impact of corporate governance on disclosure transparency

Author: monirul-alam-hossain

Post on 11-Oct-2015




1 download

Embed Size (px)


Corporate Governance, Banks, Bangladesh, Disclosure, Transparency


  • Impact of Corporate Governance on Disclosure Transparency

    in Bank Annual Reports in Bangladesh

    AKM Waresul Karim

    Saint Mary's College of California, USA

    Monirul Alam Hossain

    East West University, Bangladesh

    Mohammad Nurunnabi

    University of Edinburgh Business School, UK


    Md. Mahabbat Hossain*

    Bangladesh Institute of Bank Management, Bangladesh

    (Karim, A.K.M.W, Hossain, M.A, Nurunnabi, M. and Hossain, M.M.

    (2011), Impact of Corporate Governance on the Extent of Disclosure by Listed Commercial Banks in Bangladesh, PROSHIKHYAN, a Journal of Bangladesh Society for Training and Development, Vol. 19, No. 2) (July-


    *Corresponding Author: Faculty Member, Bangladesh Institute of Bank Management

    (BIBM), Mirpur-2, Dhaka-1216, Phone: 01716373565, Email:

    [email protected], [email protected]

  • 1

    Impact of Corporate Governance on Disclosure Transparency

    in Bank Annual Reports in Bangladesh

    AKM Waresul Karim

    Associate Professor

    Department of Accounting

    Saint Mary's College of California

    P.O. Box 4230

    Moraga, CA 94575, United States

    E-mail: [email protected]

    Monirul Alam Hossain


    Department of Business Administration

    East West University

    Mohakhali, Dhaka, Bangladesh

    E-mail: [email protected]

    Mohammad Nurunnabi

    Research Student

    University of Edinburgh Business School

    University of Edinburgh

    8 Buccleuch Place, Edinburgh

    EH8 9LW, United Kingdom

    Fax: + 44 (0) 131 668 3053

    E-mail: [email protected]


    Md. Mahabbat Hossain

    Faculty Member

    Bangladesh Institute of Bank Management (BIBM)

    Mirpur-2, Dhaka-1216, Bangladesh

    Phone: (Office) (02) 9003031-5 (Ext. 215)

    (Cell) 01716 373565

    E-mail: [email protected] or

  • 2

    [email protected]

    Biographical notes:

    AKM Waresul Karim is an Associate Professor of Accounting at Saint Mary's College

    of California, USA. He received his PhD in Accounting from the University of Leeds,

    UK. He has published extensively in academic and professional journals including the

    International Journal of Accounting, Asia Pacific Journal of Accounting and Economics,

    Research in Banking and Finance, Research in Accounting Regulation and Corporate

    Governance: An International Review.

    Monirul Alam Hossain is a Professor of Accounting at East West University,

    Bangladesh. He received his PhD in Accounting from the Manchester Business School,

    University of Manchester, UK. His current research focuses on Financial Reporting,

    International Accounting Standards, Corporate Governance and Islamic Accounting &

    Banking. He has published extensively in academic and professional journals and

    conference proceedings.

    Mohammad Nurunnabi is a research student at University of Edinburgh, UK. He has an

    undergraduate degree in Accounting and Finance, an MSc degree in Accounting and

    Finance and a Post Graduate Diploma in Social Science Research Methodology. He has

    presented papers in British Accounting Association (BAA), Irish Accounting and Finance

    Association (IAFA) and The Institute of Chartered Accountants of Scotland (ICAS).

    Md. Mahabbat Hossain is a Faculty Member at Bangladesh Institute of Bank

    Management (BIBM). He conducts training for the senior and mid level bankers in the

    field of Accounting, Finance and Business Laws. He also conducts classes in the Masters

    in Bank Management (MBA) program. He has to do research on the topic regarding

    banking industry as a part of his job. He has published in academic and professional

    journals. He is M. Phil. fellow in Accounting at Institute of Business Administration

    (IBA), University of Rajshahi, Bangladesh.

  • 3

    Impact of Corporate Governance on Disclosure Transparency

    in Bank Annual Reports in Bangladesh


    This paper reports the results of an empirical study of the role of selected corporate

    governance variables on financial reporting transparency of listed banks in Bangladesh.

    The three corporate governance variables examined were: the institution of an audit

    committee; (ii) institutional shareholding; and (iii) auditor reputation. A comprehensive

    disclosure index comprising 446 voluntary and mandatory items has been used to

    measure the degree of financial reporting transparency in terms of disclosure

    comprehensiveness. A multivariate analysis of annual reports of 27 banks (out of 29

    listed at the time of analysis) shows that banks that have instituted audit committees by

    the end of 2003 and employed Big 4 auditors produce significantly more transparent

    financial reports than those who did not. The results also show that leverage is

    negatively associated with disclosure transparency. Finally, institutional shareholding,

    size, profitability, and complexity do not have significant impact on disclosure

    transparency. Results of this study provide a greater understanding of the role of

    corporate governance tools in enhancing financial reporting transparency in the

    financial services sector in developing countries.

    Key Words: Financial reporting transparency, corporate governance, audit


  • 4

    Impact of Corporate Governance on Disclosure Transparency

    in Bank Annual Reports in Bangladesh

    1. Introduction

    It is well known that the financial reporting practices of a country depend on several

    factors, and the legal, economic, political, cultural and historical background of a country

    forms the basis of the financial reporting environment. The extent of information

    disclosure, its adequacy, relevance and reliability are important characteristics of

    financial reporting practices prevalent in a country (Hossain, 1999). The financial

    reporting practices have been changed during the last few decades. The researchers in

    International accounting emphasize the importance of compliance with IASs/IFRSs as a

    significant element in the quality of financial reporting practices. Abd-Elsalam and

    Weetman (2003) opted that the growing acceptance of the International Accounting

    Standards (IASs) by emerging capital markets has encouraged empirical investigation of

    compliance with the requirements of and there is a number of studies in the area of

    compliance of International Accounting Standards (IASs) to developing and/or emerging

    economies (Nurunnabi, 2009; Ahmed, 2009; Hossain, 2008; Samaha and Stapleton,

    2008; Dahawy and Conover, 2007; Abd-Elalam and Weetman, 2007; Hossain, Cooper,

    and Islam, 2006, Islam 2006; Akhtaruddin, 2005; Ahmed, 2005a and 2005b; Hossain,

    2003; Rahman and Jannah, 2003; Abd-Elalam and Weetman, 2003; Joshi and Ramadhan,

    2002; Hossain and Imam, 2002; Hossain, 2001; Chamisa, 2000; Owusu-Ansah, 2000;

    Susela, 1999; Rahman, 1999; Banerjee et al.; 1998; Larson and Kenny, 1998 and 1996;

    Watty and Carlson, 1998; Hassan, 1998; Al-Rai and Dahmash, 1998; Mirghani, 1998;

    Carlson, 1997; Marston and Robson, 1997; Islam, 1996; Ahmed and Nicholls (1995) or

    Nicholls and Ahmed (1995), Wallace and Briston, 1993; Larson, 1993; Wallace, 1993;

    Akter and Hoque, 1993; Hove, 1990, Shakoor, 1989; Perera, 1989 and Marston, 1986).

    However, there is a shortage of existing literature which has investigated compliance

    disclosure (mandatory or voluntary) in Corporate Annual Reports of Banking Sector in

    the context of an emerging economy in general and in Bangladesh in particular.

  • 5

    Karim and Ahmed (2005) opted that the quality of financial reporting in developing

    countries appears to be a major concern for the international financial community. In

    addition, researchers like Levitt (1998) believe that the success of capital market is

    directly dependent on the quality of accounting transparency and disclosure systems. Full

    compliance of disclosure with proper and effective audit is very important to maintain

    accountability and bring about transparency of firms, and as a result banking companies,

    which collect peoples money and make a profit by investing those funds, require more

    stringent audit and disclosure practices than non-financial firms (Reaz and Arun, 2006).

    Karim (1995), Hossain (1999), Akhtaruddin (2005), Hossain et al. (2006) found that the

    disclosure levels of Bangladeshi listed companies are generally poor which ultimately

    raises the question on accounting transparency in Bangladesh. Ahmed and Karim (2005)

    also found that the disclosure in the in half-yearly financial statements or quarterly

    financial statements of the companies in Bangladesh, is very weak in Bangladesh.

    Sundarajan and Balino (1991) found that the undesirable banking practices such as poor

    risk diversification, inadequate loan evaluation and fraudulent activities has mainly

    created the reasons for banking crises in some emerging economies like Argentina,

    Chile, Malaysia, Philippines, Spain, Thailand etc. Greuning and Bratanovic (2003) has

    opted that the modern IT based banking system have been involved with high-risk

    activities such as trading in financial markets and different off-balance sheet activities

    more than ever before which in turn make it very important for the banking sector to

    comply with the IAS 30 in the preparation and audit of the financial reports of these

    companies. In Bangladesh, there are allegations of window dressing by the banks to

    hide underlying problems, weaknesses and irregularities, and there are many examples of

    banks revealing different figures under the same heading in different disclosures

    (Reaz and Arun, 2006). Nurunnabi (2009) commented that corruption, bureaucratic

    inefficiency, political interference in administration, nepotism, misuse of power and

    resources, improper and non-observance of the rule of law, non-accountable and non-

    transparent administration are the common features of Bangladesh. To ensure more

    transparency in accounting system and disclosure of important accounting policies of

    banks and financial institutions in Bangladesh, the Central Bank (Bangladesh Bank)

  • 6

    issued a circular (BRPD) Circular No. 3/2000 dated 18/04/2000) for mandatory adoption

    of IAS-30. As a result, since 2000, all banks in Bangladesh are required to use the IAS-30

    in the preparation of their corporate annual reports.

    This paper focuses on the measurement and analysis of the extent of voluntary disclosure

    in the company annual reports of the Banking companies in Bangladesh as an example of

    an emerging economy. Including the introduction, the paper is organized in seven

    sections: Section two discusses the regulatory framework of banking industry in

    Bangladesh. Section three reviews related prior research, section four contains the

    theories and hypotheses and research methodology of the study are in section five;

    Section six presents the results of the study followed by conclusion and limitations of the

    study in Section seven.

    2. Banking Regulatory Framework in Bangladesh

    The Bangladesh Bank Order, 1972, states that:

    Central bank in Bangladesh to regulate the issue of currency and the keeping of

    reserves and manage the monetary and credit system in Bangladesh with a view to

    stabilizing domestic monetary value; preserving the par value of the Bangladesh

    Taka; promoting and maintaining a high level of production, employment and real

    income in Bangladesh; and fostering growth and development of the countrys

    productive resources in the best national interest (Government of Bangladesh

    1972, Presidents Order No. 127, p.4).

    The financial reporting practice of a country depends on legal, economic, political,

    cultural reasons (Ahmed, 2006). The Bangladesh Bank Order, 1972 and the Bank

    Companies Act, 1991 empower the Bangladesh Bank to regulate and supervise the

    banking sector of the country (World Bank, 2003). The complex process of banking

    regulation exists in Bangladesh (Sobhan and Werner, 2003) (See Appendix-1 and

    Appendix- 2). The amendment of Banking Ordinance 1961 is replaced by the Banking

    Companies Act, 1991. In addition, the Securities and Exchange Rule, 1987, Listing

  • 7

    requirements and adopted accounting standards are the main basis of the financial

    reporting practices and disclosure made by the Banking companies in Bangladesh.

    However, disclosure of information of the Banking Sector in Bangladesh has not been

    increased over the last twelve years (World Bank, 2003; Ahmed, 2006). The laws of

    Bangladesh (Companies Act 1994 and Securities and Exchange Rules 1987 for listed

    companies) set minimum legal requirements as to the disclosure of accounting

    information in corporate annual reports and is likely to be confined only to minimum

    disclosure concepts. In such a situation, accounting standards, without having any legal

    backing, are likely to have a very little influence on the financial reporting system in

    Bangladesh. In Bangladesh, it could be seen that different companies are using different

    accounting policies and procedures in the preparation and presentation of their financial

    statements in their company/corporate annual reports (Asian Development Bank, 2007).

    As a result of diversified use of accounting practices, a meaningful comparison of

    financial position as well as performance among the companies became difficult on the

    part of the users of accounting information for their decision-making purposes. Unless

    the compliance is made at the national level, there is little scope of global harmonisation

    of accounting standards

    In Bangladesh, there are two accountancy bodies- the Institute of Chartered Accountants

    of Bangladesh (ICAB) and the Institute of Cost and Management Accountants of

    Bangladesh (ICMAB). The members of ICAB are entitled to attest to the validity of

    accounts and to report to shareholders whether a companys financial statements comply

    with statutory provisions (Nicholls and Ahmed, 1995). The Institute of Chartered

    Accountants of Bangladesh (ICAB) is solely responsible for the accounting standards

    adhered to in Bangladesh. In 1983, ICAB became the member of the International

    Accounting Standard Committee (now IASB). Bangladeshi Accounting Standards

    (BASs) include International Accounting Standards (IASs/IFRSs) adopted by the ICAB.

    The Securities and Exchange Commission has by a notification dated 29th


    1997 requires all listed companies to abide by Accounting Standards adopted by the

    ICAB and hence, accounting standards are mandatory only for the companies listed in the

    Dhaka Stock Exchange (DSE) and the Chittagong Stock Exchange (CSE) (Bangladesh

  • 8

    Bank, 2006). As a result, the companies in Bangladesh are expected to comply with the

    prescribed accounting standards as prescribed by the SEC. The Securities and Exchange

    Commission (SEC) is the authoritative body, who has made the listed companies to adopt

    sixteen Bangladesh Accounting Standards (BASs) effective from February, 2000

    (Deloitte and Touche Tohmatsu, 2007). To ensure more transparency in accounting

    system and disclosure of important accounting policies of banks and financial institutions

    in Bangladesh, the Central Bank (Bangladesh Bank) issued a circular (BRPD) Circular

    No. 3/2000 dated 18/04/2000) for mandatory adoption of IAS-30 (Bangladesh Bank,

    2003-2004). The mandatory disclosure provisions under Banking Companies Act, 1991

    are shown in Appendix 1 and mandatory disclosure provisions under IAS 30 (BAS 30)

    are in Appendix 2.

    Bangladesh also has a liberal policy towards foreign direct investment (FDI). However,

    when compared to those of the India, Sri Lanka, Pakistan, Thailand and Malaysia, CG in

    practice and philosophy have up till now remained relatively under-developed in

    Bangladesh (Nurunnabi, 2009). The Companies Act 1994 does not contain any provision

    for mandatory observance of the adopted IFRSs and ISAs in practice (Nurunnabi, 2009).

    In Bangladesh, the old Banking Ordinance was replaced by the Banking Companies Act

    1991. As per the section 11 of the Securities and Exchange Ordinance 1969, all listed

    companies should submit the annual reports to the Stock Exchange, to the security

    holders and to the SEC. As we have already discussed that the Securities and Exchange

    Commission (SEC) of Bangladesh through its "gazette notification" published in

    December 1997 has amended the Securities and Exchange Rules 1987, whereby all listed

    entities in Bangladesh are now required to comply with the requirements of all applicable

    IAS, as adopted by ICAB, in the preparation and presentation of their Financial

    Statements [Rule 12(2)] and all audit practices are required to ensure compliance with

    relevant ISA, as adopted by the ICAB, in the conduct of and reporting on the audit of

    financial information of listed entities [Rule 12(3)] (Nurunnabi, 2009). In addition, they

    found no integrity between the professional bodies and the SEC, the corruption in

    corporate culture, lack of auditors professional ethics, lack of monitoring and

    supervision and finally the political tension all the year basis.

  • 9

    3. Review of Prior Research

    Nowadays, there are several researches have focused on the disclosure of information in

    corporate annual reports of non-banking sector in the developed and developing

    countries. However, a very few research can be found reflecting the disclosure of

    information of the financial companies in Bangladesh. Hossain, Cooper, and Islam (2006)

    argued that if the enterprises within IASB member countries do not comply with the

    promulgated accounting or financial reporting standards, global harmonization will not

    be achieved (Hossain, Cooper and Islam, 2006). More specifically, Islam (2006) in his

    study found that the percentage of compliance rate for Bangladeshi sample companies

    taking into consideration of 21 mandatory accounting Standards was only 71%. Other

    empirical studies measuring the compliance of mandatory and voluntary disclosure like

    Ahmed, 2009 (Bangladesh), Hossain, 2008 (India), Samaha and Stapleton, 2008 (Egypt),

    Dahawy and Conover, 2007 (Egypt), Abd-Elalam and Weetman, 2007 (Egypt), Hossain,

    Cooper, and Islam, 2006 (Bangladesh), Islam, 2006 (India, Pakistan, Bangladesh and Sri

    Lanka), Akhtaruddin, 2005 (Bangladesh), Ahmed, 2005a (India), Ahmed, 2005b

    (Bangladesh), Abd-Elalam and Weetman, 2003 (Egypt), Joshi and Ramadhan, 2002

    (Bahrain), Hossain, 2001 (Bangladesh), Owusu-Ansah, 2000 (Zimbabwe), Hossain,

    1999 (India, Pakistan and Bangladesh), Karim (1995), and Ahmed and Nicholls, 1994

    (Bangladesh) found that the companies of a number of developing countries are not

    following the mandatory accounting standards while preparing their financial reports or

    statement. This section reviews research on the current situation of the financial reporting

    system in Bangladesh in general and the disclosure of information (voluntary and

    mandatory both) of the banking sector in the context of other countries in particular.

    This part of the literature review will discuss the studies that focus the financial reporting

    in Bangladesh in general. Ahmed (1982) while evaluating financial statements as a

    communication device in Bangladesh found that the companies Act 1913 is inadequate to

    ensure desired disclosure. Parry and Khan (1984) surveyed 74 companies including 13

    banks (9 commercial banks and 4 other banks), and found that annual reports were

    generally informative and complied with legal requirements, but no attempt was taken to

  • 10

    comply with IASs. Similar findings were found in another study undertaken by Parry

    (1989). Toha (1986) has made an empirical study of the practical application of IASs in

    Bangladesh, and found that the application of IASs in Bangladesh is very limited. Hye

    (1987) examined the legal framework of the banking sector (public sector commercial

    banks in Bangladesh), has noticed that there are deficiencies of disclosure annual reports

    of the public sector commercial banks in Bangladesh.

    Alam (1989) found serious drawbacks in the provisions of the Companies Act, 19131

    relating to financial statements, and commented that the statutory requirements for the

    disclosure of accounting information are inadequate in Bangladesh. Alam (1990)

    surveyed annual reports of 62 companies in Bangladesh to evaluate their financial

    reporting practices in Bangladesh which did not include any financial companies, and

    found that about 10 percent of the companies in Bangladesh fulfilled the 1987

    requirements of the Securities and Exchange Rules. Hye (1992) observed that in spite of

    the recommendation of the ICAB, the picture depicted by published accounts is not

    satisfactory at all.

    Rahman and Jannah (2003) examined 46 sets of financial statements of major listed

    companies, including 8 banks and 3 insurance companies. By using a checklist for

    determining compliance included selected IAS requirements; their study revealed that it

    is very common for the listed sample companies not to comply with the IAS

    requirements. Nicholls and Ahmed (1995) assessed empirically assess the quality of

    disclosure in nonfinancial companies in Bangladesh and their results reveals that the

    quality of disclosure had improved significantly, particularly because of the enforcement

    of the Securities and Exchange Rules and the adoption of at least six International

    Accounting Standards by the Institute of Chartered Accountants of Bangladesh at that

    time. They commented that one of the most important features of corporate financial

    reporting was the lack of compliance with mandatory disclosure provisions. Rahman

    (1999) in his study found that the compliance with voluntary disclosure requirements in

    Bangladesh is much lower compared to the compliance with mandatory disclosure

    requirements. It is found in his study that companies do not comply with the disclosure

  • 11

    requirements set by the regulatory bodies and Acts in Bangladesh. Using a sample of 20

    Dhaka stock exchange-listed companies, with a list of 375 disclosure items they found

    that the extent of mandatory and voluntary disclosure varies widely within this

    environment. The findings of the study also indicate that the compliance with voluntary

    disclosure requirements is much lower compared to the compliance with mandatory

    disclosure requirements and that no company disclosed all mandatory information items

    in its annual reports.

    Hossain (1999) examined empirically the association between a number of corporate

    attributes and levels of disclosure in corporate annual reports of listed non-financial

    companies in three developing countries, India, Pakistan and Bangladesh. A disclosure

    index (weighted and unweighted) comprising 94 items of information has been

    developed, and applied to the corporate annual reports for a sample of 78 Bangladesh

    companies, for the 1992-1993. It was found for the Bangladeshi companies that size

    (total assets) and subsidiary of a multinational company were significantly associated

    with the extent of disclosure. The study of Hossain (1999) showed mean disclosure level

    of the sample companies as 29.33% in 1993. Akhtaruddin (2005) reports the results of the

    extent of mandatory disclosure and the association between company-specific

    characteristics and mandatory disclosure of 94 companies in Bangladesh. His results

    showed that on average, the sample companies were disclosing 44% of the items of

    information, which leads to the conclusion that prevailing regulations are ineffective

    monitors of disclosure compliance by companies. Among the corporate attributes,

    company age found not to be significant for mandatory disclosure while there is little

    support for industry size as a predictor of mandatory disclosure except where size is

    measured by sales. Further, profitability was also found to have no effect on disclosure.

    Hossain, Cooper, and Islam (2006) in their study focuses on the extent of corporate

    disclosure based on International Accounting Standards (IASs/IFRSs) adopted in an

    emerging economy, Bangladesh. Using a disclosure index consisting of items of

    information with a sample annual reports of 106 Bangladeshi manufacturing and trading

    companies have been examined for the year ending 2001-2002. Their results showed that

  • 12

    the listed non-financial companies significantly followed the selected accounting

    standards under review and did bring remarkable changes in the financial reporting

    practices made by the listed companies in Bangladesh. Their study reports that the

    average disclosure level is 69.05% with a minimum and maximum level of 35.85% and

    94.34% respectively which is not very much encouraging. Further, the association

    between the extent of disclosure and various corporate characteristics was examined

    using multiple linear regression models revealed that net profit margin of Bangladeshi

    companies and subsidiary of a multinational company was significantly associated with

    the extent of disclosure as per sample accounting standards.

    This part of the literature review will consider those empirical studies on the disclosure of

    banking companies in the world with special emphasis to Bangladesh. Kahl and Belkaoui

    (1981) pioneered the research on Bank Annual Report Disclosure Adequacy

    Internationally. Their study investigates the overall extent of disclosure by banks located

    in 18 countries. Using 1975 annual reports of the 70 banks were evaluated on the basis of

    the response score assigned to 30 informational items in the disclosure index. Kahl and

    Belkaoui (1981) found that the differences in disclosure adequacy exist internationally, at

    least for the countries included in their sample, with considerable variability in extent,

    and with US banks definitely the leaders. Further the evidence in their study supported

    the positive correlation between asset size and extent of disclosure, although less strongly

    than might have been expected.

    Shakoor (1989) has focused on the financial reporting practices of the 6 nationalized

    commercial by evaluating the performance of nationalized commercial banks in

    Bangladesh during 1972 to 1984. Skakoor (1989) commented that financial reporting

    system of banks needs to disclose more information to be disclosed and more methodical.

    Hye (1989) in his another study opined that financial reporting is embodied in the legal

    framework which out dated and suffers from serious limitations. Islam (1996) in a study

    attempted to evaluate the practices relating to disclosure of accounting policies in the

    financial statements of the banks working in Bangladesh on Islamic principles. He

    commented that the banks should disclose confidently promulgation as to compliance

  • 13

    with the professional requirements that are followed. Islam (1997) evaluates in his study-

    financial reporting in the commercial banks working in Bangladesh covering a period of

    10 years based on published annual reports and relevant legal and professional reporting

    requirements. The observations give testimony that annual reporting practices of the

    selected banks mainly comply with the legal requirements. The existing forms including

    contents of bank balance sheet and profit & loss account do not provide adequate data to

    calculate important ratios and items of information evaluating the performance and risk,

    solvency, liquidity and profitability of the banks. He added, as the banks are habituated to

    comply with the legal requirements, the professional requirements would ultimately be

    followed provided that the forms of balance-sheet and profit & loss account are re-

    arranged or modified in the light of the professional requirements specially IAS-30.

    Alam (1991) in his study found that the forms and contents of annual accounts prescribed

    in the first schedule of the Bank Company Act. 1991 is out-dated and hence inadequate.

    He identified some major inadequacies Akter and Hoque (1993) examined the disclosure

    practices of the banking sector in Bangladesh. Based on their empirical evidence Akter

    and Hoque (1993) commented that the disclosure and reporting in banking sector in

    Bangladesh are not merely only inadequate but also biased and misleading. They

    observed that in many cases financial statements of the sample banking companies are

    dressed up and cosmetised, and legal framework is outdated. Chowdhury (1997)

    describing the usefulness of adopting IAS 30 (Azizuddin, 2001), found that the practical

    implementation of IAS 30 with disclosure of compliance have significant impact on the

    banking sector over the years (Khan and Kumar, 2001). Azizuddin (2001) overviewed

    that the adoption and implementation of IAS-30 which reflects greater accountability in

    bank operations and greater transparency in the published financial information of

    banking companies. Hossain (2004) has made an attempt to discuss shortcomings in the

    published accounts and audit reports of some private commercial banks, and proposed

    some recommendations for both ICAB, which regulates the independent auditors, and the

    Bangladesh Bank, which regulates the clients of the auditors. In his study, the survey

    findings are reported only as examples. In his study Hossain (2004) found that improving

    the published financial information of banking companies results in greater transparency

  • 14

    and accountability and leads to better performance of the whole financial sector. By

    successfully implementing a significant part of IAS-30 in year 2000 and 2003,

    Bangladesh Bank has proven that the financial sector is keen on improving its image. In

    addition to new circulars a revised and updated Bank Companies Act, 2005 would be

    another milestone for the Government in general and the Bangladesh Bank is particular.

    Hossain (2001) empirically investigates the extent of disclosure of 25 banks in

    Bangladesh and associations between company size, profitability, and audit firm with

    disclosure level. A total of 61 items of information, both voluntary and mandatory, were

    included in the disclosure index, and the approach to scoring items was dichotomous. The

    results showed that size and profitability of the banks are statistically significant in

    determining their disclosure levels. However, the audit firm variable was not significant

    at conventional levels in the model. Chipalkatti (2002) examined the association between

    the nature and quality of annual report disclosures made by 17 Indian banks and market

    microstructure variables. He constructed a Bank Transparency Score (BTS) consisting of

    90 items of information considering the recommendations of the Basel committee and

    IAS 30. The study showed no significant association between the level of disclosure and

    percentage of shares held by the government, and the percentage of shares held by

    foreign shareholders respectively. The results also indicated that larger banks provide

    more transparent disclosure and there was no significant difference in the disclosure

    scores of banks across profitability levels, but banks with lower levels of leverage did

    have significantly higher disclosure scores.

    Baumann and Nier (2003) addressed the issues of developing a set of disclosure

    requirements by Pillar 3 of Basel II that improved market participants ability to assess a

    banks value using a unique dataset on almost 600 banks in 31 countries over the period

    1993-2000. These are Australia, Australia, Argentina, Belgium, Brazil, Canada, Chile,

    Finland, France, Germany, Hong Kong, Indonesia, Ireland, Israel, Italy, Japan, Korea,

    Malaysia, the Netherlands, Norway, Poland, Portugal, Singapore, Spain, Sweden,

    Switzerland, Taiwan, Thailand, Turkey, the UK and the US. The dataset contains detailed

    information about the items disclosed by banks in their annual accounts. They

  • 15

    constructed a composite disclosure index that informs about disclosure at the bank level,

    and they then analysed each of the 17 sub-indices of disclosure that make up the

    composite index in order to investigate which, if any, items of the banks balance sheet

    disclosure are most beneficial from the point of view of the bank and most useful for

    financial markets. Their findings generally confirm the hypotheses that disclosure

    decreases stock volatility, increases market values, and increases the usefulness of

    company accounts in predicting valuations.

    Hossain (2008) investigate empirically the extent of both mandatory and voluntary

    disclosure by listed banking companies in India.. A total of 184 items were selected of

    which 101 and 81 were mandatory and voluntary respectively. The study revealed that in

    disclosing mandatory items, the average score is 88, whilst the average score for

    voluntary disclosure is 25. The findings of Hossain (2008) indicate that size, profitability,

    board composition, and market discipline variables are significant, and other variables

    such as age, complexity of business and asset-in-place are insignificant in explaining the

    level of disclosure. Further, Indian banks are very compliant with the rules regarding

    mandatory disclosure, and in contrast, they are far behind in disclosing voluntary items.

    Hossain (2008) opined that his study can be a good example for other developing

    countries, who are trying to have a high level of compliance in mandatory disclosure.

    In recent study, Ahmed (2009) empirically examined the relationship between the

    disclosure score and selected corporate attributes in a developing country like

    Bangladesh. The determinants or corporate attributes he used are size of the bank {total

    assets, gross revenue and number of branches}, profitability {EPS, ROA, ROI and net

    profit margin (NPM)}, credit deposit ratio (CDR), Capital Adequacy Ratio (CAR), Debt

    Equity Ratio (DER) and Shareholders Risk ratio]. In order to identify the determinants

    of disclosure, regression analysis, multiple linear regression techniques have been used.

    Using 25% of the population (12 banks) observations over a period of 5 years (2002-

    2006), the extent of disclosure has been measured using the unweighted disclosure index.

    The results showed that disclosure levels are associated with some company

    characteristics. Only two variables that were found to be significant in determining

  • 16

    disclosure levels are return on assets and capital adequacy ratio. Ahmed and Dey (2009)

    empirically measured and analyzed the performance of disclosure items in a developing

    country like Bangladesh. Using 25% of the population (12 banks) observations over a period

    of 5 years (2002-2006), the performance of disclosure has been measured using the

    unweighted disclosure index. The study shows the top and bottom ranked banks by the size

    of the UDI. The results showed that Arab Bangladesh Bank (AB Bank) appeared to have the

    highest levels of disclosure and Standard bank appeared to have the lowest levels of


    To sum up, it is very clear from the discussion of prior research is that the financial

    reporting practices in Bangladesh are very poor in general and in the banking sector in

    particular. Most of the companies including banks making disclosure of financial facts

    follow mainly the legal requirements in preparing their financial statements. But the

    forms are prescribed by the relevant laws, and mandatory IAS 30 for the preparations of

    financial statements to ensure the desired disclosure. Most of the existing studies

    criticized the legal requirements, but also they failed to suggest specific change or

    modifications to update the forms of preparing the financial statements of banks. Finally,

    time is an important factor, which along with other factors can distinguish the findings

    and evidence of the present researchers from the studies of other researchers.

    4. Theories and Hypotheses Development

    4.1. Theories

    4.1.1. Agency Theory

    This theory explains why managers disclose information for the shareholders (Firth,

    1979; Wallace, 1988; Cooke, 1989, 1993; Hossain et al., 1994; and Aljifri, 2008).

    Managers believe that the shareholders will get their control behavior through the agent-

    owners contract and the disclosure will be a means of achieving the optimal contact. The

    theory assumes that the agency cost will vary with corporate attributes (e.g. size,

    leverage, listing status, corporate governance compliance). For instance, the agency

  • 17

    theory predicts that the highly leverage company would disclose more information to

    satisfy the debenture holders. By doing this, the cost of capital would be reduced and the

    investors uncertainty would be lower. This argument would be the same for larger

    company in terms of size, because if the larger company would use the higher debt

    because of the tax advantage, then they will disclose more to satisfy the creditors. The

    other corporate characteristics might be explained in the same argument. So, by

    disclosing more, the mangers will reduce the agency cost to be trustworthy to the

    shareholders, and then the agency theory would be justified in this regard.

    4.1.2. Signaling Theory

    Spence (1973) introduced signaling theory to explain the labor markets. This theory can

    explain why some firms disclose more information than the others (Watts and

    Zimmerman, 1986). The theory assumes that the disclosure of information is a reaction to

    informational asymmetry in markets. Companies hold much more information than the

    investors. Therefore, if the company discloses much more information would reduce the

    information asymmetry (Akerlof, 1970). The managers of the company will distinguish

    themselves from the others. The signal of the company would be credential in terms of

    getting potential and prospective investors and creditors (Morris, 1987). For example, the

    old company, the profitable company and the company using big audit firms would

    disclose than the others (e.g. loss making companies, new companies etc). This argument

    may be the same for internet reporting companies and interim reporting produced


    In short, the accounting policy of a firm and its existence and form are determined by the

    considerations of contracting efficiency (Ball, 1989, p. 3) states,). Therefore, firms with

    serious agency problems will spend more resources on contracting and monitoring than

    firms with lower agency costs (Maijoor, 1991, p. 127). The same logic may be applied to

    signaling theory. With reference to the signaling argument, Watts and Zimmerman (1986,

    p. 166) opined that the expenditure of resources on information improves the allocation

    of capital, because more efficient firms receive more capital.

  • 18

    5. Research Methodology

    5.1. Sample Selection

    The sample covers all stock exchange listed banks operating in the country 2003. That

    means our sample excludes all nationalized banks, development financial institutions

    (DFIs) and foreign banks operating in Bangladesh. All available annual reports for the

    year ending 31 December 2003 were collected. On 31 December 2003, there were 29

    banks listed on Dhaka Stock Exchange. Annual reports for the relevant year (i.e., 2003)

    were not available for 2 banks. Thus our sample resulted in 27 banks.

    5.2. The Disclosure Index

    5.2.1. Information Items Included in the Disclosure Index

    Disclosure of information in corporate annual reports is an area of research in both

    developed and developing countries. There is a large accounting literature relating to

    studies which have used disclosure indexes to measure the extent of disclosure made by

    the companies in corporate annual reports. Disclosure indexes are based upon extensive

    lists of selected items of accounting information which may be disclosed in corporate

    annual reports. Disclosure indexes seek to measure the extent of disclosure by using

    numerical weights on items of accounting information. This study analyses corporate

    financial disclosure of the banking companies in an emerging economy, Bangladesh.

    The quality of financial reporting in a country depends on the legal requirements

    governing disclosure together with professional recommendations which may have a

    varying degree of effectiveness depending on the influence of the professional bodies

    concerned (Marston, 1986). In addition, national and international accounting standards

    and stock exchange requirements may have an impact on the disclosure of information in

    corporate annual reports. Companies usually disclose information in a number of ways,

    such as through annual report and accounts, interim and quarterly reports, prospectus,

    employee reports and announcements to the stock exchange. It may be strongly argued

  • 19

    that the most important medium of external financial disclosure is the corporate annual

    report. The selection of items included in the disclosure index is a major task in the

    construction of any disclosure index (Marston and Shrieves, 1991). As a result, the major

    task of the present researchers is to develop a suitable disclosure index comprising items

    of all mandatory information that are expected to be disclosed in corporate annual report

    of the banking sector in Bangladesh. The resulting disclosure index has been used for the

    evaluation of disclosure of financial companies in the three developing countries being


    Marston and Shrieves (1991) are of the opinion that the usefulness of the disclosure index

    as a measure of disclosure is dependent on the selection of items to be included in the

    index. There is no generally accepted theory to predict users information needs and there

    is an absence of an appropriate generally accepted model for the selection of the items of

    information to be included in a disclosure index to judge the quality of information of a

    corporate annual report. As one notable researcher observes to the extent that research

    foci amongst researchers, there is no theory on item selection (Wallace, 1988; p. 354).

    An item of information may be of great importance to a particular interested user group

    while it may have little importance to other user groups. Most of the previous studies

    have included items of information of interest to a particular group. In the present study,

    items of information have been included keeping in mind their relevance to a broad range

    of users. In most previous studies, the number of items selected was relatively small.

    Special attention has been given to both mandatory items of information in the sample

    countries. In this study the disclosure index has been developed by extensively following

    IAS 30, Securities and Exchange rules 1987, Banking Companies Act 1991, listing

    requirements of Dhaka Stock Exchange and Bangladesh bank BRPD Circular No. 3/2000

    dated 18/04/2000. In addition, the disclosure requirements relating to mandatory

    Bangladeshi Accounting Standards by the sample banking companies have been

    considered and taken into account in selecting items of information where relevant, have

    been included in the disclosure index. The disclosure index considered both quantitative

    and qualitative items in the corporate annual reports of the sample companies. The

  • 20

    disclosure index constructed for this study included 446 items comprising both voluntary

    and mandatory items.

    5.2.2. Scoring of the Disclosure Index

    There are various approaches available to develop a scoring scheme to determine the

    disclosure level of corporate annual reports from the works of other researchers. In the

    present study, the annual reports of the companies examined against both weighted and

    unweighted indexes. In case of weighted disclosure index, weights are assigned to

    individual items of information in order to discriminate between disclosures of more

    important items. Some studies have used the mean scores received by each item of

    information in the questionnaire as weights to individual items in the disclosure index.

    For the weighted index to be used in this study the mean responses of users to individual

    item in the user survey will be averaged and a mean importance score will be calculated

    to provide weights to be used in the weighted disclosure index. The researchers have

    decided to use the unweighted disclosure index as all mandatory disclosure of

    information are equally important in the preparation of the financial statements of the

    banking companies in Bangladesh. An unweighted index is the ratio of the value of the

    number of items a company discloses divided by total value that it could disclose. Under

    an unweighted disclosure index, all items of information in the index are considered

    equally important to the average user. The unique advantage of using an unweighted

    index is that it permits an analysis independent of the perception of a particular user

    group (Chow and Wong-Boren, 1987; p.537). If various users of accounting information

    are asked to weigh the importance of different items of information in the disclosure

    index, they may attach different weights to the same items of information. Despite the

    attractions of reflecting users perceptions, the perceptions of different groups of users

    vary due to subjective judgement and interests, subjective judgements may average each

    other out (Cooke, 1992; p.233) or neutralise the relative importance of each disclosure

    item to all members of a user group (Wallace, 1987; p.355). The choice of an unweighted

    index over a weighted one does not produce substantially different results (e.g. Chow and

  • 21

    Wong-Boren, 1987; p.537) and there are researchers who favoured the use of unweighted

    indexes (e.g. Spero, 1979; p.57 and Rubbins and Austin, 1986).

    Under unweighted disclosure indexes (UDI), while measuring the level and extent of

    disclosure, the disclosure will be considered as a dichotomous variable. Here, the only

    consideration is that whether a company discloses an item of information in its corporate

    annual report it will be awarded 1 and if not, it will be awarded 0. In the disclosure

    model which will be used and followed in this study, the total disclosure score for a

    banking company taken to be additive. The disclosure model for the unweighted

    disclosure thus measures the total disclosure (TD) score for a company as follows:





    Where, d = 1 if the item di is disclosed

    0 if the item di is not disclosed

    n = number of items

    Finally, the selected banking company attributes such as size (total assets), profitability

    (return on equity, audit firms international affiliations, institutional shareholding,

    whether the bank has an audit committee have been extracted from corresponding annual

    reports. A multivariate analysis was carried out to examine the association between the

    extent of disclosure and 3 corporate governance variables and four control variables.

    5.3 Hypothesis of the Study

    The primary aim of the study, as mentioned earlier, is to examine the role of corporate

    governance financial reporting transparency of banks in Bangladesh. The expected role

    is examined by testing the following hypothesis:

    H0: There is no significant association between a number of corporate governance

    attributes (viz. audit committee, institutional ownership and Big 4 affiliation of audit

    firms) and the extent of disclosure in published annual reports.

    The multiple linear regression technique is used to test the hypothesis.

  • 22

    5.4 The Dependent and Explanatory Variables

    5.4.1 Dependent Variable

    Disclosure scores are calculated for each bank and used as the dependent variables in the

    regression. The overall disclosure index (ODI) for each bank is obtained by using a

    dichotomous procedure whereby the total score received by a bank is equal to the number

    of items disclosed in its annual report divided by the total number of items in the

    disclosure index. The normality of the distribution of the index scores was tested using

    the normality plot and histogram and both were found to be normally distributed.

    5.4.2 Explanatory Variables:

    Three corporate governance variables are used as test variables. They are: (i) the

    institution of an audit committee; (ii) institutional shareholding; and (iii) auditor

    reputation. Besides, four control variables wee used. They are: (i) bank size measured

    by natural log of tital assets; (ii) profitability measured by return on equity (ROE); (iii)

    complexity measured by loans and advances as a proportion of total assets; and (iv)

    leverage measured as debt to book value (market value for negative equity firms) of

    equity. The procedure for operationalising the variables in the regression analysis and the

    rationale for expecting them to explain cross-sectional disclosure variability are outlined

    in the following paragraphs.

    Audit Committee: Audit committees are increasingly being seen as one of the more

    effective corporate governance levers used in both the Anglo-Saxon and Japan-German

    models of corporate governance. Since Cadbury (1992) Committee recommendations, all

    the so-called corporate governance best practice codes recommend institution of audit

    committees in order to improve monitoring quality of both internal and external audits.

    Recent corporate governance pronouncements emphasize not just having audit

    committees but how independent the said committee is? That means in major

    industrialized economies it is no longer sufficient to have an audit committee per se,

    increased attention is being paid on the composition of audit committees. The question

  • 23

    being asked more frequently in recent times focuses on the proportion of audit committee

    members are represented by independent directors. Institution of audit committees has

    been made mandatory for banks in Bangladesh in 2003 via Bangladesh Bnaks circular

    no. 12 and 16 issued on June 10, 2003 and July 24, 2003, respectively. As of 31

    December 2003, 16 of the 27 banks in our sample have instituted audit committees. We

    expect these 16 banks to demonstrate greater transparency in their financial reporting.

    We expect so because either these are banks that are more eager to embrace corporate

    governance best practice and hence are more likely to be more transparent or the audit

    committee would act as a positive influence on their disclosure behavior. A dummy

    variable, labelled AUDCOM, is used whereby a value of 1 is awarded to firms having

    audit committees and zero otherwise.

    Institutional Shareholding: Institutional shareholding is considered an important

    corporate governance mechanism whereby institutional shareholders exert their influence

    and expertise in providing leadership in the boardroom. They also act as a safety valve in

    preventing management or other dominant shareholders to engage in value destructive

    behavior. Institutional investors have incentives to care about the quality of financial

    reporting including its comprehensiveness. The presence of one or more significant

    institutional shareholder(s) is therefore expected to enhance the level of disclosure in firm

    financial statements. We use the actual percentage of institutional shareholding to

    capture this variable. The variable is labeled INSTTSHLD.

    Auditor Reputation: The size of a firms audit firm and/or its international link is

    believed to influence both the quality and the quantity of information disclosed by the

    firm. It is expected that in countries where the Big-Four audit firms operate, financial

    statements certified by any Big-Four firm carry more credibility than those audited by

    non-Big-Four firms. DeAngelo (1981) argued that larger audit firms invest more to

    maintain the reputation of their audit quality. Haque (1984) suggested that in

    Bangladesh, only large audit firms enjoy the privilege of choosing the clients and the

    audit job. Many disclosure studies examined the potential association between the

    auditor size and extent of disclosure. Among them Singhvi and Desai (1971) and Ahmed

  • 24

    and Nicholls (1994) found positive association between audit firm size and the extent of


    In Bangladesh, none of the Big-Four audit firms have a named branch. However, some

    of the larger Bangladeshi firms claim affiliations with the international Big-Four. These

    few big firms are responsible for auditing most of the big companies in the private sector

    and almost all the multinational companies operating in Bangladesh. In the present study,

    the international link of audit firms were considered for use as explanatory variables.

    Audit firms having an affiliation with an international Big-Four were distinguished from

    those that do not. In order to see if the auditor's international link had any impact on

    disclosure comprehensiveness, this was considered for being used as an explanatory

    variable labelled AUDITOR. A dichotomous procedure was used to operationalise the

    variable awarding one if the banks audit firm was big and zero if it was not.

    Size: The size of the firm has been a major variable in most studies examining disclosure

    variability. With the exception of Spero (1979) and Stanga (1976), all the studies found

    that corporate size significantly explains disclosure levels and variability.

    The size of a firm can be measured in a number of different ways and there is no

    overriding reason to prefer one to the other(s) (Cooke, 1991). Several measures of size

    were available in this study including: total deposits, total loans and advances, total

    assets, total capital, shareholders equity, and the market value of the bank. After a

    primary examination based on the correlation between the dependent variable and the

    available size variables, we decided to drop all but total assets as our size measure. The

    chosen size variable was not normally distributed as expected. This problem was averted

    by computing the natural log of the size variable which produced normality of the

    distributions. The log of total assets (LOGASSETS) is used in the study as the size


    Profitability: Bank profitability affects disclosure in many ways. Studies on the

    understandability of financial statement messages found that narrative disclosures in

  • 25

    corporate annual reports are deliberately made complex to communicate bad news and

    made more lucid and easily understandable to communicate good news (Adelberg, 1979).

    Banks are likely to feel more comfortable when disclosing favourable rather than

    unfavourable information, because one of the objectives of information disclosure is to

    increase share prices.

    Profitability was used as an explanatory variable by Cerf (1961), Singhvi (1967), Singhvi

    and Desai (1971), Belkaoui and Kahl (1978), Spero (1979) and Wallace (1987). Cerf

    (1961), Singhvi (1967), Singhvi and Desai (1971) found positive association between

    profitability and disclosure while Belkaoui and Kahl (1978) found a negative association

    between them. A number of profitability measures were used by previous researchers.

    They include net profit to sales, earnings growth, dividend growth and dividend stability

    (Cerf, 1961), rate of return and earnings margin (Singhvi, 1967 and Singhvi and Desai,

    1971), and return on assets (Belkaoui and Kahl, 1978). In this study, a number of

    profitability measures were computed from the annual report data, but the return on

    equity was selected for the analysis. The variable was labeled ROE.

    Complexity: Complexity is likely to have a bearing on disclosure comprehensiveness.

    As operations become more and more complex, it usually warrants more disclosure.

    Several measures of complexity has been used in the literature. They include diversity of

    product and customers, number of branches, number of subsidiaries or associates, number

    of overseas subsidiaries, number of industries in which the client operates, the absolute

    amount of inventory and receivables, and the proportion of assets in inventory and

    receivables. We use the proportion of loans and advances to total assets as our measure

    of complexity. The use of a relative measure of audit complexity meant that the size

    effect was not affected by the inclusion of the variable. The variable was labelled


    Leverage: The degree to which a firm's financial structure is geared has been used in a

    few disclosure studies to examine if there exists any association between gearing ratio

    and disclosure levels. Chow and Wong-Boren (1987) and Ahmed and Nicholls (1994)

  • 26

    found no significant association between leverage ratio and the extent of voluntary

    disclosure in Mexico and Bangladesh respectively while Belkaoui and Kahl (1978)

    observed a significant negative relationship between the two variables. On the other

    hand, Robbins and Austin (1986) found a significant positive association between debt

    and municipal disclosure. The debt-equity ratio is used in the present study as the

    measure of leverage. For banks with negative equity, their book value of equity was

    replaced by market value of equity before applying the leverage formula. The variable is

    labelled LEVERAGE.

    6. Test of Hypothesis

    The descriptive statistics for the explanatory and dependent variables are presented in

    Table 2. The descriptive statistics shows that the mean disclosure level of the sample

    banks is 39.01 percent, which is equivalent to 174 items (out of 446 items examined).

    The minimum number of items disclosed by a sample bank was 110 items while the

    maximum number of items disclosed was 232. Fifty-nine percent, (i.e., 16 out of 27) of

    the banks in our sample had an audit committee while 44 percent (i.e., 12) had a Big 4

    auditor. Of the 16 banks that had audit committees, 7 had Big 4 auditors. Average

    institutional shareholding was 13.31 percent with a minimum of zero and a maximum of

    70 percent. Average total assets of the sample banks was Tk21,896 million (US$377

    million) with a minimum and maximum of Tk301 million and Tk81,705 million

    respectively. Average ROE was 14.43 percent while average complexity measure was

    59.47 percent. Average leverage was 2.748 with a minimum of 0.40 and a maximum of


    A correlation matrix of all the above explanatory variables along with the dependent

    variables was constructed which is shown in Table 3.

  • 27

    6.1 The multivariate model

    The model developed in this paper is as follows:

    ODI = + Auditcomm + Insttholding + Big4 + Complex +

    Leverage+ ROE + Assets +

    The above model, developed in this paper is based on 27 banks. A summary of the

    regression output is provided in Table 4. The results show that audit committee, auditor

    reputation, and leverage have significant bearing on the extent of disclosure made by

    banks in Bangladesh. Banks that have constituted audit committees by 2003 disclose

    significantly more items of information than those that have not. A comparison of the

    average number of items disclosed by the two categories of banks shows that banks with

    audit committees disclose 188.37 items on average while those without audit committees

    disclose only 153.09 items on average. A non-parametric t-test also shows the above

    difference to be statistically significant (t value of 3.541). The results also show that

    banks who have employed Big 4 affiliated audit firms disclose significantly more

    information than those who do not. This finding is particularly important given the fact

    that only 12 of our sample banks have a Big 4 affiliated auditor of which only 7 have

    audit committees. Therefore, the influence of a Big 4 affiliated auditor does not

    necessarily overlap with that of an audit committee. The average number of items

    disclosed by Big 4 affiliated banks in our sample is 181.17 while the average for non-Big

    4 affiliated banks is only 168.27. The third variable that emerged significant in

    explaining cross-sectional variations in disclosure levels is leverage. As expected,

    leverage has an inverse relationship with disclosure levels. It shows that banks that have

    higher levels of borrowing from other financial institutions and the central bank are more

    conservative in disclosing information.

    Our results also show that institutional shareholding, complexity, profitability, and size

    do not have significant influence on disclosure levels. Although insignificant, each of

    these variables have expected positive signs of their beta co-efficients. The results may

  • 28

    be driven by the highly regulated nature of the banking industry, relative uniformity in

    disclosure and the relatively large size of each of these banks that make them

    economically visible. As a result, their relative size, profitability, leverage, and

    complexity do not appear to make significant differences in their disclosure levels.

    Results reported in Table 4 provide evidence of the important role corporate governance

    in general and audit committees and Big 4 affiliated auditors are playing in enhancing

    financial reporting transparency in the banking sector in Bangladesh.

    7. Conclusion and Limitations

    This paper reports the results of a multiple linear regression analysis of the role of 3

    corporate governance variables audit committee, auditor reputation, and institutional

    ownership on the extent of disclosure in bank annual reports. The extent of disclosure

    was measured using a comprehensive disclosure index comprising 446 items including

    both mandatory and voluntary items.

    The results show that disclosure levels are associated with two corporate governance

    attributes whether the bank has instituted an audit committee and the reputation of its

    audit firm. Disclosure levels are also associated with the level of financial leverage

    employed by the bank. The results also show that institutional ownership does not have a

    significant influence on financial reporting transparency of banks. However, it has a

    positive, albeit insignificant, influence. It is interesting to see that size, profitability and

    complexity do not have significant influence on bank disclosure either. Again, each of

    these variables has the expected positive sign.

    Findings of this study have important policy implications. First, audit committee

    constitution was not mandatory until 2003. By the end of the year only 16 banks have

    constituted audit committees. Our finding of a positive association between audit

    committees and disclosure levels is encouraging if audit committees are pushing for

    greater transparency. It could also be interpreted as banks that are more transparent are

  • 29

    swift in constituting audit committees. The significance of the Big 4 variable is

    significant in the backdrop of a lack of Big 4 dominance in the countrys banking sector.

    The share of the Big 4 affiliated firms in the banking sector is only 44 percent! By

    international standards, this is extremely low given the size of banks as economic

    institutions compared with average firms in other industries. The evidence of a positive

    role played by Big 4 auditors can be expected to be helpful in enhancing disclosure

    comprehensiveness in the banking sector in Bangladesh.

    The study has several limitations: First, although it covered all but 2 banks operating in

    Bangladesh in 2003, the size of the sample remains small only 27. This poses a threat

    to the validity of our findings as a bigger sample size is warranted for running multiple

    linear regressions. Second, the index used to capture disclosure levels included both

    voluntary and mandatory items. Our Overall Disclosure Index (ODI) measure does not

    distinguish between the two. It is therefore possible to have a trade-off between the two

    groups of items voluntary and mandatory making it difficult to interpret disclosure

    levels with greater mandatory compliance or voluntary disclosure or both. Finally, the

    dichotomous scoring procedure employed in the study, while consistent with the tradition

    of most disclosure studies, has some fundamental flaws such as its failure to distinguish

    quality of disclosure from its quantity and its inability to reward or penalize firms for the

    depth or breadth of such disclosure.


    1 In Bangladesh, the Companies Act 1913 that was enacted by the British

    legislators in the sub-continent has been repealed by the enactment of the

    Companies Act 1994.

  • 30


    Ahmed, A. A (2009), Corporate Attributes and the Extent of Disclosure: A Study of Banking Companies in Bangladesh, Paper presented at the 5th International Management Accounting Conference, Universiti Kebangsaan Malaysia, October

    19-21 October 2009, Kuala Lampur, Malaysia.

    Ahmed, A. A. and Dey, M. M. (2009), An Empirical Analysis of Performance Measurement of the Disclosure in Financial Reporting: A Study of Banking

    Sector in Bangladesh, paper presented at the 2nd COMSATS International Business Research Conference, COMSATS Institute if Information Technology, 14

    November 2009, Lahore, Pakistan.

    Ahmed, H. (2005a), Corporate Voluntary Reporting Practices in India, The Cost and Management, Vol. XXXIII, No. 5 (September- October), pp.73-79.

    Ahmed, H. (2005b), Firms Trading Category and the Extent of Disclosure in Bangladesh, The Cost and Management, Vol. XXXIII, No. 4, pp. 5-21.

    Ahmed, J. (2006), Roadmap for accountancy profession in Bangladesh. The Financial Express, 19 February. Available at:

    Ahmed, K., and Nicholls, D. (1994), "The Impact of Non-financial Company

    Characteristics on Mandatory Compliance in Developing Countries: The Case of

    Bangladesh", The International Journal of Accounting, Vol. 29, No. 1, pp. 60-77.

    Akerlof, G.A. (1970), The market for lemons: quality uncertainty and the market mechanism, Quarterly Journal of Economics, Vol. 84, August, pp. 488-501.

    Akhtaruddin, M. (2005), "Corporate Mandatory Disclosure Practices in Bangladesh",

    International Journal of Accounting, Vol. 40, pp. 399-422.

    Akter, M. and Hoque, M. (1993), Disclosure Practices in Bangladesh: A Case Study of the Banking Sector, Dhaka University Journal of Business Studies, Vol. 14, No. 2, pp. 29-42.

    Alam , S.A.K.M. (1990), Changes in Securities Regulations: One Step Forward or One Step Backward, The Cost and Management, July-August, pp. 20-22.

    Alam, S.A.K.M. (1989), Corporate Financial Reporting in SAFA Countries- Bangladesh Context, The Accountant, Vol.XII, No. 2, April-June, pp. 14-22.

    Alam S.A.K.M (1990), "Disclosure Practices in Bangladesh: A Case Study of the

    Banking Sector", Journal of Business Studies, Vol. 14, No. 2, pp. 21-28

    Al-Rai, Z. and Dahmash, N. (1998), The effects of applying international accounting and auditing standards to the accounting profession in Jordan, Advances in International Accounting, Supplement 1, pp. 179-193.

    Aljifri, K. (2008), Annual report disclosure in a developing country: The case of the UAE, Advances in Accounting, incorporating Advances in International Accounting, Vol. 24, pp. 93100.

  • 31

    Asian Development Bank. (2007). Asian Development Outlook 2007: Bangladesh.

    Available at:

    Azizuddin, A.B.M. (2001), IAS-30: Disclosure in the Financial Statements of Banks and Similar Financial Institutions Its Adoption and Implementation, The Bangladesh Accountant, October-December, pp. 29-41.

    Banerjee, B. Martens, S. and McEnroe, J. (1998), Accounting standard-setting: a comparison of India and the United States, Advances in International Accounting, Supplement 1, pp. 239-251.

    Brealey, R. and Myers, S. (1981), Principles of Corporate Finance, McGraw Hill, New


    Carlson, P. (1997), Advancing the harmonisation of international accounting standards: exploring an alternative path, The International Journal of Accounting, Vol. 32, No. 3, pp. 357-378.

    Chamisa, E. (2000), The relevance and observance of the IASC standards in developing countries and the particular case of Zimbabwe, The International Journal of Accounting, Vol. 35, No. 2, pp. 267-286.

    Chipalkatti, N. (2002), "Market Microstructure Effects of the Transparency of Indian

    Banks", Working Paper, No 17, National Stock Exchange, India

    Chowdhury, A. (1997), A Comparative Evaluation and Rationale for Adoption of IAS 30 in Bangladesh, The Bangladesh Accountant, July-September, pp.129-141.

    Cooke, T.E. (1989), Disclosure in the corporate annual reports of Swedish companies, Accounting and Business Research, Vol. 19 No. 74, pp. 113-124.

    Cooke, T.E. (1993), Disclosure in Japanese Corporate Annual Reports, Journal of Business Finance and Accounting, Vol. 20 No. 4, pp. 521-535.

    Deloitte and Touche Tohmatsu. (2007). IAS Plus Bangladesh. Available at:

    Firth, M. (1979), The impact of size, stock market listing, and auditors on voluntary disclosure in corporate annual reports, Accounting and Business Research, Vol. 9, Autumn, pp. 273-280.

    Hossain, I. (2004), Disclosure by Banking Companies in Annual Financial Statements, CPE Seminar Paper, The Institute of Chartered Accountants of Bangladesh, 27

    April 2004.

    Hossain, M. (2008), "The Extent of Disclosure in Annual Reports of Banking

    Companies: The Case of India", European Journal of Scientific Research, Vol.23

    No.4, pp.659-680.

    Hossain, M.A, Cooper, K, and Islam, K.S (2006), Compliance with IASs: The Case of Bangladesh, paper presented at the Seventh Asian Accounting Association

    Conference, 17th-19th September, Sydney, Australia.

  • 32

    Hossain, M.A. (2003). Enforcement and Compliance of Accounting Standards: A Proposal for Bangladesh, The Chartered Secretariat, Vol. IV, Issue. 13, January - March. pp. 15-19

    Hossain, M. (2001), The Disclosure of Information in the Annual Reports of Financial Companies in Developing Countries: the Case of Bangladesh, Unpublished MPhil Thesis, The University of Manchester, UK.

    Hossain, M.A. (1999), Disclosure of Financial Information in Developing Countries: A Comparative Study of Non-financial Companies in India, Pakistan and

    Bangladesh, Unpublished PhD Dissertation, The University of Manchester.

    Hossain, M., Tan, L.M. and Adams, M. (1994), Voluntary disclosure in an emerging capital market: Some empirical evidence from companies listed on the Kuala

    Lumpur stock exchange, International Journal of Accounting, Vol. 29 No. 4, pp. 334351.

    Hove, M. (1990), The Anglo-American influence on international accounting standards: The case of the disclosure standards of the International Accounting Standards

    Committee, Research in Third World Accounting, Vol. 1, pp. 55-66.

    Hye, M.A. (1992), International Accounting Standards and the Accounting Institutes of Bangladesh, the Cost and Management, the Institute of Cost and Management Accountants of Bangladesh, Vol. XX, No.3, July-August, pp. 28-32.

    Islam, M (2006), Compliance with Disclosure Requirements by Four SAARC Countries-Bangladesh, India, Pakistan and Sri Lanka, Journal of American Academy of Business, Cambridge, Vol. 10 No. 1, pp. 348-356.

    Hye, M.A. (1989), "Compliance of IAS 30 by Bank Companies of Bangladesh", The Cost

    and Management, May- June, pp. 38-46.

    Joshi, P.L. and Ramadhan, S. (2002), The adoption of international accounting standards by small and closely held companies: evidence from Bahrain, International Journal of Accounting, Vol. 37, No. 4, pp. 429-440.

    Kahl, A. and Belkaoui A. (1981), Bank Annual Report Disclosure Adequacy Internationally. Accounting and Business Research, Summer, pp. 189-196.

    Karim, A.K.M.W. (1995), Provision of Corporate Financial Information in Bangladesh, Unpublished PhD Thesis, The University of Leeds, UK.

    Karim, A.K.M.W. and Ahmed, J.U. (2005), Determinants of IAS disclosure compliance in emerging economies: Evidence from exchange-listed companies in

    Bangladesh, Working Paper Series, Working Paper no. 21, Victoria University of Wellington, New Zealand.

    Kester, W.C. (1984), Today's Options for Tomorrow's Growth, Harvard Business Review, No. 62, March-April, pp.153-160.

    Khan and Kumar (2001), "IAS-30 and its Application in the Banking Sector in

    Bangladesh", Bank Parikrama, Volume XXVI, No.1, March 2001, p-5-21.

  • 33

    Larson, R. (1993), International accounting standards and economic growth: an empirical investigation of their relationship in Africa, Research in Third World Accounting, Vol. 2, pp. 27-43.

    Larson, R. and Kenny, S. (1996), Accounting standard-setting strategies and theories of economic development: implications for the adoption of international accounting

    standards, Advances in International Accounting, Vol. 9, pp. 1-20.

    Larson, R. and Kenny, S. (1998), Developing countries involvement in the IASCs standard-setting process, Advances in International Accounting, Supplement 1, pp. 17-41.

    Maijoor, S.J. (1991), The Economics of Accounting Regulation, Maastricht.

    Marston, C.L. and Robson, P. (1997), Financial Reporting in India: Changes in Disclosure over the Period 1982 to 1990, Asia Pacific Journal of Accounting, June, pp. 109-139

    Marston, C.L. (1986), Financial Reporting Practices in India, Crom Helm, London.

    Mirghani, M. (1998), The development of accounting standards in the Kingdom of Saudi Arabia: an international accounting standards perspective, Advances in International Accounting, Supplement 1, pp. 195-206.

    Morris, R.D. (1987), Signaling, agency theory and accounting policy choice, Accounting and Business Research, Vol. 18, Winter, pp. 47-56.

    Nicholls, D. and Ahmed, K. (1995), Disclosure Quality In Corporate Annual Reports of Non-Financial Companies in Bangladesh, Research in Accounting in Emerging Economies, Vol. 3, pp. 149-171.

    Nurunnabi, M. (2009), The perceived need for and impediments in achieving accounting transparency in developing countries: A field investigation, Paper presented at the BAA (British Accounting Association) Annual Conference, University of

    Dundee, Scotland, UK, 21-23 April, Available at:


    Owusu-Ansah, S. (2000), Noncompliance with corporate annual report disclosure requirements in Zimbabwe, Research in Accounting in Emerging Economies, Vol. 4, pp. 289-305.

    Parry, M.J. and Khan, F.A. (1984), A Survey of Published Accounts in Bangladesh,

    Institute of Chartered Accountants of Bangladesh, June.

    Parry, M.J. (1989), The Role of Accounting in the Economic Development of Bangladesh, PhD Dissertation, University of Wales, UK.

    Perera, M. (1989), Accounting in developing countries: A case for localised uniformity, The British Accounting Review, Vol. 21, No. 2, pp. 141-158.

    Rahman, M.Z. and Zannah, S. (2003), Reports on the Observance of Standards and Codes (ROSC) Bangladesh, Accounting and Auditing, (World Bank and IMF, May 16).

  • 34

    Rahman, M.M. (1999), The Extent of Mandatory and Voluntary Financial Disclosure by Listed Companies in Bangladesh: An Empirical Study, Dhaka University Journal of Business Studies, Vol. 20, No. 1, pp.189-208.

    Reaz, M. and Arun, T. (2006), Corporate Governance in Developing Economies: Perspective from the Link between Board Ownership and Financial

    Performance, Corporate Governance: An International Review, Vol. 15, No. 6.

    Samaha, K. and Stapleton, P. (2008), Compliance with International Accounting Standards in a National Context: Some Empirical evidence from the Cairo and

    Alexandria Stock Exchanges, Afro-Asian Journal of Finance and Accounting, Vol. 1, No. 1, pp. 22-41.

    Saha and Rahman (2000) "Financial Reporting Practices in Banks and Financial

    Institutions: Implementing The New Formats of Financial Statements in

    Compliance With IAS-30", The Bangladesh Accountant, July-September.

    Samuels, J.M. and Oliga, J.C. (1982), Accounting Standards in Developing Countries, International Journal of Accounting Education and Research, Vol. 18, No. 1.

    Sundarajan, V. and Balino, T. (1991), Issues in Recent Banking Crises, in Sundarajan, V. and Balino, T. (Eds), 'Banking Crises: Cases and Issues', Washington DC.

    Sobhan, F. and Werner, W. (2003), A Comparative Analysis of Corporate Governance in South Asia: Charting a Roadmap for Bangladesh. Bangladesh Enterprise Institute, Dhaka, Bangladesh.

    Spence, M. (1973), Job market signaling, Quarterly Journal of Economics, Vol. 87, August, pp. 2930.

    Susela, S. (1999), Interests and accounting standard setting in Malaysia, Accounting, Auditing and Accountability Journal, Vol. 12, No. 3, pp. 358-387.

    Toha, M. (1986), IASs in the Context of Bangladesh, a paper presented in the Third SAFA Conference, the Institute of Chartered Accountants of Bangladesh (ICAB)

    and the Institute of Cost and Management Accountants of Bangladesh (ICMAB),

    Dhaka, Bangladesh.

    Tyrrall, D., Woodward, D. and Rakhimbekova, A. (2007), The relevance of International Financial Reporting Standards to a developing country: Evidence

    from Kazakhstan, The International Journal of Accounting, Vol. 42, No. 1.

    Wallace, R.S.O. and Briston, R. (1993), Improving the accounting infrastructure in developing countries, Research in Third World Accounting, Vol. 2, pp. 201-224.

    Wallace, R.S.O. (1988), Corporate financial reporting in Nigeria, Accounting and Business Research, Vol. 18, Autumn, pp. 352-362.

    Watts, R.L. and Zimmerman, J.L. (1986), Positive Accounting Theory, Englewood Cliffs,

    New Jersey: Prentice-Hall.

    World Bank. (2003), Bangladesh: Report on the Observance of Codes and Standards: Accounting and Auditing. Available at:

  • 35

    Table 1: Descriptive Statistics of the Dependent and Explanatory Variables


    N Minimum Maximum Mean



    Overall disclosure index 27 .25 .52 .3901 .07059

    Audit committee 27 0 1 .59 .501

    institutions' share 27 0 70 13.31 15.781

    Big four and other firms 27 0 1 .44 .506

    Natural log of total assets 27 2.48 4.91 4.1060 .56837

    Return on equity 27 -30.39 31.03 14.4285 11.76349

    Audit complexity 27 .20 .86 .5947 .14874

    Leverage 27 0.40 8.56 2.748 2.0116

    Table 2: Independent Variables, Proxy and Expected Sign

    Independent Variable Proxy Expected


    Test Variables:

    AUDCOM Corporate Governance Link

    If the companies have Audit

    committee =1 otherwise 0


    INSTTSHLD Institutional shareholding Percentage of shares held by

    institutional investors


    BIG4 Auditor Reputation Whether the company is audited

    by a Big 4 affiliated audit firm


    Control variables:


    Natural log of total assets +

    ROE Profitability Return on Equity =

    Net Profit/Total Shareholders Equity


    COMPLEX Audit complexity Proportion of loans and advances

    to total assets


    LVG Leverage Debt-to-equity ratio -

  • 36

    Table 3: Correlation Matrix

    Overall disclosure









    Big four

    and other


    Natural log

    of total


    Return on




    Audit committee .561**

    institutions' share .006 -.232

    Big four and other


    .207 -.017 -.004

    Natural log of total


    .376 .412* -.220 .009

    Return on equity .170 .161 .154 .224 -.266

    Audit complexity .485* .476

    * -.242 -.128 .627

    ** -.069

    Leverage -.215 -.028 .215 .343 -.263 .505** -.354

    Table 4: Summary of the regression output for the whole sample

    ODI = + Auditcomm + Insttholding + Big4 + Complex +

    Leverage+ ROE + Assets +

    Dependent Variable Coefficients t-statistic Sig.

    (Constant) .226 2.406 .026

    Audit committee .063 2.412 .026

    institutions' share .001 1.386 .182

    Big four and other firms .045 1.958 .065

    Natural log of total assets .008 .315 .756

    Return on equity .001 1.106 .282

    Audit complexity .097 .927 .365

    Leverage -.009 -1.921 .070

    F Statistic 3.492

    Model Significance 0.014

    Adjusted R2 0.402

    N 27

  • 37

    Appendix-1: Relevant Regulation for Banking Industry in Bangladesh

    Bangladesh Bank Order No. 127, 1972 Bangladesh Bank (Amendment) Act, 2003 Banking Companies Act No. 14, 1991 Bank Company (Amendment) Act No. 13, 1993 Banking Companies (Amendment) Act No. 25, 1995 Banking Companies (Amendment) Act, 2003 Companies Act No. 18, 1994 Money Laundering Prevention Act No. 7, 2002 Bangladesh Bank Framework for Internal Control Systems in Banking


    Bangladesh Bank Guidelines for Merger/Amalgamation of Banks/Financial Institutions

    Bangladesh Bank Prudential Regulations for Banks, 2007 Bangladesh Bank Guidance Notes on Prevention of Money Laundering Bank Regulation and Policy Division Circular No. 5, 2006 Bank Regulation and Policy Division Circular No. 14, 2007

    Appendix-2: Relevant Institutions for issuing regulation and monitoring Banking

    Industry in Bangladesh

    Bangladesh Bank (BB): Issuing regulation and monitoring the banks

    Institute of Chartered Accountants of Bangladesh (ICAB): Assist on Issuing regulation

    Ministry of Finance (MOF): Issuing regulation through Bangladesh Bank (BB)

    Ministry of Law, Justice and Parliamentary Affairs (MOLJPA): Issuing regulation

    Securities and Exchange Commission of Bangladesh (SEC): Issuing regulation and monitoring the banks

    Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE): Monitoring the banks

  • 38

    Annexure-1: Mandatory Disclosure Provisions under Banking Companies Act, 1991

    Section of



    Act, 1991

    Disclosure Provisions

    Section 2 The provisions bearing of this Act shall be in addition to and not, save

    as hereinafter express by provided, in derogation of, the Companies Act,

    1994 and any other laws for the time being in force. In addition, as the

    banking companies are registered with the registered joint stock

    companies, the banking companies should comply with the provisions of

    the Companies Act 1994 if otherwise expressed in the Banking

    Companies Act, 1991

    Section 24

    Every bank shall make a reserve fund and if the amount in that fund

    together with amount in the share premium account is below the amount

    than its paid up capital. Bank will transfer to the reserve fund not less than 20 on profit before tax and it should be disclosed in the profit and

    loss account made under section 38 of this Act.

    Section 25 Every bank shall maintain a cash reserve fund not less than 5% with

    Bangladesh Bank or its agent bank and that should disclosed in the

    financial statements.

    Section 33 The detailed disclosure provisions with regard to the liquid assets of the

    banking companies in Bangladesh.

    Section 36 Every Bank company shall submit reports to the Bangladesh Bank on

    the 31st day of December and 30

    th day of June of each year showing its

    assets and liabilities in the prescribed form and manner.

    Section 37 For the purpose of benefit of public, Bangladesh Bank may publish in

    consolidated form or otherwise any information contained by it under

    this Act relating to overdue loans and advances of more than thirty days.

    Section 38 The Accounts and Balance Sheet: should prepared as per BRPD circular

    3/2000 and also the provision of the Companies Act, 1994 (Schedule XI

    of this Act). As per section 39, financial statement should b