British Accounting Review (1996) 28, 155–172

COMPETITIVE DISADVANTAGE ANDVOLUNTARY DISCLOSURES: THE CASE

OF SEGMENTAL REPORTING

PAMELA EDWARDS&

RICHARD A. SMITHThe Manchester School of Management, UMIST

Information disclosure by corporations is a sensitive and costly issue. The introductionof SSAP 25, Segmental Reporting, provides an opportunity to investigate competitivedisadvantage and other costs in a setting which has both voluntary and mandatorydisclosure elements. The paper presents the findings from a postal questionnairesupported by three in-depth interviews. The focus of the work is on the perceptionsof those who prepare financial reports. This survey shows that levels of voluntarysegmental disclosure after the introduction of SSAP 25 are minimal. Also, thatcompetitive disadvantage concerns are connected to segmental reporting by almostone third of the surveyed respondents. 1996 Academic Press Limited

INTRODUCTION

Information disclosure by public corporations is a sensitive and costly issue,and a substantial amount of academic literature debates the relative merits ofvoluntary versus mandatory disclosure regimes. From a corporate perspectivethe disclosure of information which is potentially useful to competitorsappears to be a particularly sensitive issue, especially when internationalcompetitors release different information. The introduction of Statementof Standard Accounting Practice 25, Segmental Reporting (SSAP 25), witheffect from accounting periods beginning on or after 1 July 1990 offers anopportunity to investigate competitive disadvantage and voluntary dis-closures, in the context of segmental reporting. This is considered a useful

The authors gratefully acknowledge the financial assistance for the empirical study provided by theInstitute of Chartered Accountants in England and Wales. The authors also acknowledge the helpfulcomments made by participants at the British Accounting Association’s Conference in Strathclyde, andan anonymous referee.

Correspondence should be addressed to: P. Edwards, The Manchester School of Management,UMIST, PO Box 88, Manchester M60 1QD, UK.

Received 16 March 1995; revised 16 August 1995; accepted 1 September 1995.

0890–8389/96/020155+18 $18.00 1996 Academic Press Limited

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exercise in view of the importance attributed to voluntary segmental dis-closures by the Accounting Standards Board (ASB). In Financial ReportingStandard (FRS) 2, Accounting for Subsidiary Undertakings, it is noted thatconsolidated financial statements may result in the loss of useful informationand the FRS urges that the requirements of SSAP 25 should be viewed asa minimum level (not the limit) of disclosure. SSAP 25 also represents animportant voluntary disclosure research opportunity because there is anelement of voluntary disclosure inherent in the apparently mandatory re-quirements. Academic literature from the USA and in the UK identifiesthe choice of reportable segments as critical to the usefulness of the disclosedinformation. However, Gray (1981) notes that segment identification hasnot been well specified on a worldwide basis and as a consequence, directorshave been given considerable discretion in their choice. SSAP 25 followsthe international position and permits directors substantial flexibility in theirchoice of segments.

The paper presents empirical evidence gathered using a postal ques-tionnaire and personal interviews. The findings suggest that, prior to theintroduction of the standard, the fear of competitive disadvantage was oneof three important reasons, quoted by 55% of respondents, which ledcompanies to withhold information from shareholders. After the introductionof SSAP 25 the self-declared level of voluntary disclosure is minimal. Thirty-two per cent of the surveyed companies remain concerned that they suffercompetitive disadvantage because of the mandatory reporting. The paperalso presents evidence from three face-to-face interviews which illuminatesthe impact of competitive disadvantage concerns on the quality of reportingin these companies.

PREVIOUS RESEARCH

Segmental reporting is the reverse side of the coin of consolidation (Tonkin& Skerratt, 1989) and as organizations became larger and more complex,academics, regulators, analysts and other users, identified a need for dis-aggregated information. In the UK the accounting profession’s pro-nouncement on segmental reporting was relatively late, and was substantiallypreceded by the International Accounting Standard, Reporting FinancialInformation By Segment, IAS 14. However, prior to the introduction ofSSAP 25 some segmental disclosure was required in the UK. The CompaniesAct (1967) first required an analysis of turnover and profit before taxbetween substantially different classes of business to be shown in thedirectors report. In addition there was a requirement to disclose exports.Later the Companies Act (1981) required these disclosures to be made inthe notes to the accounts and this Act also introduced a new requirement;if the turnover is substantially different between geographic markets thenthis was also to be disclosed. The statutory requirements were further

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supported by the Stock Exchange Listing Requirements which require ageographical analysis of turnover and trading results if the contribution totrading from any segment is abnormal.

Prior to the introduction of SSAP 25 there was some concern thatcompliance with the statutory requirements was patchy. A survey for theInstitute of Chartered Accountants in England and Wales (ICAEW) in 1983showed that of 100 large listed companies, just 69% complied with theCompanies Act requirements, and that the percentage was rather lower(46%) for medium-sized listed companies and very low (4%) for unlistedcompanies. A later survey of published information for 1987/88 (Tonkin &Skerratt, 1988) showed that more companies were complying with the law,but that a substantial minority appeared not to do so. Both surveys foundthat compliance with geographic segment disclosures was poorer thancompliance with business class disclosure. Yet, despite this evidence of non-compliance both surveys also showed that some companies provided moreinformation than was mandated.

A large academic literature debates the relative desirability of mandatoryor voluntary disclosures of information by corporations. The debate flowsaround the question of whether market forces will drive organizations toproduce information needed by the market in a cost-effective manner, orwhether organizations are inherently so secretive that they will disclose onlywhere there is a mandatory requirement. Empirical evidence suggests thatactual disclosure policies and practices are a response to a complex patternof pressures and influences on organizations. Mak (1991) argues that theamount of disclosure can be expected to vary across firms because it dependsupon the interaction of demand for and supply of information which willvary between firms. Similar pressures may bring different responses. A sizeeffect has been identified by many authors, for example, Singhvi & Desai(1971) who offer a range of different reasons to explain the impact ofcompany size on disclosure. These authors argue that cost of collection,perceived benefits in terms of marketability of securities and less concernabout competitive position, are all variables which may lead larger or-ganizations to disclose more. Gray & Roberts (1989) also find that size ispositively associated with making voluntary disclosure, but in addition,these authors found evidence of market and political pressures which bothencourage and constrain voluntary disclosure.

There may be a change in attitudes to disclosure over time. In 1977, Maceargued that preparers of accounts seek merely to comply with legislation andare anxious not to disclose sensitive information. However, Hussey (1991)argues that the number of voluntary disclosures has been increasing. A morecomplex and internationalizing environment may be the cause. For example,Mak (1991) argues that voluntary disclosures are dependent upon theavailability of alternative information and the level of uncertainty associatedwith the company. Cooke (1989) adds that multiple listing on various stockexchanges increases disclosure.

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Specifically in the context of segmental reporting, Rennie (1989) detectedan improvement in the segmental disclosure of a group of companies whosereporting had previously been investigated in 1977, by Emmanuel & Gray.This improved quality related to reporting on business classes, but not togeographic segments for both mandated and voluntary disclosure. However,Rennie also found an increase in the number of companies that make nosegmental disclosure at all. Gray (1981) provides a list of reasons whichmay explain the reluctance to provide segmental disclosures. One elementis the cost of disclosure which is multi-faceted. Costs include cost ofcollecting, processing, auditing and disseminating information, the dys-functional consequences of information overload and the cost, to theorganization, of increased competition. But according to Emmanuel &Garrod (1992, p. 43) the ‘single most significant cost associated withthe voluntary disclosure of segmental information relates to competitivedisadvantage’.

Competition is not a unitary concept, and its characteristics have beenvariously described by researchers in different disciplines. Economists havefocused on the impacts of various levels of market concentration, whereasmarketing researchers might analyse product and distribution policies andsearch for market niches. Competition law in the European Communityhas sought to legislate against agreements between undertakings whichmight involve price fixing, restriction of production facilities or sharing ofmarkets, products, sources of supply or customers (Commission of theEuropean Communities, 1990). Specifically in the context of segmentalreporting Backer & McFarland (1968) see the competitive issue as three-fold. First, disclosure of profitable segments may attract new competitors.Second, disclosure of loss makers may attract takeover bids or may forcemanagement to sell such segments to improve short-term entity profits.Third, international competitiveness may be adversely affected in non-uniform reporting occurs, at a regional or global level. The internationalperspective is especially important (Emmanuel & Garrod, 1992). Theseauthors associate competitive disadvantage issues particularly with foreignhost governments and the organizations’ competitors. These authors notethat disclosure country by country of different profit rates might attract hostgovernment attention and that inter-segment sales disclosures may drawunwanted attention from fiscal agencies. Line of business disclosures mayreveal the companies strategy, level of overseas operations and internalintegration to competitors. In an attitude survey conducted in New Zealand4 years prior to the introduction of a standard on segmental reportingDevonport & McNally (1985) found that finance executives identifiednegative reactions from customers, government and unions as reasons fornot wishing to disclose segmental information. Such perceptions may leadto disclosure choices which reduce the value of information in order toavoid competitors gaining knowledge (Foster, 1986).

From the previous research, two major themes are of importance to this

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study. The first that even when information disclosure is a mandatoryrequirement the actual disclosure may be variable in quality. The second,that production of good quality disclosure of mandated information andthe supply of additional voluntary information may be responses to acomplex and inter-related set of variables. This study seeks to provideevidence as to the potential impact of perceptions about costs, particularlycompetitive disadvantage costs, on the supply of segmental information.

RESEARCH OBJECTIVES AND METHODOLOGY

Corporate attitudes to disclosure are complex and influenced by manyvariables. However, those who resist disclosure often explain their attitudesin terms of cost and especially in terms of perceptions about competitivedisadvantage costs. Simultaneously, other corporations have a proactivestance in relation to disclosure and provide on a voluntary basis, informationwhich is not mandated. The introduction of SSAP 25 provides an op-portunity to investigate some of the issues involved in disclosure choices.This paper has three objectives. The first is to investigate whether theinformation required by SSAP 25 was previously available for internalmanagement use, and whether companies voluntarily disclosed this in-formation. The second objective is to investigate the incidence of voluntarydisclosure immediately following the introduction of the standard, and afinal objective is to identify preparers’ perceptions about whether any costsassociated with SSAP 25 compliance are significant.

The Sample and Response Rate

Information was collected in two ways. Initially a postal questionnaire wasused to obtain a broad spectrum of responses and this was followed bythree face-to-face interviews which aimed to elicit a deeper understandingof the most important issues.

The questionnaire survey was first piloted, by four interviews, and wasthen posted to a sample of financial directors chosen at random from theTimes 1000 listing. The target respondent was the financial director. Thepostal questionnaire produced a total of 103 fully completed responses,plus 36 companies replied providing useful written comments but withoutproviding a full questionnaire;1 this gives an aggregate response rate of35%. The fully completed responses were received from a cross-section ofmanufacturing, engineering and retailing companies but the financial servicessector is under-represented in these replies. Respondents from this lattersector are more commonly found amongst the 36. The questions weremainly closed in nature, although respondents were provided the opportunityto offer alternate answers and to expand their answers. Questions wereeither answered by a yes/no response or a five-point Likert-type scale was

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used to rank responses. On this scale a response of 1 was used to representnot important and a response of 5 to represent very important.

As regards the interviews, three companies were approached, after anexamination of their financial statements, because it appeared that theremight be interesting issues to pursue in relation to segmental reporting. It wasdecided to choose organizations of varying size and industrial background.Letters of introduction were addressed to holders of senior financial positionsin the target organizations and each of the three interviewees was the targetrespondent.

The face-to-face interviews were conducted using a semi-structured ap-proach. The interviewer had a set of questions to guide the interview, butthe interviewee was encouraged to discuss any relevant issue. All threerespondents gave permission for the interview to be recorded, and they weresubsequently transcribed. The interviews lasted between 1 and 2 hours.

Because of the selection process the responses from these companies’respondents cannot be used as a basis for generalization but the informationthey provided may shed light on disclosure practices.

The nature of these surveys is that, as argued by Dyckman (1988), theymay be influenced by the respondent’s long-term strategy objectives ratherthan genuinely held beliefs. This study seeks to report the perceptions ofthe respondent, as they were disclosed, and to analyse those responses inrelation to academic literature and the objectives of SSAP 25.

RESULTS

The results section is subdivided into three parts. The first reports on thequestionnaire survey findings regarding the availability of information andpropensity to disclose it prior to the introduction of SSAP 25. This sectionalso reports the reasons given for choosing not to make voluntary disclosure,before the introduction of SSAP 25 and reports on the levels of voluntarydisclosure thereafter. The second part presents evidence about the corporateperception of costs of compliance and the final part of the results sectionpresents material from the three interviews.

Collection and Dissemination of Information

Disclosures prior to SSAP 25. The standard specifically requires detailedinformation which has been divided into seven categories for the purposesof this research: (1) origin of turnover, (2) destination of turnover, (3)intersegment turnover, (4) an analysis of profits by segment, (5) net assetsby segment, (6) disclosure of a group’s share of associated undertakings’profits and (7) net assets of associated undertakings. Since each of theseseven categories of information must be declared for both geographical

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TABLE 1

Data availability and disclosure prior to SSAP 25

Data item Number of companies (sample size 103)

Data internally Of whichavailable

Data Data notvoluntarily discloseddisclosed

Turnover by origin (Note 1)Geographic Segment 76 50 (65·8%) 26 (34·2%)Business Class 88 55 (62·5%) 33 (37·5%)

Turnover by destination (Note 1)Geographic Segment 61 40 (63·9%) 21 (36·1%)Business Class 70 37 (52·9%) 33 (47·1%)

Profit (Note 2)Geographic Segment 70Business Class 90

Net assetsGeographic Segment 63 21 (33·3%) 42 (66·7%)Business Class 68 22 (32·4%) 46 (67·6%)

Intersegment turnoverGeographic Segment 64 30 (46·9%) 34 (53·1%)Business Class 73 34 (46·6%) 39 (53·4%)

Associated undertakings groupshare of profit

Geographic Segment 71 41 (57·7%) 30 (42·3%)Business Class 80 42 (52·5%) 38 (47·5%)

Associated undertakings groupshare of net assets

Geographic Segment 64 42 (65·6%) 22 (34·4%)Business Class 70 38 (54·3%) 32 (45·7%)

Note 1: The Stock Exchange and Companies Acts required some segmental analysis of turnover priorto SSAP 25, but these requirements did not distinguish between turnover by origin and destination.Note 2: Disclosure of profit by geographic segment was a mandatory Stock Exchange requirement;disclosure of profit by business class was a mandatory Companies Act requirement.

segments and business classes a total of 14 categories of information havebeen identified.

Companies were asked to indicate whether the information required ineach of these 14 disclosure categories was previously available for internalmanagement use and whether or not it was published. Table 1 indicatesthat a substantial proportion of companies had access to information whichthey choose not to disclose, and indicates that while the majority of com-panies already used at least some of the information, a substantial minoritydid not. In each category of disclosure business class information was morelikely to be available to internal management. SSAP 25 had two expected

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implications; first, information already available to management was likelyto become public; second, there was a need to collect and disseminate newinformation.

Respondents were asked to assess the importance of a number of reasonsfor choosing not to make voluntary disclosures of segmental informationprior to the introduction of SSAP 25. The Likert-type scale described abovewas used to rank the importance of these reasons.

Table 2 shows that the major reason for choosing not to make voluntarydisclosures was the lack of a requirement to do so, however concerns aboutcompetitive disadvantage were the second most common response. Thepolarity of the reasons given by the respondents is noteworthy. Although 55%of respondents indicate that competitive disadvantage is either important orvery important, 36% indicate that it is not an important concern.

Administrative costs of collecting and processing data are further discussedbelow, but these were not generally given as a reason for non-disclosure.

Disclosures after SSAP 25—Summary of general response to SSAP 25. All 103companies, from which responses are presented here, provided shareholderswith some disaggregated information. All these companies also receivedclean audit reports in relation to SSAP 25 indicating the auditor’s acceptancethat this standard had been complied with.

Additional voluntary disclosure. FRS 2 urged that the requirements of SSAP25 should be viewed as a minimum level of disclosure and so respondentswere asked to use a yes/no reply to indicate whether they made any voluntarydisclosure on six potential areas of information.

The items offered included capital expenditure and average number ofemployees which are the subject of United Nations and OECD re-commendations for segmental disclosure. Depreciation, cash flow, newinvestment and research and development expenditures were also offeredas these have been identified, in academic literature, as potentially usefulto shareholders. In addition a small number of respondents provided theirown choices. However, this survey indicates that in the period immediatelyafter the introduction of SSAP 25 the overwhelming response was thatcompanies do not make additional disclosure. Thirty-one per cent indicatedthat they do make some voluntary disclosure in the employees category andthe reason given for choosing to do so was, in general, usefulness toemployees and less frequently usefulness to shareholders. With this exceptionno other category attracted a yes response above 10%.

Cost of Compliance

Cost of data collection. In 1968 Mautz argued that the marginal cost ofpublicly disclosing segmental revenue and profit data is minimal becausethis information is being collected for internal reporting purposes and in

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TABLE 2

Reasons for not voluntarily disclosing segmental information prior to SSAP 25

Reason Percentage of respondents Mean Median Standardscoring importance at deviation

1 2 3 4 5

No statutory requirement 14 5 20 28 33 3·6 4 1·463Competitive disadvantage 28 8 9 26 29 3·1 4 1·725Confidentiality 22 10 23 25 20 3·0 3 1·541No benefit to external 23 13 31 16 17 2·9 3 1·477users

her literature review of segmental reporting Mohr (1983) argues that gath-ering and reporting costs are probably small. Since the author is unawareof any UK evidence to support the contention of small gathering costs therespondents were asked to make two assessments. First, whether accountinginformation changes were necessary to comply with the additional re-quirements of the standard, in terms of the 14 categories identified above,and second to identify the nature of changes.

No attempt was made to quantify these changes since the pilot interviewsshowed that companies could not realistically provide this information. Pilotinterviewees indicated that when faced with changing accounting systemsto meet regulatory demands the changes were not costed as they might beto meet internal demands for information. The survey therefore askedrespondents for their subjective assessment of the significance of change.

The majority of respondents indicated that they did not need to makesignificant changes to their accounting information systems to produceSSAP 25 information. However, over 30% were involved in making someamendments to their information systems and over 10% perceived thatthese amendments represented significant or very significant changes. Ofthe companies involved in significant change 15 indicated that changes wereneeded to collect data on net assets, 13 made changes to calculate segmentalprofits and eight to identify intersegment turnover.

Competitive disadvantage. Given the importance of competitive disadvantagein the decision not to make voluntary disclosure prior to SSAP 25’sintroduction, shown in Table 2, respondents were asked to assess theimportance of this issue after SSAP 25’s introduction. Thirty-two per centof respondents viewed competitive disadvantage as either important (17%)or very important (15%), while 31% indicated that this issue was of noimportance. A cross tabulation of preparers’ responses on voluntary dis-closure prior to SSAP 25 with responses after the introduction of SSAP 25shows a significant relationship at the 1% level. The evidence is therefore

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that the initial experience of disclosure may have reduced some preparersconcerns but that a substantial minority of preparers remain concerned.One respondent’s additional written comment is interesting. This respondentindicated that the reason for not making voluntary disclosure prior to SSAP25 was because competitors did not and that he now feared competitorswould obtain an unfair advantage because while his company had compliedwith the new rules some of its near competitors had failed to disclose ‘forone reason or another’.

Competitive disadvantage clearly remains a concern for approximatelyone-third of the companies surveyed. Foster (1986) argues that firmsmake segmental information disclosure choices which reduce the value ofinformation to avoid competitors gaining knowledge. The level of concernexpressed in this survey would therefore appear to have implications for thequality of segmental reporting. This issue was explored in greater depthusing three personal interviews. Since a cross tabulation of competitivedisadvantage concerns with industry and company size provided no sig-nificant associations, the interview material which provides more depth toan understanding of these issues, was drawn from companies operating inthree different industries. Some disclosure provisions of SSAP 25 generallyapply only to companies which exceed the criteria, multiplied by 10, fordefining a medium-sized company under s. 248 of the Companies Act(1985), which may be amended by statutory instrument. To ensure thatSSAP 25 was fully relevant to the interviewees all the selected companiesare large within the meaning of the Companies Act, but their turnoverranges from £181 million up to £1 billion.

In Depth Interview Results

Company profiles and organizational structure. A brief profile of each of thethree companies which co-operated in the interview survey is given below.

Company A’s interests were traditionally in engineering but more recentlyit has expanded into non-engineering fields. It has a turnover of £1 billion,over half of which is from overseas sources. The interviewee was the groupaccounting manager.

Company B’s interests are in the construction industry and it has aturnover of approximately £350 million. The interviewee was the groupfinancial controller.

Company C is a major transport and distribution company with turnoverof approximately £181 million. The interviewee is head of the financedivision.

Emmanuel & Garrod (1987) have noted the importance of matchingexternal reporting to the company’s internal management structure andreporting sub-divisions. Differences between internal structures and re-porting and external reporting occurred in all three companies but werevery marked in company A.

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In 1991, company A reported on five business classes and eight geographicsegments but these were reduced in the 1992 accounts to four and fiverespectively. For internal management purposes, company A reports on sixbusiness classes and 10 geographic areas. Company A indicated that theinternal groupings are designed to be evenly balanced in terms of profit andturnover so that ‘each director on the board is of a roughly equal significance’.But these groupings were not considered appropriate for external publication,because this would present the organization in a very traditional way. Thecompany is attempting to get away from it’s ‘metal bashing’ image andwishes to present a more modern image. Therefore internal organizationand external reporting are markedly different in this company.

The desire to change corporate image led to the decision to close onepart of the company during 1992. This closed section had previouslyrepresented the major part of one business class and its closure directly ledto a corresponding reduction from five to four business classes between the1991 and 1992 accounts. The change in reporting was a response toorganizational structure changes. The reduction of the geographical re-porting segments was, however, a proactive reporting decision. When askedto explain the reduction from eight to five segments, the interviewee replied‘We sold all our interests in Africa and therefore that disappeared’. Thisexplains the disappearance of only one segment. Pressed to expand, theinterviewee admitted ‘we could openly disclose more geographic segmentdata but there is no specific need for this so why disclose any more whenyour competitors aren’t?’ The reasons for this decision are amplified below.

Company B’s internal and external accounting processes are the mostclosely matched of the three companies. Company B reported that theintroduction of the standard coincided with a reorganization of the company’smanagement. Its three reported business classes were chosen to match thenew management structure precisely. However, one of the business classes,construction, provides over 90% of the group’s total turnover and it ismanaged internally as four autonomous operating regions, each of whichhas its own internal reports. There is no comparable external reporting ofthis major business division because the four autonomous regions representa geographical split of the UK, and not different types of business. Theview of the respondent was that there was no basis for further business classdisclosure.

This company also reports on three geographic segments. For publicationpurposes the geographical sub-division is UK, Rest of the EC, and Elsewhere.This final category represents 15% of turnover. Asked whether the categoryElsewhere might be further sub-divided. The respondent said, ‘we try andkeep the geographical splits as anonymous as possible’. Asked whether thisanonymity might result in the geographical segment data being misleadingand ineffective the respondent admitted, ‘To a degree you are right’. Thereasons for the disclosure choice are discussed below in the context ofcompetitive disadvantage.

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Company C’s 1991 accounts indicated that it has interests in severaldifferent countries, yet the company reported no geographic or businesssegment split in these financial statements. The 1992 accounts do provide,for the first time, a geographical analysis, but no business class information.

For operational purposes, company C is divided into three largely de-centralized divisions which have separate responsibility for the distributionof grocery, textiles and non-food merchandise. The decision to report as asingle business class, transportation, was taken ‘in discussion with ourauditors’, and the rationale is that the company’s principal activity is thedistribution of products between manufacturers and retailers. The actualproduct carried is not considered a relevant basis for published information,although the divisions do receive individual internal management in-formation.

In company C the organizational structure and external reporting areclosely matched as regards business classes, although internally there aremore reporting sub-divisions than are used for external purposes. But thecompany cannot really be described as having an organizational structurefor its overseas business. This is handled on a global basis from the UK byan overseas manager. The company tends to receive contracts of a one-offnature from overseas destinations and so its internal reporting system isflexible to provide relevant contract information to the management. Interms of geographical segments from 1992, the company will report in threecategories: UK, Europe, and the Rest of the World. Twenty per cent ofturnover is included in the latter segment, and includes the company’sinterests in the Americas and Africa. The interviewer sought to explore thesignificance of the elements which make up the rest of the world category.This was not an area which the interviewee wished to pursue. Specificallypressed the interviewee was asked to provide figures on turnover, profit andnet assets for the individual countries in the context of the SSAP 25, 10%size-limit guidelines, the interviewee declined. However, when asked ‘Doyou have any areas of excessive profit or loss within your accounts whichSSAP 25 supposedly requires you to declare?’ The interviewee replied:

‘Well, we do present combined figures, and yes, I suppose that does meanthat we make more profits in areas not distinguished from these areas that wedon’t. But we are not required to freely give away such information and hence,we choose not to’.

But this interviewee did say of segmental information, ‘I’m sure that someof the information could be misleading, Yes!’ This is also discussed belowin terms of competitive disadvantage.

Nature of competitive disadvantage. During each of the three interviewscompetition issues were alluded to as the respondents described the internalorganizational structures and the external reporting process. The competitiveissue was clearly identified as a disadvantage and there was no suggestion

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from any of the interviewees that an advantage could be gained by in-formation disclosure. It has been argued earlier that competition is not aunitary concept, and indeed the interviewees had different explanations ofthe way competitive disadvantage might arise.

Company A’s respondent noted that many people talk about competitivedisadvantage without being able to elaborate on its meaning. For him, inthe context of segmental reporting it is a political issue, especially relatedto the disclosure of business activities in certain countries, which is relevantto his company, and the disclosure of sales of products which are tested onanimals, which is not a relevant issue for company A.

Although it is the main board of company A which finally determines thereported segments the respondent perceived that he had a large influenceover the decision, and he argued,

‘If we only had one or two companies operating in a specific area . . . thenwe would not treat it as a specific geographic category, because it would givetoo much information away’.

Geographic segments must contain ‘a large number of companies op-erating over a wide area’. The respondent indicated that segmental in-formation must meet the needs of shareholders but without giving away‘gratuitous information’. Asked to indicate who might benefit from the‘gratuitous information’, the respondent rather vaguely listed a range ofusers without focusing on any one user group, perhaps demonstrating hisown inability to clarify the meaning of competitive disadvantage.

Company B’s respondent sees the competitive disadvantage issue in termsof competing companies, whereas company C identified the problem interms of the relative bargaining power of C and its customers.

Of the contracting industry, the company B interviewee said, ‘We areworking in relatively underdeveloped places without much money’. If thecompany has a big contract, it is likely to be it’s only contract in thislocation, and may be the only contract within a fairly large geographicalarea. Geographic segment disclosure therefore has the result that ‘we areessentially giving away how much profit or loss that we are making on thatparticular contract’.

In the construction industry, where tender prices are very competitive,the company tries to keep the geographical segments ‘as anonymous aspossible. The way we currently present our data gives the investor a guideto our activities abroad without being too specific’.

Company C identifies the information disclosure disadvantage as client-based. ‘Some clients might exert different commercial pressures than thosethey currently exert if that information were disclosed’. The more in-formation the client has, the stronger their bargaining position on profitmargins is likely to be. This company identifies the immediate pressure ascoming from clients but recognizes that in the longer term this could alsobe applied by competing operators.

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Although both A and B disclose geographical and business segmentstheir concerns about competitive disadvantage surround the geographicalsegments. Company C does not disclose business classes, so its concernsalso lie with the geographic segments. Especially in companies B and C thereis a belief that competitors and customers might use reported information totheir own advantage and to the detriment of their own interests. It istherefore interesting to explore whether these companies actually use othercompanies’ accounts for their benefit.

Use of competitors’ accounts. The respondents were all accountants andtherefore they may not be the most appropriate source of information aboutuse of accounts for competitive purposes. However, all three felt able todescribe their perceptions of how other companies’ accounts were used intheir organizations.

Company A has a special department for corporate development whichdoes examine the annual reports of other multinationals in similar lines ofbusiness. The main rational is to identify ways of treating data often withregard to accounting regulations. This section will also look at accountswith a view to making acquisitions, but in this context, better sources ofpublic information are also used. In terms of competition, the respondentindicated that the annual reports of individual subsidiaries are likely to bemore useful than the segmental information provided in the consolidatedaccounts.

Company B’s interviewee said ‘we do tend to look at our peers to seehow they split up their activities . . . but there is a danger of being misledby them and I don’t think one bases fundamental business decisions onthem’.

The company C respondent indicated that other companies’ accountsare used by the accounting function to seek reporting examples consideredto be of a high standard but these would not be drawn exclusively from thedistribution business.

The use of other company accounts as perceived by these respondents isapparently at odds with their perceptions of how dangerous disclosuremight be. This inconsistency is perhaps at least partially explained by theirperceptions about the relative quality of their own and others information.

Company B’s respondent indicated that they had produced a more detailedallocation of interest payments between segments than other constructioncompanies. Since interest payments are substantial in this industry, theaccuracy of this segmental division may be critical to a full understandingof performance. The respondent indicated his distrust of some competitors’information in this connection.

Company C’s respondent indicated that the company has ‘quite con-siderable problems’ correctly allocating some assets and costs betweensegments. It had been especially time consuming to ensure that the allocation

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once made had also balanced in aggregate. Especially difficult is the allocationof net assets. This respondent said of competitors’ accounts,

‘If you add all the segments together it does not come back to the overall totalfor net assets. So, from what I gather, some companies are actually gettingaround the problem of disclosure by not actually applying very rigoroustreatment to their disclosure and I suspect a lot of the information comingout may actually be quite confusing’.

A similar perception of differences in quality of information was reportedby the questionnaire respondent who indicated his company had compliedwith SSAP 25, but in his opinion his competitors had not.

It seems clear that at least within the accounting function, these companiesdo observe the accounts of their competitors and they are aware of theiraccounting policies, even though distrust of their value leads to scanty use.It may not be unreasonable therefore to perceive that competitors andcustomers also observe accounts and might gain some advantage from thatobservation.

Impacts of Reporting Segmental Information

Administrative costs. C’s respondent was quite clear that the additional costof providing information is not significant and these costs were describedas ‘nominal given the costs of the business as a whole’. Company B’srespondent agreed that cost is not significant. It is interesting that companyA is the largest of the three companies interviewed because it alone identifiedcost as an obstacle to further segmental reporting. The respondent said,‘the fundamental problems are cost and the difficulties associated withproducing all this data which is surprisingly complicated’. This cost per-spective probably derives from A’s accounting procedures which separateexternal and internal reporting so that internal and external segmentalresults are described as being a ‘completely different animal’. Whereas incompanies B and C internal and external results are basically prepared onthe same grounds, although in both companies the internal information ismore detailed, and external information is likely to be just a sub-set of whatis internally available.

As described above, Backer & McFarland (1968) identified three com-petitive issues, associated with segmental reporting: market entry; takeoverbids; and international regulation. Each of these issues was discussed withthe respondents.

Market entry/takeover bids. Respondents from companies A and C werenot concerned that disclosure of profitable segments would attract newcompetitors who would not otherwise enter the market, nor did they believethat there would be any special pressure on the company to take action onloss making segments which would not occur for other reasons. However,

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the company B respondent indicated that it would be necessary to improvecommunication with city analysts and bankers who might quiz the boardmembers about performance in different activities. Previously less-detailedexplanations might have served but this would no longer be satisfactory.

International regulation. The respondents from companies B and C said thatthe regulatory authorities should focus on creating an internationally agreedstandard of segmental reporting, rather than extending reporting re-quirements in the UK. These companies wish to see the creation of a levelplaying field, because both find that they must provide more informationthan their overseas competitors. The international influence was describedas not of great importance by the respondent from company A, despite thefact that approximately half that company’s turnover is from overseassources. This was explained by the fact that the company ‘can dictate theaccounting procedure it wants’.

Voluntary disclosure. The companies investigated by the questionnaire didnot in general provide additional disclosure after the introduction of SSAP25. This was also true of the interviewed companies. The unanimousresponse from the interviewees was that there would be no further disclosurewithout external requirements. All the respondents believed that the SSAP25 requirements were more than sufficient to meet the needs of shareholders.

SUMMARY AND IMPLICATIONS

SSAP 25 Segmental Reporting sought to improve the quality of financialstatements reporting by providing shareholders with an analysis of con-solidated information. The introduction of any new reporting standardraises issues about the cost of providing information, in contrast to theassociated benefits. In relation to segmental reporting, the costs of disclosurehave been described as including the full range of collection, processingand dissemination costs, but most particularly the cost of competitivedisadvantage. This study has used the introduction of a new reportingregulation to investigate attitudes to disclosure and to explore the nature ofconcerns about competitive disadvantage.

The empirical evidence shows that SSAP 25 resulted in the publicationof some information which was already available for internal use, but alsothat in 10% of companies significant changes to collection processes wereperceived to have been made to satisfy the new requirements. The interviewsshow that administrative costs of collection were not a burden to the twocompanies with closely coupled internal and external reporting systems, butthat this cost was perceived as large in company A which wishes to presentan external image which is not reflected in its management structures. Size

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alone does not seem to be an important indicator of the costs associatedwith administrative costs.

Prior to the introduction of the standard the main reason offered forchoosing not to make voluntary disclosure was the lack of a mandatoryrequirement, but the second most common reason was competitive dis-advantage. After the introduction of the standard there is evidence that thenumber of companies which identify competitive disadvantage as a matterof concern has reduced from 55% but that this issue continues to be animportant issue for 32% of respondents. The interviews confirmed previousresearch that indicated that competitive disadvantage is seen to arise due togeographic rather than business segment disclosures. In terms of geographicconcentration two of the interviewees find that their worldwide interests areso sparsely represented in any one region that individual contracts could beone geographic segment. The size of these companies is clearly a factor.The turnover of one is £350 million and the other £181 million.

Where competitive disadvantage is considered a problem the interviewsshow that companies may be restricting what they provide under SSAP 25.Two interviewees agreed that their own segmental information could beconstrued as misleading, yet indicated that in their opinion informationprovided by competitors was less good. These interviews suggest that avicious circle may have occurred in reporting practice. Companies whichare unsure of the accuracy of their competitors information or which reportunder more stringent rules than their competitors may take reportingdecisions to protect the reporting anonymity of their own interests. Theevidence from such a small group cannot be used to advise on policy changesbut it does suggest that auditors may need to look carefully at the ‘truthand fairness’ of segmental disclosures.

N

1. Two-thirds of these companies have chosen to report as single segment organizations.These written comments are reported in Edwards (1995).

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