Chapter 6

International Transparency and

Disclosure

Introduction to Transparency
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,

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,

The Meaning of Transparency

Bushman

and Smith measure transparency

by looking at

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,

The Meaning of Transparency

PricewaterhouseCoopers

Opacity 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,

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

International Accounting and Multinational Enterprises Chapter 6 Radebaugh,

Pressures for Disclosure

More groups want information

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, etc.)
Trend shows that greater disclosure increases the
demand for more information

International Accounting and Multinational Enterprises Chapter 6 Radebaugh,

Communicating to Users
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,

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,
Specific Info

MNE Sensitivity
To Info Provision

International Accounting and Multinational Enterprises Chapter 6 Radebaugh,

Managerial Incentives to
Disclose Information
Management

provides information voluntarily

and because of regulation

International Accounting and Multinational Enterprises Chapter 6 Radebaugh,

Costs of Information
Production

Benefits > Costs

Direct cost of disclosure is made up of

Indirect costs include

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,

Competitive Disadvantage of
Disclosure

The more specific or future-oriented the information,

the more potential for competitive disadvantage
Competition through disclosure

Vigor in the economy

In business incentives

International Accounting and Multinational Enterprises Chapter 6 Radebaugh,

The Net Costs and Benefits of

Disclosure of Specific Items

International Accounting and Multinational Enterprises Chapter 6 Radebaugh,

The Net Costs and Benefits of

Specific Disclosure Items

International Accounting and Multinational Enterprises Chapter 6 Radebaugh,

Corporate Disclosure
Practices
Meek,

MNEs tend to disclose more information

voluntarily than domestic corps.
Factors influencing voluntary disclosure are

Roberts, and Gray

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,

Corporate Disclosure
Practices
Cultural

values influence disclosure (Gray)

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,

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

International Accounting and Multinational Enterprises Chapter 6 Radebaugh,

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. requirements

International Accounting and Multinational Enterprises Chapter 6 Radebaugh,

Corporate Review

Reviews business activities as a whole

Includes the following

Chairpersons 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,

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,

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,

Financial Review
Includes

a discussion and analysis of

financial results and financial position
Includes the following

An Analysis of Results

An Analysis of Liquidity and Capital Resources

Discussion of events and impact on earnings

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,

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,

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

International Accounting and Multinational Enterprises Chapter 6 Radebaugh,

Growing Pressures for

Transparency
Pressures

are increasing because of

Cross-border capital raisings

Growth of world trade and investment

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,