Chapter 6
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Transcript of Chapter 6
Chapter 6International 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 TransparencyArthur 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 Asia…are 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 90’s?
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 SensitivitySpecific Info To 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) Hofstede’s 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
Chairperson’s 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