sufficient provisions for a good accounting and financial reporting. However, for firms of relatively modest size, such as those listed on AeRo, the Romanian rules seem to be sufficient to ensure good FRQ, close to that allowed by IFRS.

The results of our study could also be influenced by the fact that Romania (along with Bulgaria, Ukraine or Croatia, to name a few Central and Eastern European countries) is a country with a low level of transparency (measured by CPI—corruption perception index). Transparency International surveys place Romania, in 2023, at half the score of the best-placed country (46 compared to 90 for Denmark), on the same place as Jordan, Kuwait and Montenegro and below Greece, Rwanda, Cyprus, Costa Rica, Botswana or Barbados (data are available at https://www.transparency.org/en/cpi/2023, accessed 5 January 2025). Following the methodology used by S. Ahmed (2015), Romania remains in the area of countries with low transparency, which may also have an impact on the quality of accounting and financial reporting.

5. Conclusions

The evolution of accounting rules in Romania, because of the compliance with European directives, but also by taking over some elements from IFRS, is an interesting topic from the perspective of measuring the quality of financial reporting. The introduction in 2012 of the obligation to apply IFRS in the individual financial statements of Romanian companies listed on the regulated market of the BSE has created the possibility of longitudinal and cross-sectional comparisons between IFRS financial statements and financial statements prepared according to RAS. Naturally, in this study I have mobilised some of the extremely rich literature generated by the effects of IFRS application in various jurisdictions and replicated a methodology that I considered appropriate, given the availability of the data available.

The study, following and partially replicating a methodology proposed by Tang et al. (2016), aims to calculate and interpret FRQ scores, comparing IFRS indicators with RAS indicators. This analysis is performed on two levels:

-

first, I compare the FRQ score of firms listed on the regulated market, for the IFRS period (2012–2023), with similar scores calculated for the RAS periods of the same companies (2000–2011);

-

second, I compare, for the same period (2012–2023), the score calculated for firms applying IFRS (regulated market) with the score calculated for firms listed on the BSE alternative market and applying national rules (RAS).

Even if the results of the research on the IFRS impact are not completely convergent as regards the effects of these standards on FRQ, the majority of the studies seem to indicate an increase in accounting quality generated by the transition to IFRS. So, I hypothesize that the AQ/FRQ increases with the evolution of the accounting and financial reporting standards, in the case of the companies listed on the Romanian financial market. The FRQ score was computed by aggregating five of the indicators proposed by Tang et al. (2016), of which the audit-related indicators were slightly modified to better reflect the specific Romanian context: loss avoidance ratio (LAR), profit decline avoidance ratio (PDAR), accrual ratio (AR), modified audit opinion ratio (MAOR) and local auditor ratio (LoAR).

For firms listed on the regulated market of the BSE, I found 801 observations in the pre-IFRS period and 870 observations in the IFRS period. The FRQ score calculated for the IFRS period unequivocally indicates a better quality of financial reporting in this period compared to the previous one. In fact, for all five indicators, the score is better for the IFRS period, which at first sight indicates a clear and significant increase in quality in the IFRS period. The initial hypothesis of the study is confirmed, in this regard. We can consider that this is due to the changeover to IFRS, but this would be to ignore institutional, economic, social and even political issues. Our second comparison may shed some light on this issue.

For the second part of the analysis—the comparison between RAS listed firms and IFRS listed firms over the same period—the score shows again a better quality of IFRS application. However, the difference in score is not as evident as in the longitudinal comparison. Taking individual indicators into account, IFRS observations bring only three indicators above the RAS observations: accruals ratio (AR), modified audit opinion ratio (MAOR) and local auditor ratio (LoAR).

The FRQ scores calculated in the two levels of comparisons allow us to conclude—within the limits that small sample sizes generate—that IFRS implementation does indeed have positive effects on FRQ, but that institutional, economic, social and political developments may also play an important role. The application of IFRS by some firms—when the propaganda of IFRS proponents presents them as high quality—does not mean that national rules remain unchanged. Absolutely not! The scores calculated for firms listed on AeRo and applying RAS suggest that these rules have also evolved and that they seem quite suitable for the smaller and perhaps less exposed firms on AeRo. The improvements in AQ/FRQ are not only the result of changes in accounting standards, but also the effect of improved governance of listed companies and pressure from stakeholders for greater transparency in financial reporting and alignment with current sustainability objectives.

The limitations of our study are numerous and relate, first of all, to the limited number of observations analysed, given the small size of the Romanian financial market. Also, the indicators I have retained to measure the quality of financial reporting are not perfect nor do they fully cover the quality aspects of accounting/financial reporting, as is also recognised in relevant studies (e.g., A. S. Ahmed et al., 2013). Also, changes in the quality of financial reporting are not always due to changes in accounting standards; other factors may significantly influence this variable. The consideration of audit-related variables could also be complemented with internal audit-related items, to the extent that Abbott et al. (2016) find a positive relationship between internal audit quality (independence and competence) and financial reporting quality.

The data analyzed in this article are annual, as in most of the studies in which I found analyses of the quality of financial reporting. It would be useful and interesting to continue the analysis on quarterly data, following the model of Collins et al. (2017).

Future research directions could take into account other elements such as shareholding structure, state ownership, organizational structure (whether or not belonging to a group), quality of corporate governance, complementing financial reporting with non-financial reporting, integration of institutional indicators such as perception of corruption, existence of transactions with related parties, board structure, age, educational profiles and previous experiences of its members, compensation of executive management, company reputation, impact of taxation and its link with accounting, auditor’s tenure, comparison with unlisted firms, comparisons with similar countries (Central and Eastern Europe), financing structure, possible financial difficulties, impact of IFRS on other components of the financial statements. At the same time, we can analyze exactly the same data from the present study, possibly supplemented with indicators referring to other years, grouping firms according to objective criteria (size, shareholding structure, sector of activity, etc.), so as to obtain more homogeneous sub-groups. Another way to improve de relevance of a FRQ score is to weight the individual variables, depending on the importance that each of them has in the analysis of companies. The composition of the sample, i.e., the identification of a balanced sample could lead to more solid results.

Even if most studies consider listed firms—due to data availability—it would be interesting to see to what extent the conclusions for listed firms hold for unlisted firms. The latter are much more numerous, even predominant in any economy (Ball & Shivakumar, 2005; Cameran et al., 2014) and, even if they are much less publicly exposed than listed firms, they may also need high quality financial statements in their dealings with creditors, public authorities and even associates/shareholders, when the latter are not directly involved in executive management. As mentioned above, it is likely that the profiles of firms listed on the AeRo market of the BSE are closer to those of unlisted firms—a hypothesis that deserves to be addressed in further research and to the extent of the availability of data needed to establish indicators for measuring FRQ. A comparison of FRQs is provided by Bonacchi et al. (2019), who analyze unlisted vs. listed firms and conclude that, in general, listed firms exhibit a higher FRQ than that of unlisted firms, but that this result is dependent on the influence of non-market factors that affect mainly firms belonging to groups.