Introduction
Many finance specialists note that Mexican companies tend to keep business information hidden. However, the absence of credible data prevents foreign investors from doing business in the country. There are variously historical, political, social, and cultural aspects that lead to such a problem. The main goals of this paper are to discuss factors that predict disclosure levels in Mexico and explain the underlying causes of recent improvements in accounting measurement and disclosure practices in the country.
Factors for Low Disclosure Levels
Accounting is necessary to assist investors in evaluating cash flows and potential risks. This information allows determining the value of a particular company. Therefore, disclosures are very important to enhance public share ownership. However, Mexico has relatively low disclosure levels. Several factors lead to such a situation. Price stability is very important for using accounting information as a language of economics. However, high inflation rates in Mexico hinder such processes (Choi & Meek, 2014). They negatively affect cost accounting. Inflation makes companies understate asset values and other expenses and overstate revenue. Mexican firms have to consider price changes. When inflation during three years becomes more than twenty-eight percent, the country uses general price-level accounting.
Another significant factor is a tendency for confidentiality and unwillingness to present financial information to the public. Such a trend is prevailing in Mexico (Choi & Meek, 2014). Companies in the country prefer to keep their business information from disclosure because they want to avoid uncertainties, conflicts, and competition. Such a perception allows them to preserve security. Also, secrecy is associated with collectivism. Mexico is considered a collectivistic society. Therefore, its firms are less eager to collaborate with external parties. Usually, countries, where people are more concerned about life quality, the environment, and other social issues, share information more easily. However, Mexico’s society has other priorities. Therefore, the cultural dimension plays a significant role.
Another important factor is historical. Mexica’s economy was closed to foreign capital for a long time (Choi & Meek, 2014). Therefore, the country did not collaborate with international communities. Although this situation has changed, such long isolation still creates certain barriers to cooperation. The next aspect is relevant nowadays. Although Mexico is a capitalist country, its government influences all economic processes.
Traditionally, it has controlled all key industries (Choi & Meek, 2014). Therefore, this fact also contributes to low disclosure levels. Finally, Mexico’s private sector is mostly controlled by families. That is why its stock market is relatively small in comparison to countries of similar size. The majority of Mexican companies raise their capital using debts rather than stock and shares without fixed interest. A prevailing number of businesses belong to families, and they are not willing to share their information. Also, they are quite worried about financial reporting.
Factors for High Disclosure Levels
However, some factors might predict relatively high levels of disclosure. The level of education related to complicated accounting standards and practices does not matter if these standards are misused. Disclosures associated with the risks of derivative securities do not provide sufficient information if they are examined by incompetent specialists. Therefore, without general education, it is very difficult to achieve an appropriate level of accounting education.
However, Mexico has successfully dealt with this problem (Choi & Meek, 2014). The adoption of International Financial Reporting Standards (IFRS) helped the country to modify its accounting education and certification. Such training programs were aimed at improving the understanding of IFRS, which allowed auditing financial statements. It also helped to foster professional requirements for testing and licensing.
The next pertinent factor is that Mexican companies are highly influenced by the U.S. and Canadian markets. It is especially relevant to accounting. However, the international standards of accounting often do not correspond with Mexican ones (Choi & Meek, 2014). Nonetheless, such requirements have a minimal impact on financial reporting. What is more important is close economic relationships with the United States and Canada. Also, the country modifies its accounting standards by the requirements of IFRS. Moreover, Mexico is guided by the International Accounting Standards Board (IASB).
Recent Improvements
Certain improvements related to business information disclosure and accounting measurement have recently occurred in the country. Most of them are associated with the democratization of the nation (“Quality of democracy,” 2017). This process has changed people’s perceptions regarding the matter. Many politicians believe that secrecy only hinders the economic development of the country. Therefore, the first significant improvement is the occurrence of political opposition and independent media. These are very influential factors, and thus they have changed the situation dramatically.
The second improvement is the increasing number of foreign companies that do business in the country. Mexico’s economy is open to investors. Foreign direct investments have been significantly increased during recent years (“Mexico: Foreign investment,” 2018). It has happened due to the liberalization of the media and energy sectors. Finally, the country’s government has developed a new investment strategy that is aimed at infrastructure expansion. Therefore, these factors have improved transparency and created a more attractive business environment.
Conclusion
In conclusion, different aspects determine disclosure levels in Mexico. Historically, the country was isolated, thus there were only a few well-established relationships with foreign companies. Culturally, most businesses in Mexico are family-controlled, which also leads to secrecy. However, business interactions with the United States and Canada have improved the situation. Mexican society has become more democratic and open-minded. The country has changed the direction of its economic development. Therefore, the resolution of the above-discussed problems is only a matter of time.
References
Choi, F., & Meek, G. (2014). International accounting (7th ed.). Harlow, England: Pearson.
Mexico: Foreign investment (2018). Web.
Quality of democracy. (2017). Web.