chapter 6 international transparency and disclosure

Chapter 6 International Transparency and Disclosure

International Accounting and Multinational Enterprises Chapter 6 Radebaugh, Gray, Black Introduction to Transparency Lack of transparency is a major concern in raising international capital for MNEs Concerns with transparency arose with the Asian Crisis (97-98), Enron, WorldCom, Parmalat, Achieving greater transparency is a goal of regulators around the world Greater transparency can restore confidence in and expand capital markets

International Accounting and Multinational Enterprises Chapter 6 Radebaugh, Gray, Black Levitt and Greenspan on Transparency Arthur Leavitt- SEC Chair (1998) The significance of transparent, timely and reliable financial statements and its importance to investor protection has never been more apparent. The current financial situations in Asiaare stark examples of this new reality. These markets are learning a painful lesson taught many times before: investors panic as a result of unexpected or unquantifiable bad news. What does his statement imply What role to analysts play? Alan Greenspan FED Reserve Chair A major improvement in transparency, including both accounting and public disclosure, is essential.

International Accounting and Multinational Enterprises Chapter 6 Radebaugh, Gray, Black The Meaning of Transparency Transparency helps investors distinguish between good and bad quality firms using fundamentals to assess strengths / weaknesses Transparency = widespread availability of relevant / reliable information about financial position, governance, value of public firms Bushman and Smith transparency- combination firm and country specific factors such as Corporate financial reporting /Governance disclosures Availability of annual reports in English Penetration and ownership of the media Ease of gaining private information on a firm

International Accounting and Multinational Enterprises Chapter 6 Radebaugh, Gray, Black The Meaning of Transparency PricewaterhouseCoopers Opacity (opposite of transparency) Index at the country level considers Corruption levels Legal and judicial opacity Economic/political opacity Accounting/corporate governance opacity Impact of regulatory opacity and uncertainty/arbitrariness

International Accounting and Multinational Enterprises Chapter 6 Radebaugh, Gray, Black The Meaning of Transparency Bushman, Piotrosk and Smith identify two kinds of corporate transparency at the country level Financial transparency Corporate disclosure intensity Timeliness of disclosures Number of analysts and media development Governance transparency What is governance? Factors include compensation structure / management motivations

International Accounting and Multinational Enterprises Chapter 6 Radebaugh, Gray, Black Pressures for Disclosure More demand esp in well developed securities markets US, UK, Japan, France, Germany Financial community desires more disclosure Result has been increasing disclosure requirements UN, OECD, EU, and IASB are issuing more detailed regulations Globalization increases the need for further disclosure by MNEs Some groups gain tailor-made reports (trade unions, governments etc.) Trend shows that greater disclosure increases the demand for more information

International Accounting and Multinational Enterprises Chapter 6 Radebaugh, Gray, Black Communicating to Users The audience determines the range and depth of information disclosed Many users do not understand the information given them specialized training responsible for inflated market of late 90s? Few use annual reports directly role of investment advisors? Correlation with tax advisors? MNE reports tend to be more complex than domestic reports operate in multiple countries but usually report in one confusing for owners familiar with other countries financial reporting

International Accounting and Multinational Enterprises Chapter 6 Radebaugh, Gray, Black Communicating to Users and the Importance of Disclosure Simplified reports may omit important information useful to direct users (experts) Greater disclosure serves experts AND those they serve MNEs are disclosing more information about future prospects and policies and are using the Internet extensively As Future-Oriented,MNE Sensitivity Specific InfoTo Info Provision

International Accounting and Multinational Enterprises Chapter 6 Radebaugh, Gray, Black Managerial Incentives to Disclose Information Management provides information voluntarily and because of regulation selected items?

International Accounting and Multinational Enterprises Chapter 6 Radebaugh, Gray, Black Costs of Information Production Benefits > Costs Direct cost of disclosure is made up of The value of resources used in gathering and processing the information hiring experts / educating staff The cost of auditing and communicating the information Indirect costs include Competitive disadvantage Costs of government interference Internal and external information needs will always differ focus of managerial reports v. investor reports.Internal audit v. external audit. What is ERP?

International Accounting and Multinational Enterprises Chapter 6 Radebaugh, Gray, Black Competitive Disadvantage of Disclosure The more specific or future-oriented the information, the more potential for competitive disadvantage Competition through disclosure better assessment of firm quality or firm struggles Vodafone recent financial data? Vigor in the economy more information with good news / less willingness to report bad news In business incentives

International Accounting and Multinational Enterprises Chapter 6 Radebaugh, Gray, Black The Net Costs and Benefits of Disclosure of Specific Items

International Accounting and Multinational Enterprises Chapter 6 Radebaugh, Gray, Black The Net Costs and Benefits of Specific Disclosure Items

International Accounting and Multinational Enterprises Chapter 6 Radebaugh, Gray, Black Corporate Disclosure Practices Meek, Roberts, and Gray MNEs tend to disclose more information voluntarily than domestic corps. Factors influencing voluntary disclosure are Size / International listing status Country or region of origin / Industry Coordination with what competitors disclose Non-financial information is a European phenomenon

International Accounting and Multinational Enterprises Chapter 6 Radebaugh, Gray, Black Corporate Disclosure Practices Cultural values influence disclosure (Gray) Hofstedes dimensions (e.g. Power distance, collectivism, uncertainty avoidance etc.) impact disclosure Archambault and Archambault (2003) findings Companies disclose more if they are in common law countries Illiteracy, religion, inflation, market cap., number of foreign listings, dividends, and using a Big 6 auditor all affect disclosure Corruption acts as a hindrance to disclosure

International Accounting and Multinational Enterprises Chapter 6 Radebaugh, Gray, Black International Disclosure Regulation Fourth and Seventh Directives (EU) require Fair review of the development of the business Any likely future development Report activities in research and development what information does this communicate?

International Accounting and Multinational Enterprises Chapter 6 Radebaugh, Gray, Black International Disclosure Regulation U.S. - SEC Requires management discussion and analysis This entails results of operations, liquidity and capital resources, and the impact of inflation Future-oriented information is desirable U.K. ASB gives guidance for an Operating and Financial Review Similar to U.S. Disclosures vary due to regulation, size of equity market, capital market expectations, cultural & management attitudes toward secrecy

International Accounting and Multinational Enterprises Chapter 6 Radebaugh, Gray, Black Corporate Review: Pg. 139-141 Reviews business activities as a whole Includes the following Chairpersons Statement Chief executive comments on his role Review of Corporate Strategy and Results See Unilever and DaimlerChrylser in Exhibits 6.7, 6.8 Comments on External and Unusual Events Includes comments on exchange rates and company fraud Acquisitions and Disposals Information High disclosure in U.S., U.K. Human Resources Information Disclosure is high in this area in France, U.S.

International Accounting and Multinational Enterprises Chapter 6 Radebaugh, Gray, Black Corporate Review Includes the following Value-Added Information See BMW in Exhibit 6.9 Social Responsibility Information See GlaxoSmithKline in Exhibit 6.10 Research and Development Information Disclosure is high in this area in U.S., U.K., Germany Investment Program Information Disclosure is high in Australia, NZ, Holland, U.K. Future Prospects Information Disclosure is high in Germany, Hong Kong, Holland

International Accounting and Multinational Enterprises Chapter 6 Radebaugh, Gray, Black Operations Review A more detailed review of business operations is given, including segment info Includes the following Review of Business Segments Includes quantitative data and narrative commentary Review of International Operations and Geographical Segments Becoming increasingly important with globalization

International Accounting and Multinational Enterprises Chapter 6 Radebaugh, Gray, Black Financial Review Includes a discussion and analysis of financial results and financial position Includes the following An Analysis of Results Discussion of events and impact on earnings An Analysis of Liquidity and Capital Resources High disclosure in France, Italy, Holland, U.S., U.K. An Analysis of Asset Values and Inflation High disclosure in Holland, Sweden, Switzerland, U.K.

International Accounting and Multinational Enterprises Chapter 6 Radebaugh, Gray, Black Frequency and Timeliness of Reporting Globalization increases the need for more frequent reporting U.S. and Canada require quarterly reporting Biannual reports are required if local requirements are used for an MNE Europe - EU Directive on Interim Reports Requires biannual reports on income and operations Some companies disclosure quarterly (Volvo, ICI)

International Accounting and Multinational Enterprises Chapter 6 Radebaugh, Gray, Black Frequency and Timeliness of Reporting IASB IAS 34 Interim Financial Reporting Does not provide for frequency of reports, only minimum content of reports Publication of annual report is usually set at a limit of 6 months from the financial year-end Why is timeliness so important? In U.S. and Canada: 10Qs as well as 10Ks Market reaction to quarterly reports International movement to more frequent reports has been slow. Growing number of MNE voluntarily report unaudited quarterly reports to meet demands of investors.

International Accounting and Multinational Enterprises Chapter 6 Radebaugh, Gray, Black Growing Pressures for Transparency Pressures are increasing because of Cross-border capital raisings Growth of world trade and investment A lack of transparency exists in emerging economies Nature of disclosure depends on international and domestic factors and traditions IASB is working to increase to disclosure, especially in segmental disclosure