Chapter 6
International Transparency and
Disclosure
Introduction to Transparency
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Lack of “transparency” is a major concern in
raising international capital for MNEs
Concerns with transparency arose with the
Asian Crisis, Enron, WorldCom, Parmalat,
Achieving greater transparency is a goal of
regulators around the world
Greater transparency can restore confidence
in and expand capital markets
International Accounting and Multinational Enterprises – Chapter 6 – Radebaugh, Gray, Black
Levitt and Greenspan on
Transparency
Arthur Leavitt
“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.”
Alan Greenspan
“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
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Bushman and Smith measure transparency
by looking at
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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
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PricewaterhouseCoopers’ Opacity Index at
the country level considers
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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
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Bushman, Piotrosk and Smith identify two
kinds of corporate transparency at the
country level
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Financial transparency
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Corporate disclosure intensity
Timeliness of disclosures
Number of analysts and media development
Governance transparency
International Accounting and Multinational Enterprises – Chapter 6 – Radebaugh, Gray, Black
Pressures for Disclosure
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More groups want information
Financial community desires more disclosure
Result has been increasing disclosure requirements
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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, 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
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The audience determines the range and
depth of information disclosed
Many users do not understand the
information given them
Few use annual reports directly
MNE reports tend to be more complex than
domestic reports
International Accounting and Multinational Enterprises – Chapter 6 – Radebaugh, Gray, Black
Communicating to Users and the
Importance of Disclosure
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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,
Specific Info
MNE Sensitivity
To Info Provision
International Accounting and Multinational Enterprises – Chapter 6 – Radebaugh, Gray, Black
Managerial Incentives to
Disclose Information
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Management provides information voluntarily
and because of regulation
International Accounting and Multinational Enterprises – Chapter 6 – Radebaugh, Gray, Black
Costs of Information
Production
Benefits > Costs
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Direct cost of disclosure is made up of
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Indirect costs include
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The value of resources used in gathering and processing
the information
The cost of auditing and communicating the information
Competitive disadvantage
Costs of government interference
Internal and external information needs will always
differ
International Accounting and Multinational Enterprises – Chapter 6 – Radebaugh, Gray, Black
Competitive Disadvantage of
Disclosure
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The more specific or future-oriented the information,
the more potential for competitive disadvantage
Competition through disclosure
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Vigor in the economy
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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
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Meek, Roberts, and Gray
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MNEs tend to disclose more information
voluntarily than domestic corps.
Factors influencing voluntary disclosure are
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Size
International listing status
Country or region of origin
Industry
Non-financial information is a European
phenomenon
International Accounting and Multinational Enterprises – Chapter 6 – Radebaugh, Gray, Black
Corporate Disclosure
Practices
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Cultural values influence disclosure (Gray)
Archambault and Archambault (2003)
findings
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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
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Fourth and Seventh Directives (EU) require
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“Fair review of the development of the business”
Any “likely future development”
Report activities in research and development
International Accounting and Multinational Enterprises – Chapter 6 – Radebaugh, Gray, Black
International Disclosure
Regulation
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U.S. - SEC
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Requires “management discussion and analysis”
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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”
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Similar to U.S. requirements
International Accounting and Multinational Enterprises – Chapter 6 – Radebaugh, Gray, Black
Corporate Review
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Reviews business activities as a whole
Includes the following
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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
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Includes the following
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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
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A more detailed review of business
operations is given, including segment info
Includes the following
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Review of Business Segments
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Includes quantitative data and narrative commentary
Review of International Operations and
Geographical Segments
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Becoming increasingly important with globalization
International Accounting and Multinational Enterprises – Chapter 6 – Radebaugh, Gray, Black
Financial Review
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Includes a discussion and analysis of
financial results and financial position
Includes the following
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An Analysis of Results
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An Analysis of Liquidity and Capital Resources
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Discussion of events and impact on earnings
High disclosure in France, Italy, Holland, U.S., U.K.
An Analysis of Asset Values and Inflation
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High disclosure in Holland, Sweden, Switzerland, U.K.
International Accounting and Multinational Enterprises – Chapter 6 – Radebaugh, Gray, Black
Frequency and Timeliness of
Reporting
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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
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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
International Accounting and Multinational Enterprises – Chapter 6 – Radebaugh, Gray, Black
Growing Pressures for
Transparency
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Pressures are increasing because of
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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
International Accounting and Multinational Enterprises – Chapter 6 – Radebaugh, Gray, Black