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School of Management
Royal Holloway, University of London
INTERNATIONAL EQUITY ANALYSIS UNDER IFRS: A CASE
STUDY OF LONDON BASED SELL-SIDE ANALYSTS
MN5906
MSc. in International Accounting
Randolph Perry
Candidate Number: 1301003
Supervisor: Dr. John Ahwere-Bafo
18 September 2013
This dissertation is submitted as part of the requirement for the award of the
Master of Science in International Accounting

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Declaration
This Dissertation has been prepared on the basis of my own work and that where
other published and unpublished source materials have been used, these have been
acknowledged.
Word Count: 12,032
Student Name: Randolph Perry
Signature:
Date of Submission: 18 September 2013

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Abstract
This paper explores a seemingly incorrect perception among primary users of
accounting information that international accounting practices under IFRS
(International Financial Reporting Standards) are universally implemented in
different countries. Sell-side financial analysts at large investment banks are used as
a proxy for “primary users.” Data indicates that these sell-side financial analysts
produce investment recommendations for the largest institutional investment firms
in the world; making them the most likely to have significant impacts on equity
markets. Currently there is no research that examines the contemporary
responsibilities of financial analysts with relation to international accounting
information in the post-IFRS era. Prior research is used to demonstrate that
differences in accounting practices exist under IFRS despite the harmonization of
accounting standards. Therefore, even though it has been shown that differences in
accounting practices exist under IFRS, there is a perception among primary users of
accounting information that there are no such differences in practice because the
accounting standards are universally accepted.
The usefulness of accounting information in the role of financial analysts is also
further examined. The position of a London based sell-side analyst is subsequently
explored through two interviews and findings are transcribed. The results indicate
that there is no current literature detailing how primary users of accounting
information cope with international differences in the post- IFRS era, because there
is a perception among primary users that there are no differences in accounting
practices under IFRS. A secondary finding of significance indicates that financial
analysts rarely use audited annual reports and find little value in them.

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Table of Contents
1. INTRODUCTION ................................................................................................5
2. BROAD RESEARCH OVERVIEW ....................................................................7
3. RESEARCH AIMS ............................................................................................10
4. STRATEGY .......................................................................................................12
5. THEORY OF KNOWLEDGE TRANSFER.......................................................15
6. EMPIRICAL BACKGROUND AND PRIOR LITERATURE ..........................19
6.1. Financial Analysts and Foreign Accounting Data ......................................19
6.2. The History of IFRS.....................................................................................20
6.3. Scope for International Differences Under IFRS.........................................25
7. PROPOSALS .....................................................................................................32
8. RESEARCH PROCESS .....................................................................................33
9. FINDINGS .........................................................................................................35
9.1. Role of the Sell-Side Analyst ......................................................................36
9.2. Analyst Accounting Expertise and IFRS Perceptions ................................41
9.3. Usefulness of Quarterly and Annual Reports .............................................42
9.4. Usefulness of Non-Accounting Information ..............................................43
9.5. Summary of Findings ................................................................................. 45
10. CONCLUSIONS AND IMPLICATIONS .........................................................45
11. References ..........................................................................................................48

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1. Introduction
For the majority of financial analysts, having accounting rules in different
countries that generate completely different sets of financial reports is hopelessly
confusing (Antill & Lee 2008, p. xxiii; Nobes & Parker, 2010, p108-110). This was
very much the case in the pan-European equity market prior to 2005 (Miles &
Nobes, 1998; Clatworthy, 2008). Investors, analysts, lenders, or suppliers would
have to cope with the international differences of accounting practices in order to
understand the performance of a company (Antill & Lee 2008, p. xxiii; Nobes &
Parker, 2010, p108-110; Miles & Nobes, 1998). The desire to strengthen the EU
capital markets by establishing a standardized accounting system would become a
major driving force in the development and utilization of International Financial
Reporting Standards (IFRS) (Nobes & Parker, 2010, p108-110). Harmonization
efforts to produce a single set of high quality global accounting standards began to
move swiftly by the late 1990’s, and in 2000 the EU Commission proposed a
mandatory adoption of IFRS for the consolidated statements of all listed companies
in the EU (Nobes & Parker, 2010, p108-110).
Fast forward to today: The EU has sufficiently adopted a universal set of
financial reporting standards in the form of IFRS, and the SEC in the United States
has eliminated the need for foreign stock market registrants to reconcile from IFRS
to US GAAP (Antill & Lee, 2008, p. xxiii; Nobes & Parker, 2010, p108-110). These
two events have significantly contributed to the momentum behind IFRS adoption
around the world. Additionally, companies in emerging markets can add credibility
to their recorded performance by adhering to a universally accepted set of high

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quality accounting standards (Antill & Lee, 2008, p. xxiii; Ball, 2006). Essentially, it
is the view of the contemporary financial analyst that international accounting
standards have been developed and implemented in the EU and around the world,
affectively dispelling a potential inefficiency in capital markets as a result of
different accounting practices being used in different countries.
This singular perception is the main focus of this research study and should
be viewed as a major problem with the way primary users of financial statements
effectively process accounting information. Ball (2006) addresses a very important
subject area relating to this perception, “that converge de facto is less certain than
convergence de jure.” This point which can be applied to adoption, fundamentally
states that, “convergence in actual financial reporting practices is a different thing
than convergence in financial reporting standards” (Ball, 2006).
The works of Ball (2006) and Kvaal (2010) empirically show that
differences in accounting practices exist in different countries under IFRS even
though the accounting policies are the same. Patterns are developed from the
national accounting traditions in the domestic financial statements, which then flow
onto the consolidated statements of the large corporations examined (Ball, 2006;
Nobes, 2006; Kvaal, 2010). Scope for this exists in IFRS because there are options
for different accounting choices under IFRS (Nobes, 2006). Eight types of
opportunities for variations in accounting practices are further documented by Nobes
(2006) and in future research, as he and Kvaal (2010) conclude that “companies, in
the absence of strong incentives to do otherwise, will pursue a policy previously
adopted if it is still allowed.” Following studies by Ball (2006) and Nobes (2006),
Zeff (2007) identifies four types of cultures inherent in different countries which
present significant obstacles to global financial reporting comparability. Finally,

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research from Alexander (2006, p. 75) notes that “the use and interpretation of
financial reports requires an understanding of the context in which, and the thought
process under which they are prepared.” These findings indicate that the primary
users of accounting information still need to employ discretion when analyzing the
performance of an international company, in isolation or against its peers, to cope
with considerable international diversity in accounting practices under IFRS.
2. Broad ResearchOverview
In order to properly understand the specific research aims of this dissertation,
it is important to address the contextual events surrounding these objectives. This
research involves the role of accounting on stock markets and is motivated by both
empirical observations and by the prior literature. To explore the lasting effects of
international diversity under IFRS, it is important to obtain knowledge about how
accounting is used in practice on stock markets, and the coping mechanisms applied
for such diversity. These issues, which were highly under-researched in the period
prior to IFRS, are now virtually nonexistent in contemporary literature.
Companies listed on stock markets produce accounting information that is
used by investors worldwide. The transfer of information from companies to
investors is especially interesting, and a topic covered in section 5 of this research.
Marton (1998) points out that actors on stock markets are often anonymous and that
companies and their investors do not communicate directly. This leads to the
rationalization that financial reporting as a direct line of information is what makes
accounting so useful in equity markets (Marton, 1998). Accounting can therefore be
seen as a valuable source of information transfer between companies and investors
on any given stock market.

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Given this assumption, it is expected that the role of a modern day financial
analyst will heavily involve the use of accounting information. Pre-IFRS studies
discussed in section 6.1 empirically research this function, which included coping
mechanisms for international diversity. This research, explores the post-IFRS
perception of London based financial analysts, who appears to believe that
accounting differences from different countries no longer exist due to the adoption
of IFRS. Today, very little is understood about how equity analysts utilize financial
information and cope with international diversity. In fact, so little is known
publically about the roles of those in financial markets, that a London based
publication recently conducted 70 interviews in the financial industry and produced
a piece titled The Voices of Finance (The Guardian, 2013).
The ultimate providers of capital for equity markets are investors and the
London Stock exchange is widely considered to have the largest internationally
oriented financial market in the world (Miles & Nobes, 1998; Clatworthy, 2007).
Over the past few decades, this capital market has seen substantial increases in
international investments dominated by institutional investors (Myners, 2001;
Clatworthy, 2007). In lieu of credible sources of information for UK institutional
investor data, a comparable analysis produced by an SEC commissioner in the
United States shows that in 2009, institutional investors owned an aggregate 73% of
the outstanding equity in the 1000 largest US corporations (SEC Filings, 2013).
With regard to the use of accounting information, this data suggests that financial
analysts producing investment recommendations to the world’s largest institutional
investment firms, are the most likely to have a significant impact on stock markets.
Investment banks in the UK play the role of the middle man for almost all
aspects of the London equity market (Marton, 1998; Clatworthy, 2008). As financial

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intermediaries, investment banks receive data and information produced by listed
companies and sends the processed results to institutional investors who ultimately
make investment decisions. Employees for the bank who receive and process the
data and information from companies are called sell-side analysts. The sell-side
analyst constructs reports that are used by investment firms to make investment
decisions. The investment bank also works as a brokerage house and makes money
in the form of commissions from securities trading. The financial analysts of the
investment bank are called sell-side analysts because they work for the firm that
sells securities. Portfolio managers at large institutional investment firms also
employ financial analysts called buy-side analysts. Buy-side analysts directly use the
reports produced by sell-side analysts in conjunction with their own knowledge of a
company in question to produce a report that is in turn analyzed by the portfolio
manager. This chain of analysis that leads to large institutional investment decisions
begins with the sell-side analyst.
Sell-side analysts represent a clearly definable group, and their investment
decisions have been shown to be the most influential on stock markets (Barker,
1998; Marton, 1998). From an accounting perspective, professional bodies are most
concerned with the way users interpret accounting information. The IFRS
Framework classifies primary users of general purpose financial reporting as
“present and potential investors, lenders, and other creditors, who use that
information to make decisions about buying, selling, or holding equity or debt
instruments and providing or settling loans or other forms of credit” (IFRS
Framework, 2013). Barker (1998) and Marton (1998) also both characterize sell-side
analysts of large investment banks, as amongst the most important users of financial
statements. Miles & Nobes (1998) showed that 7 out of 8 fund managers assumed

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that analysts made all adjustments necessary for international diversity in accounting
information. This paper proceeds by using the sell-side analyst as a proxy for the
defined “primary user” in the IFRS Framework, and focuses on the sell-side analyst
as the main receiver and interpreter of financial information from companies on the
equity market.
To conclude this section, it is important to define accounting information in
this study as annual and quarterly reports issued by companies. Accounting
information is only used in reference to financial reporting, while managerial
accounting is not examined in this research. The investors and analysts considered in
this research are employed by large investment banks and other financial institution.
They are assumed to be the most informed users for interpreting accounting
information and the most influential in effecting equity markets.
3. ResearchAims
This paper examines the pan-European equity market after the mandatory
implementation of International Financial Reporting Standards. The main objective
of this research is to explore the incorrect perception among primary users of
accounting information that international accounting practices under IFRS are
universally implemented in different countries. The role of this perception and how
it may ultimately affect investment decisions is also subsequently investigated.
In order to accomplish this primary objective, the following secondary
research aims must be accomplished:
1. Demonstrate that differences in IFRS practice exist.

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2. Examine the role of the sell-side analyst.
3. Explore the extent to which accounting information is useful in the
work of a sell-side analyst.
Aim number 1 provides the fundamental context for this dissertation. The
purpose of this paper is to explore a disturbing perception among primary users of
accounting information that differences in IFRS practice do not exist. It is therefore
crucial to establish that differences in IFRS practice do exist.
Achieving Aim number 2 satisfies the general relationship between this
secondary objective and the main objective. The perceptions developed by the
primary users of accounting information cannot be adequately explored without
properly understanding the contextual events surrounding the users. Therefore, the
role of the sell-side analyst as a proxy for primary users must be understood.
Additionally, as this role appears to be shrouded with mystery (The Guardian,
2013), it is important for this research to help shape a view of the current position
for future research, as the role has significant implications in financial markets.
As with aim 2, there is a general relationship between aim number 3 and the
main objective. An interaction between aim 2 and aim 3 also exists, as exploring the
latter is helpful in examining the prior and vice versa. With regard to the main
objective, if accounting information is useful to the work of sell-side analysts, then
incorrect perceptions about it may have serious implications for equity markets.

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4. Strategy
An explorative case study is used in this research to enlighten readers and
satisfy the primary objective. The rationale behind this explorative research was
developed due to a significant lack of current research on how primary users of
accounting information cope with differences in accounting policies post-IFRS.
Previous research conducted by Miles & Nobes (1998) discusses foreign accounting
data in UK financial institutions, but a more contemporary analysis after the
adoption of IFRS has yet to be determined. Clatworthy (2008) makes references to
the continual challenges of accounting harmonisation under IFRS, but his statistical
work and data collection was performed before the mandatory implementation of
IFRS. The primary motivation of Clatworthy (2008) was to expand on the work of
Miles and Nobes (1998), while further examining the coping strategies undertaken
by UK analysts and fund managers for international analysis. Zeff (2007) continues
to elaborate about the detailed harmonisation problems exposed by research
developed in the wake of a dramatically changing accounting landscape. There are a
handful of contemporary studies on the existence of differences in international
financial reporting practices pre-&-post-IFRS. Ball (2006), Nobes (2006), and Kvaal
(2010 & 2012) are some of the most notable. However, none of them discuss how
analysts or primary users cope with these issues post-IFRS.
The intention of this paper is to utilise a multi case study strategy to
determine how international financial reports are assessed by sell-side analysts.
Using the case study as a research strategy for this paper provides a number of
benefits to the researcher and also compliments the purpose of this paper in terms of
data collection and observation. The aim is to design two good case studies that
explore contemporary accounting issues in the London equity markets. This paper

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will conclude the research by presenting the findings and answering the objectives.
The case study strategy best represents real life scenarios, and this is a primary focus
encouraged by this explorative research. As no current research has been done on
the topic of this paper, the information that can be explored will provide a more
enlightened view for future empirical research. This information can be used to
better quantify future observations and draw up better conclusions with the
collection of more precise data.
This form of research strategy focuses on “how and why” topics, and does
not require control of behavioural events as these are merely observational (Yin,
2009, p8). As no current research has been done on the topic, this paper will have to
focus on contemporary events. According to previous work conducted on using
correct research methods, the situations described above dictate that a case study is
the most relevant research method to use (Yin, 2009, p8). “How” and “why”
questions are more likely to lead to the use of case studies as a research method, and
in the cases of this study, help explore the subject area (Yin 2009, p9). Such
questions often deal with operational links which need to be traced over a period of
time and in the case of our studies it needs to answer questions based on work
conducted pre-IFRS and link them to this paper’s formulated objectives and
questions relating to post-IFRS research. In comparison to other studies which focus
on “how” and “why” questions, for instance history studies, case studies add an
extra two sources of evidence: “direct observation of the events being studied and
interviews of the persons involved in the events” (Yin 2009, p11). This added depth
of focus towards contemporary events is very important and a crucial aspect towards
gaining enlightenment in the subject area. Although case studies and historical
studies can overlap, a case study’s unique quality lies in its strength and ability to

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deal with a “larger range and variety of evidence—documents, artifacts, interviews
and observations,” aspects of which are beyond the scope of conventional historical
studies (Yin 2009, p11). Though like historical studies, experiments are a systematic
method of research, they are also not relevant to this study because there is no
examination of behavioural outcomes by the investigator (Yin 2009, p11). It seems
then, utilising case studies is the best strategy for this paper.
The essence and central tendency among this research strategy is that, “it
tries to illuminate a decision or set of decisions, why they were taken, how they
were implemented, and with what result” (Yin, 2009, p14; Schramm, 1971). For this
paper, a set of outcomes will not be relevant, as the study is exploratory in nature
and does require a clear or evident result. However, the objectives are clearly set,
and providing insight to those objectives should leave implications to the
phenomenon and the context. Two case studies through the use of face to face
interviews were conducted in this research. Sell-side financial analysts were asked a
series of questions regarding their occupation within an investment bank to satisfy 3
of the 4 objectives. Aim number 1 is satisfied by citing the previous literature that is
continually promoted throughout this dissertation.
The remainder of this paper is organized as follows: The next section
employs a theoretical system of information transfer in the business environment.
Continuing from this development, prior research is analysed and used as a
contextual basis for the main objective. Proposals outlining the direction of the case
studies are presented, followed by the research process. Findings are stated, and the
dissertation concludes with answered objectives and implications of the research.

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5. Theory of Knowledge Transfer applied to Capital Markets
Further inquiry into the role of financial analysts requires a theoretical
understanding of how information is transferr ed on equity markets. This paper will
clarify the process of information or “knowledge transfer” between companies and
analysts using financial reports with business related theories of information transfer
from Lin (2005). From an accounting perspective, what is interesting about the stock
market is the way anonymity plays a role in the set up of this “transfer,” in that listed
companies and their investors often communicate using the intermittent issuance of
financial reports, but often never communicate directly (Marton 1998). According to
Beaver (1989), “direct two way communication is often impossible” because there
are a large number of “players” or “middle men” between companies and investors.
The “path of communication” between them is also often restricted by regulators
where any form of private communication is stringently controlled (Marton 1998).
As a result, financial reports have the potential to be vital sources of information
between the “path of communication," as they form an important bearing in stock
market transactions (Marton 1998). To clarify this “path of communication,” a
simple model (figure 1) using the “sender-receiver” concept in knowledge transfers
will be used, and the roles of the “players” or “actors” within this path will be
elaborated on.
Lin (2005) proposes a “sender-receiver framework for studying knowledge
transfer” and discusses the barriers which exist for parties seeking knowledge. For
the purpose of this paper, knowledge seekers will be analysts and investors in the
stock market, while knowledge itself will represent financial information. Lin (2005)
states that knowledge transfer is increasingly distributed between “geographically
dispersed individuals” and that “outsourcing and globalisation” implies knowledge

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transfer which crosses national boundaries. This supports globalisation issues within
the accounting field leading to more internationalised financial reporting (Nobes,
2006). Lin (2005) also states that shifts towards more “distributed forms of
organisations have presented new challenges to knowledge transfer,” and that
“information incompleteness” may negatively impact the transfer of knowledge.
Figure 1 is a very simple and intuitive model proposed by this study based on
the work by Lin (2005), for describing the interrelationship between companies
(senders) providing financial information (knowledge) to analysts/investors
(receivers). The model will be used to describe the transfer of knowledge (financial
information) between companies and sell-side analysts. The sell-side analyst’s
perception of this information is then relayed to the buy-side analyst/ institutional
investor. Figure 1 displays knowledge transfer of financial information in capital
markets:
Figure 1
* *
*arrows signify direction of knowledge transfer
COMPANY
(SENDER)
SELL SIDE ANALYST
(PRIMARY RECEIVER)
BUY SIDE ANALYST/
INSTITUTIONAL INVESTOR
(SECONDARY RECEIVER)

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Differences in financial reporting between international companies can cause
problems to analysts (knowledge seekers) as their ability to share knowledge might
be affected by limiting the ability to assess and understand the different international
financial reports. To elaborate further, there are two types of information structures
which are common settings of knowledge transfer within business settings: sender-
advantage asymmetric information structure and symmetric incomplete information
structure (Lin, 2005).
The first structure is where the sender has more existing information than the
receiver about the knowledge transfer, and that with this asymmetry, there is a
possibility of leading to a failure or malfunctioning of the knowledge market (Lin,
2005). This is typically the feature in capital markets as it is knowledge senders or
companies who post financial reports which provide information about the company
to the investors/analysts who in turn, without the same prior knowledge of the
financial information, are seeking the utility of that information to make investment
decisions. Failure or malfunctioning of the market in the context of stock markets
can be expressed using examples of companies providing financial information
which are then misinterpreted by analysts who wrongfully advise investors into
making investment decisions.
This structure of information transfer was a large problem in the pan-
European equity markets prior to the implementation of IFRS. To improve the
sender-advantage asymmetric information structure, Lin (2005) proposes “signalling
mechanisms” to cope with such potential failure in knowledge transfer. For financial
reporting, IFRS can be viewed as a “signalling mechanism” designed to alleviate the
problems of international accounting. However, it is a purpose of this paper to
demonstrate that the correct interpretations of financial reporting under IFRS cannot

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be achieved without a thorough understanding of how accounting practices can
differ across borders.
Symmetric incomplete information structure, is where “neither the sender
nor the receiver has complete information about the knowledge transfer” (Lin 2005).
In capitals markets, our research uses an example of less than adequate accounting
practices and options being applied in foreign countries. For instance, Ball (2006)
discusses how foreign subsidiaries of an international company may not report
timely losses due to sub-standards in foreign regulations; thus incentives to report
such losses are decreased. Such information manipulation by the hand of
subsidiaries can lead to a phenomenon known as “signal-jamming” where the
integrity of the knowledge transfer has been compromised (Lin 2005). In this case,
there could be a compromise in accounting numbers as net income/net asset figures
in these subsidiaries may be misrepresented to the parent company by using
incomplete financial information in reports (Ball 2006). This international parent
company is unaware of the fact that it is now the sender of such incomplete financial
information to a receiver or analyst who is likely to be even more unaware of the
incomplete information sent in the consolidated reports. Ball (2006) goes on to
further outline certain “pros and cons for investors” in relation to IFRS policy, but
focuses more on the “volatility” in financial reporting with arguments for and
against IFRS. He believes “implementation is the Achilles heel of IFRS,” and that a
uniform set of accounting standards will not necessarily lead to uniform reporting
behaviour (Ball, 2006).

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6. Empirical Background and Prior Literature
6.1 Financial Analysts and Foreign Accounting Data
For the majority of analysts, the major material of analysis is “those streams
of income derived from core business activity, i.e. sales of core products and
services” (Antill & Lee, 2008, p.91). An analyst must be able to clearly recognise
revenue issues in their field/sector in order to understand and able to valuate
companies properly, thus assisting financial investment making decisions (Antill &
Lee, 2008, p.90). Interpreting financial accounting information provides the
foundation for revenue recognition issues within a specific sector. Financial analysts
must therefore be able to competently forecast investment influencing issues through
the use and interpretation of accounting data.
Many financial analysts in London work within sectors which scope out
internationally. International Financial Reporting Standards exists to eliminate
differences in financial reporting in order to increase efficiency in the capital
markets. The EU adopted the use of IFRS in 2005 for listed companies, and this has
contributed to the gradual adoption of IFRS globally (Nobes & Parker, 2010, p108-
110). However, differences in international financial reporting still survive under the
practice of IFRS (Nobes, 2006; Ball 2006; Zeff. 2007; Kvaal, 2010).
These differences should affect the way analysts interpret financial data
within their sector and influence investment making decisions. Before the
widespread adoption of IFRS, research done by Choi and Levich (1991), Miles and
Nobes (1998), Marton (1998), and Clatworthy (2008); was designed to identify the
coping strategies of financial analysts for such inefficiencies. Miles & Nobes (1998)
conducted interviews of17 London-based international analysts and fund managers.

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The research indicated that most analysts were unaware of international accounting
differences, with only some cases of specialist sector analysts being aware of only
UK and US practices (Miles and Nobes 1998). Marton (1998) shows that financial
reports provide a useful source of information on the stock market, but finds that
there are negative implications from combining international trading with
domestic/national financial reporting systems. The work done by Choi and Levich
(1991) interviewed users of cross-border data in 52 organizations in five major
financial centres. Over half of the users were found to report an effect on their
market decisions due to international accounting diversity. Clatworthy’s (2008)
results indicate a substantial reliance on sources other than the annual report by
analysts when analysing overseas companies. His work also states that the process
involved in the analysis of overseas equities remains a largely unexplored area of
research.
The EU’s mandatory adoption of IFRS gave way to much research
speculating its effectiveness with regard to extinguishing international accounting
practices. Several specific research issues using empirical observations and data
collection were able to address and measure prevalent national accounting practices
that remained under IFRS. This study will attempt to identify an existing gap in
industry research, by exploring the use of accounting data and financial reports from
listed companies and how they are used by analysts post-IFRS.
6.2 The History of IFRS
International Financial Reporting Standards (IFRS) are issued by the IASB
(International Accounting Standards Board), an independent organisation based in
the UK (Nobes & Parker, 2010; Ball, 2006, Antill & Lee; 2008). Purported to be a

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set of financial reporting rules which would apply equally to public companies
worldwide, IFRS was originally produced to achieve higher quality standards, while
striving to improve the “harmonisation of preparation and presentation of financial
statements” (Antill & Lee, 2008, pg xxii; Ball 2006). For financial analysts and
investors, the differences in financial reporting internationally as discussed above
can provide obstacles towards the understanding of a company’s performance and
reported earnings. International standards in accounting have been set up to try and
eliminate these differences and decrease the potential inefficiency in capital markets
these differences might cause (Antill & Lee, 2008).
IFRS has been adopted in many parts of the world. It is important to clarify
the meaning of “adoption” as in context to financial reporting. It means that national
accounting rules are set aside and replaced by IFRS using a level of national
jurisdiction (Nobes & Parker, 2010, p108-109). According to Ball (2006), global
adoption of IFRS will be beneficial to investors using financial reports by increasing
the quality of information provided. A number of potential advantages for using
IFRS can be determined for investors; for instance the costs needed to compare
alternative investments will be reduced as a result of eliminating the need to make
adjustments in international financial reports (Ball, 2006). For investors, this could
reduce costs of processing such financial information and therefore provides
beneficial appeal to investors in the global adoption of IRFS (Ball, 2006).
Companies providing financial statements using IFRS are also expected to benefit
from the adoption as international investors will be more likely to invest in these
companies. For example, reducing international differences in accounting to some
degree helps to remove barriers to cross-border acquisitions and divestitures, “which
in theory will reward investors with increased takeover premiums” (Ball, 2006;

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Bradley, 1988). Thus the financial incentives for the adoption of IFRS worldwide
are clear.
Towards the end of the 1990s, the IASC (International Accounting Standards
Committee and precursor to the IASB) had been clearing a path toward international
harmonisation with the inception of IASs (International Accounting Standards)
(Nobes & Parker, 2010, p108). Previous EU directives for financial reporting were
being left behind, so in 2000, the EU commission proposed the launching of a new
guideline, that by the year 2005, it would be compulsory for all companies listed
within the EU to adopt IFRS for all their consolidated financial statements (Nobes &
Parker 2010, p108-110). This would cause an outlawing of European domestic rules
and US rules for the purpose of accounting (Nobes & Parker, 2010 p110). The
motives for this initiative was part of a desire to increase the strength of EU capital
markets by establishing a more harmonised accounting system by providing a set of
more standardised policies under IFRS (Nobes & Parker, 2010, p110). Although the
existence of US GAAP provided a means to fit this purpose, it was deemed unfit for
use within the EU due to it being regarded as too complicated and “too immune
from European influence to be politically acceptable” (Nobes & Parker, 2010,
p110). The move towards the adoption of the IFRS was subsequently facilitated by
large European companies who had garnered a burgeoning acceptance of
international standards. For instance, in Germany, a large number of companies
from 1994 onwards started to use international standards like US GAAP for their
financial statements in order to reduce the costs of raising finance. By 1998, a policy
was enforced by the German government that allowed listed companies to use
international standards without the need to comply with regular national accounting

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principles or requirements for consolidated statements (Nobes & Parker, 2010,
p111).
A draft Regulation in 2001 was published by the EU commission and by
2002 was approved by the European Parliament and Council of Ministers. It
required listed companies within the EU to use international standards for their
consolidated financial statements onwards from 2005 (Nobes & Parker, 2010, p111).
Other companies and states that had formerly utilised other acceptable set of
standards (i.e. US GAAP) were allowed an extended the deadline to 2007. However
it is the European Parliament’s opinion that, “new and revised standards cannot be
endorsed in advance for EU use” (Nobes & Parker, 2010, p111). In order to gain
approval for endorsement the Accounting Regulatory Committee (ARC) was set up
to provide assistance to the EU Commission to determine whether IFRS can be
endorsed within the EU (Nobes & Parker, 2010, p111). The ARC is composed of
representatives from each EU member states and it is through this that the EU was
able to achieve influence over the IASB. A consequence of this was the creation of a
form of “EU-endorsed IFRS” which was slightly revised from the original IFRS set
by the IASB (Nobes & Parker, 2010, p111). For instance, there is a difference in
IAS 39 of the IFRS to the EU-endorsed version which provides more flexibility on
the use of hedge accounting (Nobes & Parker, 2010, p111-112). The EU
commission’s liaison with the IASB ensured that IFRS took into account issues
which are considered important within Europe and by 2004 most of the existing
content of the IFRS was endorsed (Nobes & Parker, 2010, p112-113). However,
according to Nobes & Parker (2010) “the fact that the EU-endorsed IFRS is not the
same as IFRS has led to confusion and to audit problems.” For instance Nobes &
Parker (2010) discuss an auditors’ opinion on GlaxoSmithKline’s consolidated

24. 24
statements for 2008; they state that GlaxoSmithKline’s “group financial statements
give a true and fair view...” and this complies with the EU-endorsed IFRS’ policy.
Interestingly, IAS 1 of IFRS requires instead a “fair presentation” of the financial
statement (Nobes & Parker, 2010, pg 113). Confusion therein lies among the
practical assumption that these two assessments are the same when in actuality they
are not. This problem however disappears when presented in other languages such
as French or Italian because “true and fair view” and “fair presentation” is translated
using the same expression (Nobes & Parker, 2010, p113).
The International Accounting Standards (IASs) regulation of 2002 went into
effect in 2005, and about 8000 listed companies within the European Union (EU)
adopted the use of IFRS to prepare their consolidated financial reports (Zeff, 2007).
In addition to the EU, many Asian countries have also adopted IFRS or are in the
process of doing so; for instance China in 2007, albeit with a few minor differences
in regulation. A problem arises in the fact that countries like China, India and Japan
adopt local variations of IFRS, thus creating differences in financial reporting when
compared to nations which fully converge with IFRS (Clatworthy, 2008). In the US,
IFRS is not used, and the nation’s standards are governed by US GAAP (Nobes &
Parker, 2010, p114). However in 2007, the US Securities and Exchanges
Commission (SEC), enforcers of US GAAP, formally proposed a rule to accept
foreign registrant’s financial statements prepared in accordance with the English
language version of IFRS as published by the IASB without reconciliation to US
GAAP’ (Zeff 2007, SEC 2007). This provided a major step forward in strengthening
the global position of IFRS. Such particular standardisation of IFRS rules in the US
may be viewed by some as an example of `convergence’ (Nobes & Parker, 2010, p
110). The proposed convergence of US GAAP to IFRS is however, very unlikely in

25. 25
the near future. One of the aims of the IASB is to secure support and acceptability of
IFRS in all of the major capital markets (Zeff, 2007). It was therefore of great value
and importance that the IASB was able to get the SEC on board in accepting IFRS
as an equivalent to US GAAP on the US equity market. (Nobes & Parker, 2010,
p108).
6.3 Scope for International Differences under IFRS
The compulsory use of IFRS in the EU and its variants elsewhere implies
that the study of differences in international accounting is becoming less relevant.
Nobes (2006) reports that international differences in IFRS are still a cause for
concern, whereby the motives and opportunities allowing international accounting
differences under IFRS to exist cannot be overlooked. Factors such as the legal
systems and tax systems (discussed below) still provide opportunities for differences
to exist under IFRS (Nobes, 2006). For instance, the principles of IFRS reporting
standards are the same in the UK and Germany, but the enforcement and monitoring
of the standards remain a national responsibility (Nobes, 2006). As a result, “the
nature and regulation of audit, the stock exchange rules, the activities of the stock
exchange regulator, and any other of the monitoring or reviewing bodies” also
remain nationally enforced so international differences in these areas also continue
to exist (Nobes, 2006). As described below, UK and German based markets
represent a Common/Roman law dichotomy which subsequently affects differences
in enforcement of financial reporting practice within these countries (Nobes, 2006).
Sticking with the UK and Germany as comparative examples, Lamb et al. (1998)
suggest a stronger operational linkage between tax and financial reporting within
Germany. Such taxation dominated financing systems have been a typical feature in
Germany where one set of accounting rules are used for both tax and financial

26. 26
reporting. In the UK under national requirements there are two sets of rules for
several accounting issues: “one for taxation and one for financial reporting” (Nobes,
2006). Different approaches to tax practices also predetermine IFRS consolidated
financial statements where national practices of individual company accounting will
flow onto the consolidated statements (Nobes, 2006). For instance, asset
impairments are tax deductible in Germany but not in the UK, so they are
encouraged in financial statements in Germany displaying a level of bias in favour
of them. As a result, they may survive in German IFRS consolidated statements,
“given the room for judgement in IFRS impairment procedures” (Nobes, 2006). This
shows that national accounting traditions are likely to continue to survive into
consolidated financial reporting as long as they comply within the scope of IFRS
rules (Nobes, 2006).
So why do differences occur in international financial reporting? Major
differences in international financial reporting are far from obvious, even to
accountants (Nobes & Parker, 2010, p29). This study would like to show how this
may impact non accountants such as financial analysts, where most analysts lack
any sort of accounting qualifications (Nobes, 1998). Several factors are linked to the
differences in financial reporting internationally:
Culture
Financial reporting/Accounting is affected by its environment so the culture
of the country has its effects too (Nobes & Parker, 2010, p29). Accounting is seen as
a sub-structure to the way individuals of a certain culture would like their society to
be structured (Nobes & Parker, 2010, p29). Gray (1988) applied Hofstede’s study
(1984) on defining basic cultural patterns and dimensions to explain international

27. 27
differences in the behaviour of accountants and the nature of financial reporting
behaviours and practices. For instance, Gray’s study suggests that a country with
high uncertainty avoidance (the degree to which members of a society feel
uncomfortable with uncertainty and ambiguity thus compelled to maintain codes and
beliefs which are intolerant to deviant ideas/persons) will be “more likely to exhibit
conservative measurement of income with a preference to limit disclosure to those
closely involved in the business” (Gray, 1998; Nobes & Parker, 2010, p30).
Research has also identified many direct potential influences to the accounting
environment and culture: legal systems, corporate financing and tax systems (see
below) interact with culture in a complex way which in turn seem to affect the style
of financial reporting within the country’s accountancy profession (Nobes & Parker,
2010, p31). Zeff (2007) reports that differences in cultures across borders is one of
the factors that “could impede or interfere” with the promotion of genuine
convergence and comparability of financial reporting worldwide. Zeff’s report also
categorises culture into four branches: business & financial, accounting, auditing,
and regulatory cultures; these all influence the way in which financial reports are
created worldwide and might also explain the tendencies towards differences in
international financial reports.
Legal systems
Legal systems in most countries can usually be identified as either “common
law” or “code law” (Nobes & Parker, 2010, p32). These categories developed by
Nobes (2010, p 32), have defining characteristics with some countries and states
embodying elements of both. Essentially, those countries designated “common law,”
have a long history of utilizing equity markets and producing financial reports that
service investors. This accounting information is not used for tax purposes, which is

28. 28
developed separately. “Code Law” legal systems generally refer to those countries
that have a history of using accounting information explicitly for tax purposes. Their
financial systems commonly have a bank central structure, whereby large banks and
companies have an interdependent relationship.
The nature of accounting regulation within a country is influenced by its
general system of laws (Nobes & Parker, 2010, p32-33). For instance, Bushman and
Piotroski (2006) and Ball (2006) observe how in common law countries there are
greater incentives to report losses in a timelier manner; while Jaggi and Low (2000)
report that there are also higher levels of disclosure in common law countries. Below
is a table illustrating examples of developed countries’ legal systems and where they
fall under these two categories. Although a country’s regulatory system for financial
reporting and accounting is affected by the nature of its legal system, financial
reporting rules and practices are probably even more affected by other issues such as
IFRS policies (Nobes & Parker, 2010, p33).
Table 1 * (countries and their legal systems; taken from Nobes & Parker, 2010 p33)
La Porta et al. (1997) state that there is a strong statistical connection
between common law countries and strong equity markets (Nobes & Parker, 2010,
Common Law Codified Roman Law (Code Law) Elements of both
England & Wales France Scotland
United States Germany South Africa
Canada Japan Philippines
Australia Spain Germany

29. 29
p34). In code law countries such as Germany, France, and Spain, there has been a
very significant provision of capital from banks. By contrast however, common law
countries such as the UK and US rely on millions of private shareholders to finance
the large number of companies within them (Nobes & Parker, 2010, p 33). This
difference in business organisation and ownership is influenced politically and
determines the extent to which governments can intervene and enforce requirements
thus affecting the way in which financial data is disclosed (Nobes & Parker, 2010
p34-36). For instance, due to the lack of outside shareholders in comparison to
common law countries, many European code law countries and places like Japan
have used external financial reporting to protect finance providers/creditors. (Nobes
& Parker, 2010, p34-36).
Taxation
The need for a calculation of taxable income (mainly government imposed)
demands a need for annual financial reporting (Nobes & Parker, 2010 p37). As a
consequence tax considerations form a major part of financial reporting rules. The
degree to which such taxing regulations determine accounting measurements can
also differ and be due to the legal systems of the countries as stated above. For
instance the study of deferred taxation has amounted to much controversy within the
UK and US accounting standards, whereas in Germany and France, this problem is
minor; in code law countries it is largely the case that the tax rules are the
accounting rules (Nobes & Parker, 2010, p37-39). Another example of differences in
taxation is that “asset impairments losses are tax deductible in Germany but not in
the UK” (Zeff, 2007; Nobes, 2006). As mentioned before, the consequence of this is
that a German company might prefer to use this as a means of tax deduction and
may be more willing to disclose such losses in their financial statements, but a UK

30. 30
company might not recognise such an impairment loss (Zeff, 2007). Many
companies in code law countries have notoriously focussed on reducing taxable
income and thus take advantage of options to report a lower accounting income
(Zeff, 2007). This conservative way of accounting was a result of the link between
taxation and financial reporting, but is becoming less relevant among the largest
corporations due to international competition.
Globalization
Since the Second World War there has been a globalisation of economic
activity (Nobes & Parker, 2010, p7). This has lead to a global spread of “not just
goods and services but also of people, technologies and concepts” (Nobes & Parker,
2010, p7). This in turn has caused an increased use of foreign financial information
and thus the need for international comparability of such financial information has
grown (Miles & Nobes, 1998). Capital markets have also become more globalised
and thus methods of internationalisation in the global stock markets have become
more prevalent. For instance, “cross border listings and the extent to which
international companies translate their annual reports into languages for the benefit
of foreign investors” (Nobes & Parker, 2010, p10). In most markets various
mechanisms such as these are used to cope with international differences in financial
reporting/accounting (Miles & Nobes, 1998). The main reasons for globalisation and
foreign listing within these international companies are to attract extra investors and
widen the pool of shareholders within these companies (Nobes & Parker, 2010,
p10). Accounting information is therefore becoming used as an international
communication device so that a broader level of investment can be acquired.

31. 31
Other factors
Stock market motivated countries such as the UK and US have a larger more
substantial body of private shareholders and public companies than countries that
have notoriously been “bank” driven (i.e. Germany, France, Italy, Spain etc). This
means that there is a higher need for auditors in countries like the UK and US (Zeff,
2007). Being a stock market driven country is a major factor as to why the
accountancy profession is found to be larger, stronger, and more competent than in
non-stock market driven nations (Zeff, 2007). Financial reports are thus more
detailed in stock market driven countries, as there is a greater need to supply timely
information to the larger investor dependent market.
The nature of the profession and how it can influence the practice of
financial reporting provides a considerable obstacle to significant harmonisation of
financial reporting between some countries (Nobes & Parker, 2010, p39-41). Nobes
& Parker (2010, p 41-42) proposes that an “important direct cause of financial
reporting differences is a two way split of countries into: (I) those with important
equity markets and many outside shareholders; and (II) those with a credit-based
financing system with relatively unimportant outside shareholders.” Common law
countries are associated with the equity/outsider system as it leads to more
“decision-useful’” financial reporting that affects large auditing professions and the
separation between tax and accounting rules (Nobes & Parker, 2010, p41-42).
Some factors also exist that may affect financial reporting internationally,
but are considered too vague to be useful. Factors such as language, religion,
education, geography and others have not been addressed. The history of a country
is also a major factor, although it is the history of the country’s equity market or

32. 32
legal system which is more relevant rather than the general history itself (Nobes &
Parker, 2010 p42). For instance, a good predictor of a former colonial country’s
accounting system is that it will be similar to that of its former colonial power
(Nobes & Parker, 2010, p42). This can be a significant factor and have a larger
bearing on the country’s financial reporting than other factors such as tax or the
corporate financing system. For example, some former British colonies in Africa
utilise an accounting system based on that of the UK, though lack any sort of equity
market (Nobes & Parker, 2010, p42). For many common wealth countries however,
the International Accounting Standards Board (IASB) has replaced the former
British influence over financial reporting and accounting (Nobes & Parker, 2010,
p42). Zeghal & Mhedhbi (2006) have also shown that in developing countries with
capital markets and Anglo-American culture, international standards in accounting
(i.e. IFRS) are more likely to be adopted.
7. Proposals
This dissertation can now draw on a summary of the research to this point
and establish a set of propositions with regards to the perceptions of sell-side
analysts. These propositions are suggested in the context of examining the London-
base equity analyst after the implementation of IFRS:
1. Sell-side analysts are not qualified accountants and do not recognise that
there are options for different accounting practices under IFRS.
2. Quarterly and annual reports are a useful source of information for sell-side
equity analysts.
3. Sell-side analysts rely more on non-accounting information than on actual
accounting data for information.

33. 33
8. ResearchProcess
Using a set of two case studies, this paper reports on interviews conducted
with two London based sell-side analysts working for two of the ten largest
international investment banks. Interviews for this study were exceptionally hard to
come by, and it can only be assumed that financial analysts are incredibly busy as
the role is very competitive. The two interviewees for this study were found over a
period of 5 weeks, whereby trial and error techniques in several different areas
finally produced results .The initial and obvious step was to contact large investment
firms via email and telephone. HR departments as well as all other relevant
departments with posted contact information were targeted. Unfortunately, this
process failed miserably as none of the parties contacted were remotely interested in
helping with this study. To seek other alternatives, resources from prior research
were utilized. An organization called the UK Society of Investment Professionals
was incredibly helpful for the research by Miles& Nobes (1998) and Clatworthy
(2007). However, this organization had merged with the CFA (Chartered Financial
Analyst) society of the UK and changed its name to such. The CFA society is an
international non profit organisation which issues certifications for Chartered
Financial Analysts (CFA) and other investment professionals. It is also the awarding
body for the Investment Management Certificate (IMC), the UK’s leading entry
level qualification for investment professionals and through the provision of training
and education, aims to promote high ethical and professional standards in the field
of investment (CFA Society, 2013). As emails and phone calls for large investment
banks had already failed, the first route for attempting introduction with this
organization was face to face contact by cold calling on their headquarters. Several
names and business cards of employees that might be able to help were collected

34. 34
and followed up with subsequent emails and phone calls. As this method also proved
to be quite fruitless, a second attempt was made to catch relevant employees in the
office. This study’s sense of urgency was noticed by several employees and one with
access to a probable interviewee finally agreed to help set up an interview. “Friend
of a friend” networking techniques were employed to locate another interviewee.
People in the investment banking field were contacted via LinkedIn, a business
social networking site, and followed up with via more networking. Several potential
candidates in the field were located; unfortunately none specialized in equity
analysis. Ultimately, following up on a few leads given by the first interviewee
finally materialized into an email response from the second interviewee, who was
returning from a holiday abroad. Interviewee number two agreed to meet before he
was due back in the office.
The interviewees were “self-selecting” in terms of the sense that they
personally agreed to take part in the study (Miles & Nobes, 1998).This problematic
process of finding interviewers may introduce a bias in the fact that certain analysts
are now excluded from the study i.e. the analysts who refused to respond because
they might be “opposed to assisting outside research” (Miles & Nobes, 1998).
Although, the initial goal was to produce several interviews for a larger set of data,
time constraints led this study to proceed with just 2 interview subjects. The two
interviewees worked for two of the top ten largest investment banks in the world.
The interviewees both worked in the food retail sector which involved foreign
markets. The findings of this study can therefore only be regarded as suggestive and
ultimately may not accurately portray UK equity analysts as a whole.
Interviewing the subjects rather than using questionnaires has a huge
advantage because it can improve the ability to collect a series of more relevant and

35. 35
richer answers by reducing ambiguity and focussing on more direct and interesting
lines of enquiry (Miles & Nobes, 1998). To alleviate the problem of interviewer
bias, a likely disadvantage of this method of enquiry, the interviews were recorded.
The interviews were informally structured and followed a set template of open
ended questions leaving room for follow up questions and further exploration.
Questions may not have been asked in the same particular order. The informal
approach to the interviews allowed the interviewees to feel comfortable when asked
more probing or personal questions about their work and therefore reduced the
difficulty in obtaining the answers needed.
9. Findings
The findings from the two interviews are further explained and cover the
three proposition topics. However, in order to properly understand the contemporary
circumstances of each proposition, this study has added a special section titled, The
Role of the Sell-Side Analyst. As is the goal of any exploratory case study, this
section is dedicated to understanding the contemporary responsibilities of the
interviewees, while shedding light on the real life context to which their roles entail.
Two sell side analysts were interviewed for this study. To recap, both analysts
worked for the London branches of two of the top ten largest investment banks in
the world. Each interviewee works in the Food Retail sector, and examples of
companies analysed by each analyst are listed in Table 2. Both interviewees
preferred to remain anonymous and will further be identified as R1 and R2. R1 has
worked as a sell-side analyst for 4 years while R2 has 3.5 years of experience. These
interviewees therefore fall into the category of analysts hired well after the

36. 36
mandatory adoption of IFRS by the EU. Their perceptions could therefore differ
from those who have worked in the field since the adoption of IFRS in 2005,
although due to extremely high industry turnover, such analysts are quite scarce.
This potential weakness and others in the study are discussed in the conclusion.
Company by Country of Origin-Food Retail
Table 2
9.1 The Role of Sell-Side Analysts
Each interview began with an open ended question asking each interviewee
to explain their role in the equity market. The following information is taken directly
from R1 and R2.
Sell-side analysts effectively liaise with companies and provide advice to
investors. So that’s buy-side clients, which are mostly large institutional
clients. That’s where we mostly get the revenue from. So that’s Fidelity,
Blackrock, Schroders, etc. (R1)
Company Country of Origin
1. Tesco UK
2. Carrefour France
3. Metro Germany
4. Morrisons UK
5. Sainsbury’s UK
6. Colruyt Belgian
7. Ahold Holland
8. Delhaize Belgian

37. 37
What we do on the sell side as an analyst, is we have to provide good ideas.
Because without ideas the sales people aren’t selling anything and the bank
isn’t making any money. (R2)
The interviewees stated that the ideas or advice they produce using the analysed data
is passed on to the buy-side analysts who are incentivised to act on stocks for the
interest of the institutional investment firms they work for. In essence the objective
of the advice/ideas from sell-side analysts is to influence whether a buy-side analyst
purchases, sells or places hold on a stock. The sell-side analyst makes money
(incentive) by being the liaison or acting as the “middle man” between successful
investment decisions; if sell-side analysts cannot provide the best ideas/advice then
their banks will not be able to broker the transactions the buy-side analysts are
interested in and no money can be made. The sell-side analyst is therefore heavily
incentivised to produce good ideas/advice and importantly must get these ideas
heard over other competing analysts.
You’re brokering ideas to buy-side analysts. The buy-side analysts are
putting their money and reputation on the line by investing in that company.
So as a sell-side analyst in a competitive world you’ve got to be able to
authoritatively say you know this business. (R2)
Using the prior research and work on Knowledge transfer (Lin 2005), this research
derived a basic model (figure 1), which represents the communication between the

38. 38
parties described as senders and receivers of financial information. The interviewees
further elaborated on aspects of figure 1 tying it in to specific roles and aims of sell-
side analysts in particular. As equity analysts, it was the interviewees’ jobs to
analyse data and information provided by listed companies (senders in our model);
they are then heavily incentivised to use this data to produce advice or provide good
ideas to pass on to buy-side analysts working for large institutional investment
companies. A few names of such institutional investment firms like Fidelity,
Blackrock and Schroders, were thrown around and these companies operate by
specialising in large asset based funds such as mutual or pension funds. Fidelity
Investments is one of the largest financial services groups in the world. As of
February 28, 2013, the company was currently managing over US$1.7 trillion of
assets (Fidelity Investments, 2013).
The interviewees each described the same main three methods of obtaining
information from companies:
1. The first method involves complete access to the company’s information. This
includes access to management i.e. CEOs, CFOs, and the investor relations team.
Let’s say, on the day of results at 7am their statement comes out. I’ve read it,
but I want to hear what the company has to say, so I call them up at 5
minutes past 7 and say hey, can you guide me through this. Well they can’t
guide, but they can help you narrow things down. (R2)

39. 39
If you really get on well with the management they can tell you stuff that’s
sort of not publishable. And you would never publish it because you have an
understanding; but it can just sort of shape you view of things. (R1)
Additionally, access to the physical retail locations in the form of store visits is also
an option. The major advantage of this access is that it allows for more detailed
probing and fact finding rather than just number crunching.
You’re building up a flavour of what the company does, why they do things,
and what the impact could be. (R2)
One interesting aspect of their work involved the use of corporate road shows. In
these road shows a sell-side analyst sets up a meeting between the companies and
institutional investors’ buy-side analysts. It presents an opportunity for buy-side
analysts to communicate directly with company CEOs/CFOs and investor relations.
It is through these meetings where the line of communication is able to essentially
cut out the “middle men” of sell side analysts and allows the sharing of sensitive
information between the two parties.
2. Quarterly reports are used by sell-side analysts as one way of obtaining a
company’s financial information. These reports contain unaudited financial results
often called preliminary results for that specific quarter of the year. The reports are
laid out in a manor advantageous to analysts and are often referred to as trading
statements. Facts and figures of a company’s performance are stated in the financial

40. 40
information of these reports and they can include notes from the management.
Quarterly reports allow the analysts to see trends in a company’s performance and
allow them to generate a forecast in models which are created and used for investor
presentations.
3. The final major method of information gathering is Investor Presentations.
Presentations are generally given by the CFO or CEO of the company. Details of
any specific changes or significant events i.e. supplier problems, mergers
&acquisitions, etc are also given at these presentations.
So I was talking to people in Pharma (Pharmaceutical Sector); for them it
was something like drug pipelines. It’s something that accountants don’t tag,
but it makes massive differences in the value of the company. That’s the sort
of information you’ll get in an Investor Presentation. (R1)
The key element to investor presentations is finding out the details that drive the
numbers in the trading statements. Quarterly reports or trading statements will come
out at 7am and presentations are usually held between 9am and 11am afterwards.
Questions, answers, and discussions are held in the presentation to gather more
information. It is at these presentations where the analyst must ask the right
questions to immediately gather information needed to create ideas for investors.
The next section lists the findings from the interviews for the contemporary analysis
of this paper’s proposals.

41. 41
9.2 Accounting Expertise and IFRS Perceptions.
The analysts were asked what academic or professional qualifications they had in
order to determine if they held any sort of accounting qualifications. R1 had a
degree in economics and R2 had a degree in business & computer science. Both
were CFA qualified and held no formal vocational accounting qualifications such as
an ACCA or ACA qualification. This supports proposition 1 in the fact that these
analysts are not qualified accountants. In the process of describing their roles as sell-
side analysts, the interviewees were asked several open ended questions to gauge
awareness of international differences existing under IFRS. The topics of
international company comparison were brought up between Carrefour (French),
Metro (German), and Tesco (British). Interviewees were asked if there were any
differences in the way one company establishes accounting numbers vs. any other
under IFRS.
No, no everything is the same between countries. Because it’s IFRS, it’s
basically everything excluding the US. (R1)
No, if it’s under IFRS I’m going to have to assume that the same accounting
policies are in place in each country. (R2)
To follow up on this line of questioning, the interviewees were asked about a
country’s culture and level of conservatism, and how it applied to their reporting.
Specifically they were asked about Germany’s Metro, and if they ever had to

42. 42
compensate for a level of conservatism in the reporting when comparing the
company to the UK’s Tesco.
As an analyst you write what you expect from a company. All companies give
conservative guidance on numbers as they always want to beat them. But
there are no cultural implications to that. (R1)
No, there are no cultural differences with large companies. Or at least I
never saw that. (R2)
These corroborating views also support proposition 1 and essentially tells us that
sell-side analysts do not acknowledge financial reporting differences under IFRS.
Since the overwhelming perception of the contemporary sell-side analyst seems to
be that accounting practices between countries do not differ, any apparent
differences do not seem to affect their work.
9.3 Usefulness of Quarterly and Annual Reports
Both analysts stated that they used quarterly reports when compiling data for
equity analysis. These reports are laid out in the form of trading statements, which
make the data more user friendly. However, one of the most astonishing findings in
this study was that both analysts stated they generally do not use audited annual
reports and regard the audited information to be relatively valueless. The methods
analysts use to ascertain information (described in section 9.1 The Role of Analysts)
rely mostly on the use of quarterly reports. This is because audited annual reports

43. 43
are released one to two months after the final results of the year are released to
investors.
So the thing is, when the annual report comes out, it’s obsolete. (R1)
At the investor presentation, you’ve already got the numbers from the
trading statements, you’ve got the investor presentation which has all the
extra information, and if you’ve got any further questions ask management,
and then you’re done. (R2)
So let’s say it’s the final results of the year, results come out, you’ve got all
your information, you’ve updated your model, and the stock price has
already moved. Two months later the annual report comes out. Does the
stock price move? No, because there is no new information coming to
market. (R1)
I used it (annual report) just to double check my numbers and for things like
PP&E, but it doesn’t move the market. (R2)
9.4 Usefulness of Non-Accounting Information.
Much like the previous segment, section 9.1 The Role of Analysts, has
already provided insight into how sell-side analysts obtain non-accounting
information from companies. Exploring the usefulness of non-accounting
information is important to the objectives, and highlights the gaps in knowledge that
must be filled with accounting information. Corporate road shows as mentioned

44. 44
before, introduce opportunities for companies to communicate directly with
institutional investors at events organized by sell-side analysts. These events can
allow for the transfer of sensitive information related to investment between the two
parties and temporarily circumvents the need for accounting information. However,
the purposes of the shows are indeed to illicit or maintain investment, and can
therefore be assumed to be inherently biased. The interviewees were asked about the
significance of non-accounting information and to gauge the importance of the three
main methods for obtaining information highlighted in section 9.1.
The numbers are used in everything. But let’s say our company’s key
supplier is soon to go bust. And we haven’t had anything delivered in the last
2 weeks, customers are going away faster than we thought, and there’s a
profit warning. The numbers couldn’t have caught that. (R1)
So the model is all about the financial reports. For the success of you as an
analyst, you want to focus on knowing the companies really well, so you
have something to say that’s interesting. And from the perspective of trying
to understand what the company might do in the future, you need to be on
those analyst trips with the company’s management. (R2)
So I’d say a third, a third, a third to a certain degree (in regards to the
importance of the three methods used to obtain information described in
section 9.1) . But, you can’t get anywhere if you have a sh*t model. You have
to make sure your model is very robust and that comes from the trading
reports. (R2)

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9.5 Summary of findings
Consistent with Miles & Nobes (1998), this explorative research indicates a
strong reliance on accounting numbers. A notable finding was that sell-side analysts
generally do not use audited annual reports. The perception that international
differences in reporting do not exist under IFRS is compounded by the analysts’
apparent perception that cultural differences (used with regards to the questions on
conservatism) do not exist between large international companies.
10. Conclusions and Implications
Exploring a seemingly incorrect perception among primary users of
accounting information that international accounting practices under IFRS are
universally implemented in different countries is the study’s main objective. The
research process undertaken has led to one main conclusion: There is no current
literature on how primary users of accounting information cope with international
differences under IFRS, because there is a perception among primary users that
there are no differences in accounting practices under IFRS.
The secondary objectives in this research were designed to complement the
main objective, and they are accomplished as follows:
Aim 1: The existence of international differences under IFRS has been
demonstrated using the prior literature. This information is presented throughout the
dissertation and is specifically referenced in section 1, section 6.1, and section 6.3.

46. 46
As noted in section 1, the findings of Kvaal (2010) show that companies will pursue
accounting practices previously adopted if scope for it is allowed.
Aim 2 & 3: As discussed in sections 9.1, 9.3, and 9.4, the role of a sell-side
analyst is to act as a liaison between listed companies and institutional investors.
Although it has been shown that differences in accounting still exist under IFRS,
there is a perception among analysts that there are no such differences in
international financial reporting. This perception seems to be innervated by the fact
that analysts are not qualified accountants so therefore would not recognise such
differences. Differences in financial reporting under IFRS seem to elude the work of
analysts, as it is assumed all accounting is the same under the principles put forth by
IFRS. Findings have shown that quarterly reports are a more useful source of
financial information for equity analysis than annual reports (which are often not
used at all) and that although analysts significantly rely on non-accounting
information, there is still a strong reliance on accounting numbers.
Research limitations
The major limitation in this research is the sample size. In order to obtain
more reliable information, a larger sample size of sell-side analysts should be
utilised. Unfortunately, due to time constraints, lack of funding, and the immense
difficulty in procuring test subjects, this limitation could not be solved in this study.
An additional problem with both interviewees is that they began their careers as
analysts in the post-IFRS era, and do not have experience conducting work when
international coping strategies were deemed necessary for the pan-European market.
This however, seemed to be the case with most contemporary analysts due to the
demanding nature of the job and the high employee turnover.

47. 47
Due to the lack of literature surrounding the work of financial equity
analysts, a full preparation for each interview was not possible. This led to an
agreement with interviewees for follow up questions. These however, were very
difficult to get answered, as the analysts were very busy. A larger sample size again
would probably have made it easier to obtain additional data from follow up
enquiries. Another limitation to this study was the lack of direct observation in the
work environment of the analysts. Any information gathered was from the analysts
themselves during the interview process and subject to interviewee bias on the
topics. Nevertheless this research should be regarded as reliable. The interview
subjects should be viewed as experts in their field, due to positions at two of the top
ten investment banks in the world. Thus the interviewees can be regarded as equally
or better informed than the average analyst/investor.
Implications
The results of this research show that accounting information is useful to the
work of sell-side analysts. However, any incorrect perceptions of sell-side analysts
with regard to financial information should be of great interest to institutional
investment firms and accounting bodies such as the IASB (International Accounting
Standards Board) and the CFA (Certified Financial Analyst) Society. Another major
issue to be further expanded upon is that of audited annual reports. If the most
significant primary users in equity markets are not interested in the information
provided by annual reports, then the resources involved in preparing them may need
be evaluated. Further research into the roles of financial analyst and their use of
accounting information should be a primary concern of the IASB and the CFA
Society.

48. 48
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