The moderating role of company life cycle on the relationship between readability of audit reports and readability of financial statements

Subject Areas : Accounting & Accountability

Ali Sardar Antiquechi ¹ , Alireza Mehrazeen ^{2 *} , Amir Shams ³ , Zahra Noori Tupkanloo ⁴

1 - PhD student of Accounting, Department of Accounting, Neyshabour Branch, Islamic Azad University, Neyshabour, Iran
2 - Department of Accounting, Islamic Azad University, Neyshabour Branch, Neyshabour, Iran.
3 - Department of Accounting, Neyshabur Branch, Islamic Azad University, Neyshabur, Iran
4 - Department of Economics, Neyshabur Branch, Islamic Azad University, Neyshabur, Iran

Received: 2025-01-26 Accepted : 2025-06-07 Published : 2025-07-28

Keywords: Audit report readability, company life cycle, financial statement readability,

Abstract :

Purpose: The disclosure of complex information in financial statements reduces readability, thereby hindering investors’ ability to process the information. This study investigates the moderating role of company life cycle on the relationship between audit report readability and financial statement readability.

Methodology: To test the research hypotheses, financial statements were extracted from the Tehran Stock Exchange website, related databases, Rahavard Novin software, and Stock Exchange Comprehensive Data. Data for companies were collected from 2015 to 2022. EViews software was used to analyze the relationship between the variables.

Findings: The findings indicate a positive and significant relationship between auditor report readability and financial statement readability. Conversely, the company life cycle exhibits a negative and significant association with financial statement readability. Importantly, the negative interaction effect between company life cycle (specifically, the growth stage) and auditor report readability suggests that the positive influence of clear auditor reports on financial statement clarity is diminished in companies experiencing growth.

Originality: Since the comparability of financial statements improves with the improvement of the life cycle in the maturity stage, it is expected that the readability of financial reporting will also enhance accordingly.

References:

بنابی قدیم، رحیم، و واعظ، سید علی (1400). بررسی رابطه شاخص مسئولیت‌پذیری اجتماعی با قابلیت مقایسه اطلاعات حسابداری در مراحل چرخه عمر شرکت. بررسی‏‌های حسابداری و حسابرسی، 28(1)، 1-30. doi: 10.22059/acctgrev.2021.316824.1008493
جباری، حسین، و نقدی، نریمان. (1395). رابطه بین ساختار سرمایه و چرخه عمر شرکت. پژوهش های حسابداری مالی و حسابرسی، 30(8)، 139-162. doi: 10.22051/jfm.2018.13671.1263
حیدرپور، فرزانه، رجب دری، حسین، و خلیفه شریفی، علی (1395). ارتباط بین چرخه عمر شرکت و خطر سقوط قیمت سهام. حسابداری و منافع اجتماعی، 6(4)، 1-22. doi: 10.22051/ijar.2016.2588
رضائی پیته نوئی، یاسر، و صفری گرایلی، مهدی (1397). خوانایی گزارشگری مالی و احتمال گزارشگری مالی متقلبانه. نشریه پژوهش های حسابداری مالی، ۱۰(4)، 43-58. doi: 10.22108/far.2019.113858.1337
رضوانی، فریبا، و برندک، سجاد (1398). خوانایی‌ گزارشگری‌ مالی و هزینه‌های حسابرسی. چشم انداز حسابداری و مدیریت، 2(18)، 112-126. https://www.jamv.ir/article_103820.html
ریاحی نژاد، محدثه، و توانگر، افسانه (1400). تأثیر فرهنگ سازمانی بر رابطه مدیریت سود و خوانایی گزارش‌های مالی. پژوهش های حسابداری مالی و حسابرسی، 52(13)، 87-114. doi: 10.30495/faar.2021.687681
مهربان پور، محمدرضا، آذر خوش، حمید، حسن زاده کوچو، محمود، و عربی، مهران (1399). تأثیر چرخه عمر واحد تجاری بر مدیریت سود از طریق فعالیت‌های واقعی. پژوهش های حسابداری مالی و حسابرسی، ۳۰(8)، 131-107. dor: 20.1001.1.23830379.1399.12.46.5.7
Abernathy, J. L., Guo, F., Kubick, T. R., & Masli, A. (2019). Financial statement footnote readability and corporate audit outcomes. Auditing: A Journal of Practice & Theory, 38(2), 1-26. doi: 10.2308/ajpt-52243
Ajina, A., Laouiti, M., & Msolli, B. (2016). Guiding through the fog: does annual report readability reveal earnings management?. Research in international Business and Finance, 38, 509-516. doi: 10.1016/j.ribaf.2016.07.021
Anthony, J. H., & Ramesh, K. (1992). Association between accounting performance measures and stock prices: A test of the life cycle hypothesis. Journal of Accounting and Economics, 15(2-3), 203-227. doi: 10.1016/0165-4101(92)90018-W
Asay, H. S., Elliott, W. B., & Rennekamp, K. (2017). Disclosure readability and the sensitivity of investors' valuation judgments to outside information. The Accounting Review, 92(4), 1-25. doi: 10.2308/accr-51570
Bakarich, K. M., Hossain, M., & Weintrop, J. (2019). Different time, different tone: Company life cycle. Journal of Contemporary Accounting & Economics, 15(1), 69-86. doi: 10.1016/j.jcae.2018.12.002
Biswas, P. K., Habib, A., & Ranasinghe, D. (2022). Firm life cycle and financial statement comparability. Advances in accounting, 58, 100608. doi: 10.1016/j.adiac.2022.100608
Bonabi Ghadim, R., & Vaez, S. A. (2021). Investigating the relationship between social responsibility index and financial statement comparability in the company life cycle stages. Accounting and Auditing Review, 28(1), 1-30. doi: 10.22059/acctgrev.2021.316824.1008493 [In Persian]
Boubaker, S., Gounopoulos, D., & Rjiba, H. (2019). Annual report readability and stock liquidity. Financial Markets, Institutions & Instruments, 28(2), 159-186. doi: 10.1111/fmii.12110
Coulton, J. J., & Ruddock, C. (2011). Corporate payout policy in Australia and a test of the life‐cycle theory. Accounting & Finance, 51(2), 381-407. doi: 10.1111/j.1467-629X.2010.00356.x
da Costa, V. B. F., Bitencourt, L., Dias, B. H., Soares, T., de Andrade, J. V. B., & Bonatto, B. D. (2025). Life cycle assessment comparison of electric and internal combustion vehicles: A review on the main challenges and opportunities. Renewable and Sustainable Energy Reviews, 208, 114988. doi: 10.1016/j.rser.2024.114988
Dickinson, V. (2011). Cash flow patterns as a proxy for firm life cycle. The accounting review, 86(6), 1969-1994. doi: 10.2308/accr-10130
Doyle Jr, J. J. (2007). Child protection and child outcomes: Measuring the effects of foster care. American Economic Review, 97(5), 1583-1610. doi: 10.1257/aer.97.5.1583
Faff, R. W., Gray, S., & Tan, K. J. K. (2016). A contemporary view of corporate finance theory, empirical evidence and practice. Australian Journal of Management, 41(4), 662-686. doi: 10.1177/031289621663203
Fakhfakh, M. (2016). Linguistic performance and legibility of auditors’ reports with modified opinions: An advanced investigation based on the ISAs on audit reports. Asian Review of Accounting, 24(1), 105-130. doi: 10.1108/ARA-02-2014-0021
Firtel, K. B. (1998). Plain English: A reappraisal of the intended audience of disclosure under the Securities Act of 1933. Southern California Low Review, 72, 851. https://kipdf.com/plain-english-a-reappraisal-of-the-intended-audience-of-disclosure-under-the-sec_5ac2a7d11723dd4dc97899dd.html
François, T. (2015). When readability meets computational linguistics: a new paradigm in readability. Revue française de linguistique appliquée, 20(2), 79-97. https://shs.cairn.info/article/E_RFLA_202_0079
Freeman, J., Carroll, G. R., & Hannan, M. T. (1983). The liability of newness: Age dependence in organizational death rates. American Sociological Review, 692-710. doi: 10.2307/2094928
Habib, A., & Hasan, M. M. (2017). Firm life cycle, corporate risk-taking and investor sentiment. Accounting and Finance, 57(2), 465–497. doi: 10.1111/acfi.12141
Habib, A., & Hasan, M. M. (2019). Corporate life cycle research in accounting, finance and corporate governance: A survey, and directions for future research. International Review of Financial Analysis, 61, 188–201. doi: 10.1016/j.irfa.2018.12.004
Hanks, S. H. (1990). The organization life cycle: Integrating content and process. Journal of Small Business Strategy, 1(1), 1-12. https://jsbs.scholasticahq.com/article/26827.pdf
Hansen, J. C., Hong, K. P., & Park, S. H. (2018). Accounting conservatism: A life cycle perspective. Advances in Accounting, 40, 76-88. doi: 10.1016/j.adiac.2017.10.001
Heidar Poor, F., Rajab Dorri, H., & Khalife Sharifi, A. (2016). The relationship between companie's life cycle and the stock price crash risk. Journal of Accounting and Social Interests, 6(4), 1-22. doi: 10.22051/ijar.2016.2588 [In Persian]
Hesarzadeh, R., & Rajabalizadeh, J. (2019). The impact of corporate reporting readability on informational efficiency. Asian Review of Accounting, 27(4), 489-507. doi: 10.1108/ARA-11-2018-0203
Jabbari, H., & Naqdi, N. (2016). The relationship between capital structure and the company's life cycle. Financial Accounting and Auditing Research, 30(8), 139-162. doi: 10.22051/jfm.2018.13671.1263 [In Persian]
Krishnan, G. V., Myllymäki, E. R., & Nagar, N. (2021). Does financial reporting quality vary across firm life cycle?. Journal of Business Finance & Accounting, 48(5-6), 954-987. doi: 10.1111/jbfa.12508
Lehavy, R., Li, F., & Merkley, K. (2011). The effect of annual report readability on analyst following and the properties of their earnings forecasts. The Accounting Review, 86(3), 1087-1115. doi: 10.2308/accr.00000043
Lo, K., Ramos, F., & Rogo, R. (2017). Earnings management and annual report readability. Journal of Accounting and Economics, 63(1), 1–25. doi: 10.1016/j.jacceco.2016.09.002
Marshall, G. L., Bayaz-Ozturk, G., Kahana, E., Gallo, W. T., & Seghal, A. (2022). Dynamics of financial hardship in the United States: Health and Retirement Study 2006–2016. Journal of Gerontological Social Work, 65(3), 241-251. doi: 10.1080/01634372.2021.1953662
Mehrabanpour, M, Azar Khosh, H, Hassanzadeh Kocho, M., & Arabi, M. (2019). The effect of business unit life cycle on profit management through real activities. Financial Accounting and Auditing Research, 30(8), 107-131. dor: 20.1001.1.23830379.1399.12.46.5.7 [In Persian]
Miller, D., & Friesen, P. H. (1983). Successful and unsuccessful phases of the corporate life cycle. Organization studies, 4(4), 339-356. doi: 10.1177/01708406830040040
Mohammadzadeh Moghadam, H., Salehi, M., & Hajiha, Z. (2025). The effect of financial statement readability on audit report readability. International Journal of Finance & Managerial Accounting, 10(39), 215-232. dor: 20.1001.1.23830379.1399.12.46.5.7 [In Persian]
Pound, G. D. (1981). A note on audit report readability. Accounting & Finance, 21(1), 45-55. doi: 10.1111/j.1467-629X.1981.tb00028.x
Quinn, R. E., & Cameron, K. (1983). Organizational life cycles and shifting criteria of effectiveness: Some preliminary evidence. Management science, 29(1), 33-51. doi: 10.1287/mnsc.29.1.33
Rezaei Pitehnoei, Y., & Safari Graili, M. (2018). Readability of financial reporting and the probability of fraudulent financial reporting. Journal of Financial Accounting Research, 10(4), 43-58. doi: 10.22108/far.2019.113858.1337 [In Persian]
Rezvani, F., & Barandak, S. (2020). Financial report readability and audit fees. Journal of Accounting and Management Vision, 2(18), 112-126. https://www.jamv.ir/article_103820.html
Riahi Nejad, M., & Tavangar, A. (2021). The effect of organizational culture on the relationship between earnings management and readability of financial reports. Financial Accounting and Auditing Research, 52(13), 87-114. doi: 10.30495/faar.2021.687681 [In Persian]
Ruiz-Valero, L., Arceo, A., Kesik, T., Touchie, M., & O'Brien, W. (2025). Life cycle assessment of housing and neighbourhoods: A systematic review. Renewable and Sustainable Energy Reviews, 210, 115249. doi: 10.1016/j.rser.2024.115249
Salehi, M., Zimon, G., & Seifzadeh, M. (2022). The effect of management characteristics on audit report readability. Economies, 10(1), 12. doi: 10.3390/economies10010012
Smith, M., & Taffler, R. (1992). Readability and understandability: Different measures of the textual complexity of accounting narrative. Accounting, Auditing & Accountability Journal, 5(4), 84-98. doi: 10.1108/09513579210019549
Tan, H. T., Wang, E. Y., & Zhou, B. (2015). How does readability influence investors' judgments? Consistency of benchmark performance matters. The Accounting Review, 90(1), 371-393. doi: 10.2308/accr-50857
Wernerfelt, B. (1985). The dynamics of prices and market shares over the product life cycle. Management Science, 31(8), 928-939. doi: 10.1287/mnsc.31.8.928