Introduction
The authors investigate the association of quality of corporate governance and the level of disclosure of expected impacts of applying Australian equivalents of International Financial Reporting Standards provided by Australian companies as was effective right from the beginning of the year 2005. Companies were required to provide in their annual or interim reports, how the transition to these standards would be managed and to report the expected key differences in the accounting policies as a result of the implementation of these changes.
Discussion
The authors investigate the linkage between firm governance the reporting of the impacts of implementation of the AIFRs; whether the firms that are governed better disclose more about the AIFRs impacts than those less well managed companies. The authors consider regulated disclosures within the provisions of the Australian accounting standards governed by the AASB 1047 and study the variations in the level of these disclosures. The authors use an index based on the number of expected changes in the specific accounting policy following the implementation, and the number of sentences used to explain transition to AIFRs, to measure the extent of the disclosures. The authors link the quality of corporate governance with the extent of disclosures because extensive disclosures can provide better understanding of the impact of implementation of AIFRs and are indicators of more transparency.
The authors used a sample of 1000 Australian companies listed on the ASX, but 965 were used since four did not provide importantly required information in their annual report and following elimination of those without full set of figures to test the models. The authors found a positive correlation between more frequent board and audit meetings and more disclosure about the impacts of AIFRs. Higher level of disclosure was also found in companies which had smaller audit committees and smaller proportion of members with accounting and finance expertise.
The authors hold that firms do not reach full disclosure of information which is necessary to maximize firm value. Two theories put forward to explain the disclosure of information include the legitimacy and political economy theory. While the latter holds that the political, social and institutional framework in which events take place need consideration while studying the economic events, the former considers the implicit social contract between the society and the company. It has been posited that companies have incentives in releasing information showing that they are not breaching the society’s expectations and norms. Agency theory also explains the disclosure aspect and theorizes that companies may withhold information to have the market prevented from monitoring their performance, and this creates ‘disclosure agency problem’.
The researchers find evidence for superior governance structures among higher-level disclosing companies. These companies performed better in respect to diligence in board and audit committee, and quality of external audit. The number of sentences narrating the transition of AIFRs and the and the provided explanation on expected impact of transition on economic policy do provide a suggestion of greater awareness of the impacts of the aforementioned transition, although they do not fully measure the quality of disclosures.
Conclusion
Disclosure of information by a firm may be limited to the perceived advantages they have for the public. Companies have advantages in releasing information that is positive in relation to societal needs and values. Requirements to disclose information lead to improved governance in terms of diligence in board and audit committee, and quality of external audit.
References and Bibliography
Kent Pamela & Jenny Stewart (2008). Corporate governance and disclosures on the transition to International Financial Reporting Standards. Accounting and Finance 48, 649–671.