The influence of full compliance with the Companies Act on the knowledge‐creating potential of the directors’ report

Accounting is a complex system, comprising numerous items and transactions that are interrelated in various ways. Management’s decisions are reflected in accounting information. The user of accounting information has a real need to comprehend such information in order to make informed decisions. The research reported in this article reveals that when the directors’ report fully complies with the letter and context of the Companies Act, it should be used as: a communication tool to enhance comprehensibility; as a mechanism to explain the economic reality of the company; and as a vehicle to reduce the gap between accounting information and the user. It should therefore be used as a knowledge‐creating statement, which the various stakeholders of the company can tap into.