Financial disclosure for diversified operations : a critique of the orthodox model, and some tentative proposals

The aggregative information disclosed by all entities will represent a lower quality of reporting in the case of diversified organisations because it will be more difficult to place the information in context. However, the boundaries of industrial activity are poorly defined and this will cause cause substantial difficulties for any attempt to restore the quality of information disclosed by diversified organisations. This study is based on the view that financial reports should be veritable (ie be shown to have real-world referents). The orthodox model for reporting the results of diversified operations requires that allocations be made according to the criterion of benefit. In the, almost inevitable, presence of interaction, such allocations cannot have real-world referents and thus reports drawn up using the orthodox model cannot be veritable. Empirical evidence suggests that the attempt to require the publication of such reports in the UK has yielded uneven and inconsistent information. The treatment of interaction in the literature dealing with the orthodox model is confused. If interaction effects can be identified and measured, they can be disclosed separately or summarised by means of the range of ambiguity. Reports incorporating this information are likely to be highly complex and difficult to interpret. A variety of proposals for dealing with the problems of allocation In financial reports is examined in the context of diversified operations, but the proposals are found to be unsatisfactory. Some tentative suggestions concerning the search for a veridical reporting scheme are made. Finally, the boundary condition management model is developed. Since diversification causes a loss of quality ox Information available to outside parties, it is argued that such parties should be given some control over the process, together with the necessary information. Internal boundary condition management should provide some scope for improving performance' and disclosures relating to this improvement should be made.