Chapter 6

1. Chapter 6 International Transparency and Disclosure

2. 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

3. Levitt and Greenspan on Transparency Arthur Leavitt- SEC Chair (1998) “The significance of transparent, timely and reliable financial statements and its importance to investor protection has never been more apparent. The current financial situations in 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

4. 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

5. 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

6. 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

7. 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

8. 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

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

10. 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

11. 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

12. 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

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

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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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 International Accounting and Multinational Enterprises – Chapter 6 – Radebaugh, Gray, Black