Corporate Governance and Informational Disclosure on Internet Financial Reporting: The Saudi Arabia Evidence

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Abstract

The proposed study aims at in-depth understanding of the existing correlation between corporate governance and transparent disclosure of the internet financial reporting (IFR) in Saudi Arabian companies. This relationship will be investigated in an empirical research in order to clarify the reliability of possible impacts of corporate governance techniques on the disclosure transparency in IFR.

The researcher will attempt to explore the phenomenon on “how” and “by what means” the Corporate Governance can affect the process. The paper will take into consideration a number of aspects related to corporate governance and financial disclosures such as shareholders’ rights, ownership structure, board composition and audit committee characteristics.

These aspects will act as tools for measuring the CG features, procedure and outcomes in the proposed research. The research is a qualitative study that aims at describing the relationship between CG and transparency of disclosures using IFR in selected companies in the country (KSA). A set of research questions is developed to investigate the phenomenon based on a number of variables identified in the proposal.

The anticipated results are expected to develop additional knowledge on the phenomenon. For instance, it is expected that is a well-organised CG will give investors and shareholders an opportunity to find all necessary data about an intended company and research its prospects. Transparency will allow investors make quality and informed decisions on investment. It is also expected that process will be beneficial to regulators and the companies themselves.

Topicality and Aim of the Study

In the modern corporate behaviour, transparency in financial reporting is a critical business aspect to companies, shareholders and regulators. Corporate reporting allows existing shareholders and potential investors to analyse the data provided on the annual reports of an organisation. In addition, it gives them an opportunity to research its investments’ strengths, weaknesses, threats and opportunities within the existing business environment.

In case the above-indicated process is followed with strictness, investors become aware of the state of affairs within a firm, which enables them to make informed decisions on investments. Maintaining transparency in the corporate reporting is captivating for regulators as well. In this way, these officials find it easier to detect illegal behaviours and protect the investors’ interests (Ho & Wong, 2001).

Moreover, it is worth noting that organisations themselves gain advantages from the enhanced corporate governance (CG) through the transparent reporting. In particular, they are able to decrease expenditures through reduction of informational gaps within the prevailing investor-company relationship.

Research Project

The proposed study is a continuation of a personal research and professional practical experience aimed at achieving an in-depth understanding of the existing correlation between corporate governance and transparent disclosure of the internet financial reporting (IFR) in Saudi Arabian companies. The afore-stated relationship is explored to clarify the reliability of possible impacts of corporate governance techniques on the disclosure transparency in IFR.

Additionally, this investigation will attempt to provide details on “how” and “by what means” the CG can affect the process analysed. Such components as shareholders’ rights, ownership structure, board composition and audit committee characteristics will be considered in order to measure the CG features, procedure and outcomes while conducting research.

Main Goals of the Research

The central focus of the research is to develop an in-depth understanding of the impact of Internet Financial Reporting on the quality of corporate governance in Saudi Arabia. In particular, the research will aim at describing the impact of IFR on enhancing transparency in reporting, which is a characteristic of good CG in modern companies.

As such, the study hopes to show the impact of IFR in enhancing transparency and effectiveness of reporting, which will indicate the relevance of CG in providing the right information to the shareholders, investors, the company and regulators based on evidence from Saudi Arabia. Thus, the study will achieve its goals by approaching the problem in three dimensions: (a) ownership structure of the companies under analysis, (b) ownership board structure and (c) total debt over the total asset.

The Review of Academic Literature

Corporate governance includes the set of rules and practices in the organisation that are executed to support the balance of all shareholders’ interests in order to ensure the sufficient return-on-investment (ROI) measures. To be involved in the CG process, numerous parties use contractual agreements. Overall, CG is based on several related contents.

This section will pay a lot of attention to three principle parties of the CG process: shareholders, corporate directors, executive managers (Shleifer & Vishny, 1997). A sufficient number of academic sources have considered the effects of CG mechanisms and disclosure of corporate organisations in numerous dimensions, involving disclosure of quality, timing, and tendency in corporate finance (agency theory) among other issues.

Rahman (2012) has indicated that the use of the internet as a reporting tool refers to the firm’s high quality since it presents itself as up-to-date and advanced technique compared to traditional firms (p. 1). As a result, companies get particular benefits from the process. For instance, it leads to an enhanced market exposure. Ojah and Mokoaleli-Mokoteli (2012) have researched the interconnectedness between IFR and CG processes on the international level.

The scholars have concluded that it is possible to eliminable several agency problems, specifically in providing assurance to company shareholders that managerial decisions are value-enhancing rather than self-serving (Ojah & Mokoaleli-Mokoteli, 2012, p. 69). The World Wide Web (or the Internet) is a common and contemporary technical advancement applied by numerous individual investors when collecting information about the existing investment opportunities and even trading shares (Spiro & Baig, 1999).

Additionally, firms use such internet tools as websites in order to share and communicate their financial information or improve communication with their investors (Ashbaugh, Johnstone & Warfield, 1999). Furthermore, Hodge, Kennedy and Manies (2004) have stressed that the transparency of the internet information disclosure has become a significant facilitator influencing the investors’ decisions.

With respect to Sarbanes-Oxley Act (SOX) of 2002, a sufficient number of barriers to non-effective and non-transparent CG have now been outlined in the American business law (Securities and Exchange Commission, SEC, 2003). Consequently, the statute has encouraged companies to put an emphasis on the corporate transparency in terms of financial reporting as well as the quality of their disclosures (Strine, 2006).

Knowldge gaps identified in literature review

From an analysis of the existing knowledge in IFR in Saudi Arabia, it is evident that some aspects need additional clarification to develop a good understanding of the subject. For instance, this review has shown that the relationship between internet-based reporting and shareholder’s rights Saudi Arabia is not well understood because few studies have attempted to describe this phenomenon.

Secondly, there is a scarcity of information that attempts to explain the relationship between the levels of an organization’s internet-based reporting and its managerial ownership. Thirdly, this review indicates that the relationship between the levels of an organization’s internet-based reporting and institutional ownerships in KSA is lacking.

Studies that need be expanded

This study will be based on previous studies that have attempted to explore the topic. However, the proposed study will be primarily based in KSA. The study by Ashbaugh, Johnstone and Warfield (1999) provides an important background for the proposed study. The proposed study will expand the previous knowledge developed in similar studies by Hodge, Kennedy and Manies (2004). In addition, it will improve the evidence collected by other researchers such as Rahman (2010).

Aims of the study

To investigate the relationship between a firm’s internet-based reporting and the shareholder’s rights.
To investigate the relationship between the levels of an organization’s internet-based reporting and its managerial ownership.
To investigate the relationship between the levels of an organization’s internet-based reporting and institutional ownerships.

Research Questions

The paper will achieve its objectives by limiting the research to answering specific research questions. Although the research questions are only four, they cover a wide area of research that makes the scope of this study-

general;
fundamental reporting;
corporate social responsibility reporting; and
corporate governance reporting elements.

The study will strive to answer the following research questions:

What is the relationship between a firm’s internet-based reporting and the shareholder’s rights?
What is the relationship between the levels of an organization’s internet-based reporting and its managerial ownership?
What is the relationship between the levels of an organization’s internet-based reporting and institutional ownerships?
What is the relationship between an organizational internet-based disclosure and proportion of independent directors sitting on its organizational board?

With the help of the above-indicated questions, it is possible to ensure the online presence and disclosure of IFR on the firm’s operations. To obtain the information required, the researcher will explore data accessible on the organisation’s primary website. If there is no such a source available, financial reporting within secondary websites will be analysed.

Research Methodology

Overall, the given paper will follow the qualitative study requirements, but it will also involve a practical research component aimed at exploring the questions as discussed in the previous section and measure the CG characteristics throughout Saudi Arabian companies. In research, a qualitative study aims at describing the phenomenon in question using data collected from its aspects associated with quality.

This is in contrast to quantitative research that focuses on quantities or numbers. In addition, it is worth noting that qualitative research is important in the proposed study because it allows the researcher to use a smaller number of target participants/samples compared to quantitative studies that focus on large numbers of samples. The number of companies to be used as a sample in the Saudi Arabian study proposed herein is expected to be small due to time constraints and the laborious process involved.

The need for a small sample

A small sample is necessary for the proposed study for a number of reasons. For instance, the research problem involves the entire financial system in Saudi Arabia. Noteworthy, the process of reporting is an important task in all financial companies in the country, which means that the research will need to focus on the wide scope.

Secondly, the number of institutions that apply internet reporting is relatively large, yet the proposed study will be conducted under constraints of time and resources. A small sample is necessary as a representative of the entire population of institutions that is targeted. Moreover, the reporting process is relatively similar, which reduces the need for a large sample for the study.

It is important to note that qualitative study has the capacity to provide in-depth and rich information from the data collected, which is sometimes difficult with quantitative studies. For instance, the small number of participants allows the researcher to understand each sample in-depth, which is impossible when a large number of samples are used.

The research will be founded on the analysis of Saudi Arabian firms’ IFR information available online. It is to be an empirical inquiry focused on a contemporary phenomenon – internet financial reporting – within its real-life context. The size of the sample will be specified in the process of data collecting.

The research methodology will be organised to provide a detailed description of the web-based data on firms’ financial state and activities. The aim is to provide a thorough argumentation focused on the thesis statement of this research. It also aims at clarifying the IFR effectiveness for stakeholders and outlining possible improvements in the country’s business context.

Moreover, it will be possible to compare the findings of previous researchers in the chosen field in terms of international and/or country-specific characteristics of the IFR to arrive to the generalised conclusions.

Key Problems for Investigation May Include:

Corporate governance in general, the informational disclosure and the correlation between two concepts.
Investigation related to the level of information demand with regard to the CG on the grounds of Saudi Arabia.
The principle information source on the core elements of the research available for both shareholders and investors.
Whether there is a connection between the CG concept and the transparency of IFR in the firms within the country chosen or not?
The exploration of the either positive or negative impacts of the managerial ownership proportion on the transparency of IFR in Saudi Arabian companies.
The clarification in terms of whether the block ownership structure is able to cause negative or positive effect on the IFRtransparency.
Understanding negative/positive consequences of the data released via the IFR on the company’s size, profitability, growth as well as negative relation to level of asymmetric information throughout the corporate organisations in Saudi Arabia.

Some Concerns Related to the Research Questions that Can Arise:

1. Regardless the significance of CG, there is a limited number of academic studies regarding the problem analysed taking into account the illustrative material from both developing countries in general and Saudi Arabia in particular.
2. Applying improper proxies can lead to false research results.
3. Inappropriate data declaration by the firms involved in the IFR process.

The Set of Methods Applicable for the Exploration

The researcher will operate the variables involved in the study – financial data on the firm’s available online, instruments necessary to collect the data and those to process the information obtained. Therefore, the central aspect used in the scope of the given project will be the researcher’s observations.

The information acquired will be critically evaluated and compared to the findings of the previous studies on topic (critical analysis). The results of observation and analysis will be described in detail. The researcher will also explain variation in the textual data obtained (e.g. why and what components of necessary data are highlighted on the web, how it affects shareholders’ activity and so forth) and specify the relationships between information available and stakeholders’ decision-making.

Potential Outcomes of the Given Study

The researcher will focus on a detailed analysis of information obtained and research methods applied in order to explain the stated hypotheses. The core purpose of the given exploration is to develop an understanding the relationship between disclosure of information and the CG level within Saudi Arabian companies.

The answers to the research questions will be gained through a critical analysis. The results obtained will assist in identifying the level of consistency/inconsistency with the earlier scholarly sources examining the subject of the given research. As a result of the study conducted, it will be possible either confirm or refute the hypotheses outlined. The transparency in terms of corporate reporting (CR) is vital to firms, shareholders and regulators.

In case CR process is organised, investors and shareholders will be given an opportunity to find all the necessary data about a company and research its prospects to determine its worthiness as a profitable investment. Furthermore, transparency will aid potential investors in making quality, effective and valuable decisions. Additionally, this process will be beneficial to regulators.

Specifically, market regulators will gain an improved capacity to detect illegal behaviours and protect the investors’ interests. Besides, corporate organisations will get advantages resulting from transparency in the share market. For instance, they will gain a capacity to reduce their capital because of decrease of the asymmetry information between companies and investors.

The study outcomes will be of great help in finding answers to research questions set. Afterward, it will be possible to clarify consistency/inconsistency of the findings of this research as compared to the previous studies within the chosen scientific field.

This will be done in respect to the relationships between the disclosure of information on Saudi Arabian Company’s website and the level of corporate governance. The evidence from the four hypotheses considered will support the perspective highlighted.

Sources for Obtaining Information

The researcher is about to consult a wide range of sources of information:

Journals in-print (for instance, Update, Program, Library Trends, Library Review);
Web-based gateways and databases (like OCLC, BIDS, OMNI, BUBL);
Standard-making and regulatory bodies (such as UKOLN, W3C, SO, JISC);
Journals available online (for example, Ariadne, Biblio-Tech Review);
Publications by the government and other regulators (HESA, HEFCE, RNIB, etc.);
Monographs and other large scientific works concerning library management, tendencies in higher education in the field and e-learning;
Texts for referencing, such as ONS publications.

The Outline of the Research Progression

Year one: The period will be marked with such activities as research training, the review of the academic sources, and assistance in refining of the major research questions. Additionally, the investigator will ensure establishing contacts with disability support staff and e-learning personnel within other facilities.
Year two: The period will be devoted to the piloting and development of techniques and methods that are likely to be applied in order to conduct the given study.
Year three: The principle empirical phase will be performed.
Year four: During this period, supplementary review of the peer-reviewed sources on the topic as well as their analysis will be held.
Year five: The research conducted will be written, edited, and proofread.

Appendix

General variables to be investigated in the study:

Variable ID	Variable name	Variable context/description
Var. 1	Website	Does the company have a specific and operational website?
Var. 2	Secondary website	When the organisation has not launched a primary website yet, are there secondary websites able to present the necessary financial information about it?
Var. 3	Annual financial reports	In case the company operates its own website, does it have annual reports/interim reports/other financial data documents available on this web-source?
Var. 4	Coverage of the analysts	Is there a link providing access to a list of analysts covering the company’s financial performance?

Table 2: General reporting variables.

The study will investigate the aspects of fundamental reporting that are made available on the internet by firms in Saudi Arabia. The aim is to investigate whether the companies make their crucial annual reports available for investors, analysts, shareholders and controllers.

In this case, these variables concern the availability of a company’s crucial financial accounts such as audit reports, income statements, statements of shareholders’ equity, balance sheet and cash flow statements. In this context, the following variables have been identified for the proposed study:

Variable ID	Variable name	Variable context/description
Var. 5	Audit report	Are the company’s audit reports available online?
Var. 6	Statement of the chief executive officer	Is it possible to access the Chief Executive Officer’s statements as part of its financial documentation in the website?
Var. 7	Segmental data	Are the firm’s segmental data depicted in annual reports?
Var. 8	Stock information	Does prime/secondary websites contain any stock data on the company analysed?
Var. 9	Subsidiaries, joint ventures and affiliations	Does the organisation make information with regard to its subsidiaries, joint ventures, affiliates available?
Var. 10	Corporate Income statement	Does the firm make its Income/ P& L statements accessible via the World Wide Web?
Var. 11	Statement of Shareholders’ equity	Can the company’s changes statement concerning shareholder’s equity be researched in the prime/secondary website?
Var. 12	Corporate Balance Sheet statement	Does the organisation own an online Balance Sheet?
Var. 13	Corporate Cash Flow Statement	Is there a web-based Cash Flows statement of the company?
Var. 14	Dividend information	Is any dividend information accessible through the internet?
Var. 15	Accounting standards	What accounting standards have been used by the firm investigated concerning its consolidated accounts?
Var. 16	Notes on Corporate Financial Reports	Are there online notes to the statements with respect to the given organisation?

Table 2: Variables for fundamental reporting.

Corporate social responsibility (CSR) reporting variables are investigated by answering the following variables:

Variable ID	Variable name	Variable context/description
Var. 17	Employee status and working conditions	Are there online financial data available in terms of the firm’s number of employees, working conditions and value-added statements?
Var. 18	Environmental concern	Does the company’s IFR highlight the environmentally friendly policies?

Table 3: Corporate social responsibility (CSR) reporting variables.

Corporate governance reporting variables incorporated into the IFR will be assessed in accordance with questions listed below:

Variable ID	Variable name	Variable context/description
Var. 19	Director’s remuneration	Is there Director’s remuneration available on the prime/secondary website?
Var. 20	CG policies	Are any CG policies by the company under analysis disclosed online?
Var. 21	Directors biographies	Are the firm’s directors biographies provided in the internet sources?
Var. 22	Corporate Governance committees	Is there any information accessible online with respect to the company’s Corporate Governance committees?
Var. 23	Committee charter	Can any committee charters’ data be researched online?
Var. 24	Code of conduct	Is there a web-based code of conduct provided by the company?
Var. 25	Article of Incorporation	Is it possible to access an online version of an Article of Incorporation of the given organisation?
Var. 26	Risk management policies	Can any risk management policies be investigated through the internet tool?

Table 4: Corporate governance reporting variables.

All research questions previously outlined will be analysed through the lens of the qualitative features of financial data.

References

Ashbaugh, H., Johnstone, K., & Warfield, T. (1999). Corporate reporting on the internet. Accounting Horizons, 13(3), 241-257.

Ho, S. S., & Wong, K. S. (2001). A study of the relationship between corporate governance structures and the extent of voluntary disclosure. Journal of International Accounting, 139-156.

Hodge, F., Kennedy, J., & Manies, L. (2004). Does search facilitating technology improve the transparency of financial reporting? The Accounting Review, 79(3), 687-703.

Ojah, K., & Mokoaleli-Mokoteli, T. (2012). Internet financial reporting, infrastructures and corporate governance: An international analysis. Review of Development Finance, 2(2), 69-83.

Rahman, Z. D. (2010). The impact of internet financial reporting on stock prices moderated by corporate governance: Evidence from Indonesia capital market. Web.

Securities and Exchange Commission (SEC). (2003). Final rule: Disclosure required by Sections 406 and 407 of the Sarbanes-Oxley Act of 2002. Release No. 33-8177. Washington, DC: SEC. Web.

Shleifer, A., & Vishny, R. (1997). A survey of corporate governance. Journal of Finance, 52, 737-783.

Spiro, L., & Baig, E. (1999). Who needs a broker? Business Week, 112-117.

Strine, L. E. (2006). Toward a true corporate republic: A traditionalist response to Bebchuk’s solution for improving corporate America. Harvard Law Review, 119, 1759-1783.

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