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Introduction
The theme International corporate reporting and financial accounting, is a vast area of research and study that goes a long way to elaborate corporate financial reporting and transparency. It is important to note that the need for proper transparency and suitable corporate financial reporting is highly essential. Due to many corporate financial accounting scandals in the past, national regulators and capital market institution have introduced new corporate reporting requirements so as to improve standards. Thus the significance of corporate financial reporting is seen to cover broad issues that seek to bridge a gap between corporate governance and corporate financial accounting, disclosure issues is one of the important aspects. In discussing disclosure issues, I will particularly focus on the voluntary versus mandatory disclosure aspects.
The reason as to why disclosure is required is because users of financial report, including employees, suppliers, management, shareholders, financial analyst, creditors and the state require such reports for decision making. It is thus of great importance published annual reports contain reliable information that is timely to enhance efficient decision-making. These published reports however have different extent and quality of disclosure that differs among companies as well as countries.
Most companies today are constantly looking for ways of increasing their market share and attracting capital. This makes it very important for information in the financial statement to be adequately produced; increase in market globalization has led to the need for harmonizing accounting standards that will be universally understandable and accepted. The formation of international accounting standard committee in 1973 led to the issue of more than 30 international accounting standards, which outlined the general preparation and disclosure of information in the financial statement.
Corporate transparency is determined depending on the information it discloses in the financial statements. If properly and accurately disclosed then a firms corporate image will be enhanced, marketability improved, acquisition of long-term fund enabled and cost of capital reduced. The international financial and economic problem has resulted in the need to enforce and improve financial reporting disclosures.
New developments on international accounting standards, corporate structure and legislation changes have resulted to constant review on this subject. Empirical evidence on mandatory and voluntary disclosures and the factors influencing them will enhance quality of reporting in financial statement. Study has shown that quality of corporate disclosure will influence the quality of investment decision made by investors; if the disclosure is sufficient then the current and potential investors will have confidence in the reporting entity.
Voluntary versus Mandatory disclosure
Disclosure has been defined as the provision of quantitative or qualitative information relating to a business entity in the annual reports. Mandatory disclosure can thus be referred to as that information which the companies are obligated to disclose by the accounting standards setting body, whereas voluntary disclosure refers to the release of certain financial information at the discretion of the reporting entity.
The factors that contribute to the existence of these two disclosures include the relationship between the risk preferred by the shareholders of the firm and the potential investors. The nature of the business associated with a firms disclosure, the structure between cash flows and the weight placed by existing shareholders and outside investors in the social welfare function determine disclosure policy. The quality of disclosure is determined by certain corporate characteristics. They include profitability, liquidity, audit size, corporate size, listing status, ownership structure and gearing.
Normally the non-profit making firms disclose less information so as to cover losses and the constantly reducing profit, whereas the profit making firms will disclose more information so as to be able to obtain capital in the best terms (Bujaki & McConomy, 2002). However, other nonprofit making companies may decide to release more information to the public to avoid undervaluation of the companys shares. Sometime aspects like the agency costs which are always higher in companies with more debt in their capital structure, show that disclosures tend to increase with leverage. Thus, companies with more debt ordinarily disclose more information so as to assure the providers of fund that the firm is less likely to bypass their covenant claims. Meigs (1993) argues that increased disclosure of IAS requirement enhances the monitoring role of financial statements, which in turn reduces agency costs.
The levels of mandatory and voluntary disclosure by those companies that are listed depend with the listing age (Sutton, 2004). This has shown that older companies are more likely to have more information in their annual reports so as to maintain and uphold their reputation, on the contrary less developed or newly started firms do not disclose a lot of information as it may be used by other competitors (Ali et al., 2004).
Mandatory disclosures
Mandatory financial disclosure varies in the way it is adopted from country to country. In some countries like USA and Japan most private company no matter how big they are, are not obligated to disclose their financial information. However, on the contrary European companies including most of their private companies are required to disclose certain information in their financial reports (Radebaugh et al., 2006). Mandatory disclosure of financial statements by private companies relates to a number of things in accounting and economics including: business formalities deregulation, credit information and investor protection. In essence, mandatory publication not only reduces the cost of business operation but also increases the credit worthiness or access to credit (Lewis, 2000).
There has been substantial controversy on the content of mandatory financial disclosure over the years, in the current framework of the USA, mandatory disclosure by public companies are by law required to disclose financial information to the public on a periodic basis as well as other important information about the company. The fact that public companies shares are traded in the stock exchange, mandatory disclosure of information will have a direct impact on the value of the public companies.
Mandatory financial disclosure in a way does play a major role in economic growth; this is because it is an important criterion of the legal system intended to safeguard the firms transaction with creditors and investors. Providing this kind of protection plays a role in the development of financial markets and this is an important element of economic growth.
The effects associated with introduction of mandatory disclosure include the significant decrease in risk for new issues as observed by Glautier (1997). Izedonmi and Ola (2001) discovered that many small firms delisted while those previously disclosing values of the firm increased. Mandatory publication of financial statement by public companies as well creditor protection may be a precondition for freedom among investors (Ezejelue, 2001).
The foundation of modern financial market is as a result of mandatory disclosure, thus many requirements on the companies that disclose their information to the public are imposed. This requirement range from quarterly and annual financial statements to extra ordinary disclosures as and when the material event occurs. Common characteristic of these disclosures is that: they are part of the regulatory process, are extremely relevant to the firms future cash flows and are not at the discretion of the companys management.
Mandatory disclosure regulation has examined the consequences of corporate disclosure (Elliot & John, 2005), which may or may not be socially desirable. Mandatory disclosure rule may be implemented so as to provide information to the potential investors and this makes part of the information to be available to the public. Potential investors are normally interested in the quality of the information that is disclosed rather than the private information.
Mandatory disclosure needs sometimes to be verified by an external entity like an auditor, an appraiser or a rating agency. Thus to capture the cost of verification then an assumption has to be made that any report either present or absent must be verified in conformity with the current disclosure policy. These assumptions of the verification process have several properties such as; lack of the need to verify a firm that has low cash flows and cost of verification increasing as a result of the unfavorable information that must be verified.
The major disadvantage of mandatory disclosure is that whenever a company publishes its accounts it benefits the competitors as well as third parties in a way that the disclosing company may not recover or be compensated. This benefit include improvement in the accuracy and predictive power of the credit rating models, allows comparative analysis when allocating capital among industries by the investors and making decisions for regulators and policy makers.
Mandatory disclosure items, as outlined by the international financial reporting standards, include presentation of financial statements (IAS 1), inventories (IAS 2), event after the balance sheet date (IAS 10), income taxes (IAS 12), property, plant and equipment (IAS 16). Revenue (IAS 18), borrowing cost (IAS 23), related party disclosure (IAS 24), consolidated and separate financial statement (IAS 27) are also included. Others include investment in associate (IAS 28), interest in joint venture (IAS 31), financial instrument presentation (IAS 32), impairment of assets (IAS 36), intangible assets (IAS 38) and business combination (IFRS 3). However, there are other mandatory disclosure items apart from the ones listed above, it is important to highlight that not all the above items are mandatory in all countries as it depends highly on the adoption of international standards by this countries (Alexander et al., 2003).
Voluntary disclosure
The issue of voluntary disclosure has been a topic of interest across financial markets in countries like United States, United Kingdom and the Asian regions. Voluntary disclosure is highly influenced by the management of a company as well as the ownership patterns (McConomy, 2002). Studies have also revealed that the extend of enterprises that the government have invested in or are shareholders also influences the levels of voluntary disclosures, the purpose of which is to support the government initiative to promote transparency.
Corporate voluntary disclosure represents free choices by the company management to provide information to users of the financial reports that are published annually. It is important that the users, preparers as well as the accounting policy makers to understand why firms disclose voluntary information (Barrett, 1975). Factors that have played a major role in enhancing voluntary information disclosure include; firms financial status, corporate governance and ownership patters.
Studies on voluntary disclosure dates back to the 60s, it showed that voluntary disclosure was associated with a companys specific features such as size, gearing, listing and managerial ownership (Blake, 1981). Recent research has however shown that loss making firms can derive a lot of benefit by voluntary disclosing information as compared to the financially healthy ones.
Independent directors have an influence on the board and highly control management behavior. It has been argued that the more composition of independent directors on the board, the more faster management will be challenged to take advantage of the available opportunities in the market and thus this firms will be expected to disclose more voluntary information (Henry, 2006).
Agency theory has shown that there is a positive relationship between management interest and the extent of voluntary disclosure; this has been elaborated by Henry (2004) after his study revealed that the level of shareholding by management is positively related to the amount of information given about earnings. Voluntary disclosure has also been effective in reducing agency cost that is normally high for firms with more debt in their capital structure. This is achieved by facilitating suppliers assessment of firms ability to meet its debt (Alford, 1993). This information provided could be important to the companys future growth as well as increases the debt holders confidence in that the firm will be less likely to deviate from their covenant claims.
Large companies have a competitive advantage as result of voluntary disclosure as compared to smaller firms who perceive that disclosure of certain information will make them be at competitive disadvantaged position compared to larger firms in the industry. Thus, as a result the cost of competitive disadvantage being high in small firms makes them less likely to disclose additional information, while larger firms may release addition information due to the low cost of competitive disadvantage (Jorissen, 2003). Due to these factors, large companies can rip many benefits by voluntarily disclosing information as compared to small firms. However, large companys production of differentiated products that are concentrated in active markets can make voluntary disclosure damaging to their competitive position.
Voluntary disclosure can have damaging effects to major services provided to the company. This can be seen in the sense that if many firms stop publishing their account then information needed by users will be unavailable which may lead to worse assessment of credit risk for all companies in the economy. Thus, the need for making voluntary disclosure rules should not be detrimental to the importance of mandatory disclosure in any economy (Ball, 2006).
Voluntary disclosure checklist items include general corporate information like the mission statement, information about directors like their functions, capital market information like the stock exchange code, risk management issues associated with the Organization, corporate governance report, environmental liabilities and cost, and corporate social responsibility report.
Conclusion
The cost and benefit analysis on the scope of mandatory disclosure on public reports need to be addressed with caution. Mandatory disclosure can also be used as a tool of developing policies that aim at reducing costs, enhance value (by administrative reforms) and achieve retrieval systems. In so doing, it will enable achievement of the use of new information technologies in assessing the credit risk of companies. Failure to disclose certain information by most companies is normally directed at tax evasion and fraud and has no merit in the corporate social perspective.
The major limitation associated with voluntary disclosure is that they are not reliable for users. This is because such disclosures are not normally guided by international standards though international standards board highly advises its applicability in companies.
References
Alexander, D, Britton, A & Jorissen, A 2003, International Financial Reporting and Analysis, Thomson Learning, Surrey.
Alford, A, Jones, J, Leftwich, R & Zmijewski, M 1993,The relative informativeness of accounting disclosures in different countries, Journal of Accounting Research, vol. 31, pp. 183-223.
Ali, MJ, Ahmed, K & Henry, D 2004, Disclosure compliance with national accounting standards by listed companies in South Asia, Accounting and Business Research, Vol. 34, no. 3, pp. 183-199.
Ball, R 2006, International Financial Reporting Standards (IFRS): pros and cons for investors, Accounting and Business Research, International Accounting Policy Forum, pp. 5-27.
Blake, J 1981, Accounting Standards, Longman Incorporation, London.
Barrett, ME 1975, Financial reporting practices: Disclosure and comprehensiveness in an International Setting, Journal of Accounting Research, Vol. 14, no.1, pp. 10-26.
Bujaki, M & McConomy, BJ 2002, Corporate governance: Factors influencing voluntary disclosure by publicly traded Canadian firms, Canadian Accounting Perspectives, Vol. 1, no.2, pp. 105-139.
Elliot, B & John, J 2005, Financial Accounting and Reporting, Pearson Education Limited, Essex.
Ezejelue, AC 2001, A Primer on International Accounting, Educational Books and investments Limited, Port Harcourt.
Glautier, MW, & Underdown, B 1997, Accounting Theory and Practice, Pitman Publishing, Kent.
Izedonmi, PF & Ola, C 2001, Intermediate Financial Accounting, BOFIC Consulting Group and Centre for High Performance Organizations, Benin City.
Lewis, R & Pendrill, D 2000, Advanced Financial Accounting, London Pearson Education Limited.
Meigs, RF & Meigs, WB 1993, Accounting: The Basis for Business Decisions, McGraw Hill Inc, New York.
Radebaugh, LE, Gray, SJ & Black, EL 2006, International Accounting and Multinational Enterprises, John Wiley and Sons, New York.
Sutton, T 2004, Corporate Financial Accounting and Reporting, Pearson Education Limited, Essex.
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