Intellectual capital disclosure: evidence from UK accounting firms
| Pages | 768-786 |
| DOI | https://doi.org/10.1108/JIC-06-2017-0079 |
| Published date | 26 June 2018 |
| Date | 26 June 2018 |
| Author | Angus Duff |
| Subject Matter | Behavioural accounting,Organizational structure/dynamics,Accounting & Finance |
Intellectual capital disclosure:
evidence from UK
accounting firms
Angus Duff
Department of Accounting, School of Business and Enterprise,
University of the West of Scotland, Paisley, UK
Abstract
Purpose –The purpose of this paper is to examine the extent and quality of voluntary intellectual capital
disclosures (ICD) by professional accounting firms (PAFs) in the UK.
Design/methodology/approach –The research method adopted for this study is content analysis
considering the ICD in firms’annual reports, corporate social responsibility reports, websites and recruitment
materials. The sample for this research is based on 20 PAFs ranked by fee income. The paper employs
institutional theory as its theoretical lens.
Findings –The findings of this paper show that ICDs vary across different forms of reports. The most
frequently reported disclosure category is human capital, while the least reported category is internal capital.
Monetary disclosures are most likely to relate to internal capital, while pictorial disclosures are most likely to
relate to human capital.
Research limitations/implications –The sample size of the study is relatively small reflecting the
extreme market concentration of accounting services in the UK and internationally. Future research can
conduct a longitudinal study to capture the trend of reporting practices and consider narrative and discursive
approaches to ICD.
Originality/value –No previous studies of intellectual capital (IC) disclosure have considered ICDs in
professional service firms that are in themselves rich sources of human capital. Furthermore, the
investigation uses a wide range of communications and assesses monetary, non-monetary, narrative and
pictorial disclosures. This research extends both the IC disclosure and PAFs’literatures.
Keywords Intellectual capital reporting, Institutional theory, Accounting industry
Paper type Research paper
1. Introduction
This paper aims to contribute to the empirical understanding of intellectual capital
disclosure (ICD) within professional accounting firms (PAFs) in the UK and quantify their
empirical relationship. This is achieved by investigating the ICD practices of the largest 20
professional service firms (firms) providing accounting-related services in the UK.
Significant recognition has been given to the role intellectual capital (IC) plays in
determining organisational strategy and value creation. Businesses today are increasingly
dependent on knowledge-based resources, rather than on the traditional production of
wealth using industrial, tangible assets (Ricceri, 2008). Toms (2002, p. 258) suggests that
“intangible asset creation occurs through enhanced reputation and disclosure influences the
external perception of reputation”.
PAFs are chosen for the purposes of this investigation for three reasons. First, it is the
knowledge-intensive nature of advisory work that requires the production of intellectual
resources. Consequently, PAFs are expected to be rich sites of IC. Second, firms also fulfil a
significant public interest mission (Dellaportas and Davenport, 2008; Lee, 1995; Mitchell
et al., 1994), in their provision of independent audit and assurance services, which is a core
service line for the accounting industry. The public interest role is performed by
undertaking an audit and assurance exercise funded by the client, but for the benefit of
investors, employees, regulators and other interested third parties. Consequently, the
auditor acts as a legitimacy agent and, by virtue of their reputation in the market, as a
Journal of Intellectual Capital
Vol. 19 No. 4, 2018
pp. 768-786
© Emerald PublishingLimited
1469-1930
DOI 10.1108/JIC-06-2017-0079
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1469-1930.htm
768
JIC
19,4
competent and independent third party convey legitimacy to their client. PAFs aim to
enhance their reputation, allowing the production of quasi-rents that enable them to charge
a premium for their services relative to lower quality suppliers (Arruňada, 1999; Duff, 2009).
These quasi-rents allow the maximisation of IC and partner equity. Third, the accounting
industry trains large numbers of graduates each year, adding to the industry’s human
capital. This investment in training is considerable, as is its impact on the UK economy.
The paper’s contribution occurs in two ways. First, a theoretical contribution whereby
the construct of prestige from the institutional theory (IT) literature is adopted to provide an
interpretation of observed patterns in ICD practice in the accounting industry in the UK.
Specifically, how firms use ICD to convey legitimacy, status and reputation to those
evaluating audiences who consume firms’corporate communications. Second, it makes an
empirical contribution through a consideration of three research questions: whether the
frequency of ICDs is related to firm size; how ICDs are distributed in different forms of
corporate reports produced by the firms; and a consideration of the relationship between the
form of disclosures and the incidence of ICDs.
The research has three significant and attendant findings. First, the business of
communicating IC is an antecedent of communicating legitimacy, status and reputation
within and about the accounting industry. Second, there exist a wide range of media aimed
at many and varied different audiences who consume the ICDs. These include clients,
employees and talent considering joining the firm[1]. Third, many ICDs that are presented in
websites and recruitment materials are produced in the hope of recruiting high-quality
graduates that the industry requires to operate and be globally competitive against other
professional service advisors.
This paper is structured as follows. Section 2 discusses ICD and the accounting industry.
Section 3 describes the theoretical framework for the analysis: legitimacy, status and
reputation which collectively describe prestige. Section 4 provides an overview of prior
empirical research. An explanation of the content analytic method used follows in Section 5.
Section 6 reports the findings. The final section provides the concluding comments.
2. The accounting profession: IC definitions and literature review
2.1 The UK accounting industry
The UK accounting industry is characterised by a high degree of market concentration, with
the four largest firms (the Big Four) earning fee income of nearly £9 billion (Accountancy
Age, 2015) (see Figure 1). By contrast those 46 firms ranked 5-50 in terms of fee income,
2,814
2,550
1,874
1,860
515
395
294
214
145
137
82
71
65
64
53
46
45
44
34
32
1
Fee income £M
Firm rank
Source: Adapted from Accountancy Age (2015)
UK PAFs ranked by 2014 fee income
201918171615141312111086975432
Figure 1.
Largest UK
accountancy firms
by fee income
769
Intellectual
capital
disclosure
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