The Accountant's Role in Corporate Governance. Global, Unified. Transparency and Disclosure Criteria for Financial Reporting

Academic Paper, 2021

72 Pages, Grade: Post graduate


Table of Contents


Rationale of the Study
Significance of the Study

Review of Related Literature
Transparency and Disclosure
Global, unified financial reporting disclosure
The evolution of the role of accountants
Conceptual Framework

Research Environment
Research Respondents
Research Instrument
Research Procedures

Chapter 4


Findings of the Study




Highlighted in this study is the extent of practice in transparency and disclosure of financial information in terms of accuracy, consistency, appropriateness, completeness, clarity, timeliness, convenience, and governance and enforcement. It examined the criteria for transparency and disclosure of financial information currently applied in the Philippine setting, considering related party transactions, audit committee financial expert disclosure, annual financial reports; and strengthening guidelines for managing conflict of interest. It also assessed the preparation for the global and unified standard for the upcoming ASEAN integration in the Philippines, as well as, the role of accountants in enhancing transparency and disclosure towards a more effective corporate governance.

The study utilized the descriptive method of research employing the survey questionnaire and open-ended questions. This was conducted personally and through social network to twenty accountants from the academe, government, business and industry, and accounting firms. Mean and standard deviations were used to answer the problems where these are applicable. Qualitative analysis was used for the open-ended questions.

Findings revealed that accountants practiced the principles on timeliness, consistency and accuracy to a very great extent. Transparency and disclosure of related party transactions and annual financial report were done to a very great extent. Accountants abide with the global, unified criteria for transparency and disclosure in preparation for the ASEAN integration. Accountants served as moral guardians to control corruption and fraud in corporate governance.

Chapter 1


Rationale of the Study

Corporate governance stands upon several principles, raised from the Cadbury report, Principles of Corporate Governance, and Sarbanes-Oxley Act of 2002, which include rights and equitable treatment of shareholders, interests of other stakeholders, role and responsibilities of the board, integrity and ethical behavior, and disclosure and transparency. Disclosure and transparency are one of the principles of corporate governance that aims to inform the public of the roles and responsibilities of the board and management in order to provide stakeholders with a level of accountability. It also includes the implementation of procedures to independently verify and safeguard the integrity of the company’s financial reporting (OECD, 2004).

Developing countries are often faced with a myriad of problems, such as underdeveloped and illiquid stock markets, economic uncertainties, weak legal controls and investor protection, and frequent government intervention. These structural characteristics, coupled with poor economic performance, a predominance of concentrated shareholding and controlling ownership, demand effective corporate governance in these countries. In contrast to the numerous studies on corporate governance in developed countries, minimal research has been done on developing countries. The increasing globalization and democratization in most developing countries, however, calls for the enhancement of governance practices in these countries (Tsamenyi , Enninful-Adu, & Onumah, 2007).

The world changing economy and financial flows, which brought the increasing internationalization and interdependence, have put the openness issue at the forefront of economic policy making. Transparency and disclosure play a vital role in the changing business environment faced by organizations today. Transparency and accountability are mutually reinforcing. Transparency enhances accountability by facilitating monitoring and accountability enhances transparency by providing an incentive for agents to ensure that the reason for their actions are properly disseminated and understood. Transparency is a means of fostering accountability, internal discipline and better governance. Transparency and accountability improve the quality of decision making in policy-making institutions (Lepadatu & Pirnau, 2009).

Corporate reporting functions to enable all connecting nodes of accountability between stakeholders and the company. There is a clear accountability vested in Boards of Directors and management for satisfactory stewardship of invested funds and legally enshrined expectations that the directors will be active in the best interests of the corporation (Azam, Warraich, & Awan, 2011). The availability of financial information is essential to enable all investors to make informed decisions on a level playing field (Atkinson, 2002). However, aside from management and the board, accountants play a significant role in the pillar of disclosure and transparency.

Through the combined efforts of accountants and management transparency and disclosure will be properly implemented at an optimal level leading to greater benefits not only to the top management but also to all the stakeholders involved. If actions and decisions are visible and understandable, the monitoring costs are lowered. The general public is better able to monitor public sector institutions; shareholders and employees, to monitor corporate management; creditors to monitor borrows and depositors to monitor banks. Therefore, poor decision will not go unnoticed or unquestioned (Lepadatu & Pirnau, 2009). Thus, there is a need to delve deeper into the area of transparency and disclosure in corporate governance, particularly in financial reporting.


Statement of the Problem

This study investigated the principles and criteria for transparency and disclosure in financial reporting and the accountant’s contribution facilitating its implementation.

Specifically, it answered the following questions:

1. What is the extent of practice in transparency and disclosure of financial information in terms of:
1.1. Accuracy;
1.2. Consistency;
1.3. Appropriateness;
1.4. Completeness;
1.5. Clarity;
1.6. Timeliness;
1.7. Convenience;
1.8. Governance and enforcement?

2. To what extent are the criteria for transparency and disclosure of financial information currently applied in the Philippine setting, in terms of:
2.1. Related party transactions;
2.2. Audit committee financial expert disclosure;
2.3. Annual financial reports;
2.4. Strengthening guidelines for managing conflict of interest?

3. How can global and unified criteria for transparency and disclosure of financial information aid in the preparation of the upcoming ASEAN integration in the Philippines?

4. How can accountants contribute in enhancing transparency and disclosure towards more effective corporate governance mechanisms?

Significance of the Study

Accountants. To understand the accounting profession more thoroughly especially in the area of corporate governance is an essential priority of accountants. It is enlightening to see a new perspective and definition of what the accountants really contribute to organizations.

Business organizations. Since transparency is one of the most important pillars of corporate governance, solidifying its standards will be very beneficial not only to business organizations, but to all types of organizations, profit or nonprofit. It paves the way to the solution to complexity and confusion in financial reporting transparency and disclosure.

Stakeholders. It will not only be to the advantage of stockholders and management, but also of minor and other stakeholders if the organization will achieve appropriate levels of transparency. Transparency is actually more geared towards the protection of the interests of stakeholders

Public. By giving particular attention to transparency and moving towards more standardized and institutionalized framework for financial reporting, it gives a level of assurance to the public that organizations are credible and accountable for the financial reports they publish.


Accountant is practitioner ofaccountingor accountancy, which is the measurement, disclosure or provision of assurance about financial information that helps managers, investors, tax authorities and others make decisions about allocating resources. Most accountants are employed in public practice, commerce and industry, academe, and the government.

Corporate governance provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined. These are the mechanisms by which companies are controlled and directed (Todorovic, 2013).

Disclosure is the presentation of the financial information, which the regulatory establishments for capital markets make it obligatory, and of other financial and nonfinancial information apart from these information, by companies, clearly and openly, for the public (Atabey & Çetin, 2012).

Financial reporting is the preparation, presentation and disclosure of relevant and valuable financial reports to the intended users that supports in business decision-making (Stanko, 2001)

Transparency is the approach of making persons, managements, markets or governments responsible for their activities and policies. In this context, transparency, in terms of managements, can be defined as the disclosure of the whole information, intended for their assessment by (public opinion) (Atabey &Çetin, 2012).

Chapter 2


Review of Related Literature

According to Dr. Yeong-Bin Lee & Ling Tung (2012), Disclosure and transparency is an integral part of corporate governance. Disclosure helps the public understand a company's activities, policies and performance with regard to environmental and ethical standards, as well as its relationship with the communities where the company operates. Inadequacy of disclosure and transparency may lead to unethical behavior such as fraud and corruption, costing not only the company but the economy as a whole. There is a close relationship between transparency and the enforcement mechanism of corporate governance. There are five key constructs for evaluation of disclosure and transparency includes protection of rights of shareholders, strengthening of functions of board of directors, disclosure of financial information, information transparency, rights of stakeholders (Lee, 2012).

However, this study only covers the transparency and disclosure of financial information, which is related to the accounting profession. The succeeding discussions deal with transparency and disclosure of financial information, the evolution of the role of accountants in corporate governance, and the convergence of a global, unified transparency and disclosure of financial information.

Transparency and Disclosure

The OECD Principles of Corporate Governance are a number of corporate governance standards, which were developed by the OECD in co-operation with governments, international organizations, and businesses. According to the OECD (2004), the Principles are intended to be used by policy makers for self-assessments and by other stakeholders such as researchers, investors, analysts, and consultants. The Principles generally represent a common basis that OECD member countries consider essential for the development of good governance practices (OECD, 2004). The framework contains four principles that were released in May 1999 and revised in 2004, including principles of just and equality, principle of accountability, principle of responsibility, and principles of disclosure and transparency(Atabey & Çetin, 2012).

How to enhance transparency, reduce information asymmetry between management and investors, provide investors with relevant, accurate and timely information that informs decision making about project design and management has become more important for businesses than ever before. Disclosure and transparency ensure that all interested parties are provided with true, correct, complete and timely information, which they can use for decision-making. It reduces information asymmetry and uncertainty, enables investors to make the most well-informed investment decisions and eliminates the risk of illegal insider trading (Lee, 2012).

Transparency refers to the principle of creating an environment where information on existing condition, decision and action are made accessible, visible, and understandable to all market participants. Accountability refers to the need for market participants, including the authorities, to justify their actions and policies and accept responsibility for their decisions and results. Transparency is necessary for the concept of accountability to take hold amongst the three major groups of market participants: borrowers and lenders, issuers and investors, as well as national authorities and international financial institutions (Lepadatu & Pirnau, 2009).

Financial accounting and reporting can be seen, ideally, as an objective source of accountability within corporations and the broader structures of industrial and financial capitalism. Consistent with these beliefs, financial accounting and reporting research examines how such forms of reporting provide a monitoring mechanism to ensure that managers act in the interests of shareholders. Sloan suggests “accounting provides the information for governance mechanisms to operate efficiently (Sloan, 2001). In sum, accounting expertise and accounting technologies, contributed to making corporations knowable and understandable as norms of business organization within the public domain (Stein, 2011).

Accounting expertise and accounting technologies functioned in a number of ways. First, they were relevant to a growing call for greater publicity (financial disclosure and reporting). While the intention was that publicity would provide a means to control corporations, by making corporations knowable and understandable, publicity contributed to a corporate discourse of corporations as norms of business organization. Corporations would be controlled not by their abolishment through laws, but by regulatory and corrective measures. Such measures would permit corporations to be seen as productive and economically attractive. Corporations could be changed from speculative enterprises to investments (Stein, 2011).

Financial transparency is defined as the ability of market participants to gauge management/insider actions and form accurate assessments regarding a firm’s current state and future prospects. Financial transparency and information disclosure contain information on the company’s accounting policy,consistency with international accounting standards, efficiency indicators (ROE/ROA),Gearing ratios,consolidated financial statements,off balance sheet financing information/contingent liabilities,social responsibility,corporate governance statement and awareness,five year financial summary,stock price information,market capitalization,forward looking information,qualitative historical information,risk management,Chairman’s statement,Managing director’s review,value added statement/information, andinternal control (Tsamenyi , Enninful-Adu, & Onumah, 2007).

The degree of transparency depends on both the willingness and ability of management to rectify any informational discrepancies with market participants. Accounting disclosure standards are only one possible means of achieving transparency. Growth and value firms may also have different information environments. These characteristics may have a larger influence on transparency than corporate governance structures. Finally, a discretionary component of transparency may exist. This component is related to the willingness of management to communicate information to the market (Ciccone, 2000).

The financial information of a firm is communicated through various channels to the market. The market participants interpret the information and use it to make various assessments, for example, the share price, the cost of capital, and future earnings estimates. Firms that generate a large quantity of relevant, reliable information should enable the participants to form more accurate assessments. These firms are thus considered transparent (Ciccone, 2000).

Conversely, firms with vague, inaccurate, or sparse information will inhibit the assessments. These firms are considered opaque. If these regulations are weak, firms can choose to manipulate required information or to not disclose relevant information. Thus, weak accounting regulations may result in lower transparency (Ciccone, 2000).

There is a growing recognition of national governments including central banks, that transparency (the openness of policy) improves the predictability and hence, the efficiency of policy decision. Transparency forces institutions to face up to the reality of a situation and makes officials more responsible, especially if they know they will have to justify their views, decisions and actions afterwards. Timely policy adjustments are encouraged (Lepadatu & Pirnau, 2009).

Transparency does not change the nature or risks inherent in financial systems. It may not prevent financial crises but may moderate market participant’s response to bad news. Transparency helps market participants to anticipate and qualify bad news and lessens the probability of panic and contagion (Lepadatu & Pirnau, 2009). Users of financial statements have expressed strong interests in developing reporting standards with enhanced predictive value. The importance of not adding to the current complexity and volume of disclosures was recognized. Forcing compliance to performance metrics irrelevant to a specific industry, with the stated aim of consistency, would accomplish nothing (Sayther, 2004).

The objective of financial statements is to provide information about the financial position (balance sheet), performance (income statements), and changes in financial position (cash flow statement) of an entity. The transparency of financial statements is secure through full disclosure and by providing fair presentation of useful information necessary for marking economic decision to a wide range of users. In the context of public disclosure, financial statements should be easy to interpret. While more information is better than less, the provision of information is costly. Therefore, the net benefits of providing more transparency should be carefully evaluated (Lepadatu & Pirnau, 2009).

Transparency must be understood from the viewpoint of the user of financial information, not the provider. From a user perspective, financial transparency involves at least eight related concepts including accuracy, consistency, appropriateness, completeness, clarity, timeliness, convenience, and governance and enforcement (Kulzick, 2004).

Accuracy is achieved if information follows the standards agreed upon. Consistency is when standards are applied consistently between periods and between different companies to provide comparability. Appropriateness is when standards used accurately reflect the underlying economic reality of the organization and its industry. Completeness is when all information needed by the user to make sound decisions should be available. This includes key performance indicators and other information beyond presented in the financial statements needed to accurately assess the company’s performance and position (Kulzick, 2004).

Clarity is when information is presented in a manner that is clear and understandable to the user. Timeliness is when information should be presented within a reasonable time after it is known to management and on a sufficiently frequent basis. It suggests that information is available soon enough so that users can incorporate it in their decision process (Stanko, 2001). Convenience is when all significant information must be easily and equally accessible to all users. Governance and enforcement is when adequate policies should be in place to assure that the agreed-upon level of transparency occurs (Kulzick, 2004).

There are six levels of transparency according to the multi-layer conceptual framework of transparency in financial statements. The model imagines transparency as a hierarchy of lenses that ultimately should provide a view of the firm’s economic performance and financial position. A lack of transparency at a high level automatically reduces transparency at all lower levels (Mensah, Nguyen, & Prattipati, 2006).

Transparency level 1 (transactions and events) deals with whether the financial statements include all transactions and events of the period that actually affected the financial position and performance of the entity and excludes all others. The information needed to judge transparency includes the independent auditors’ opinion, management representations, information on governance, any conflicts of interest and related party transactions, history of restatements, and explanation of unusual ratios and trends. Verifiability and freedom from bias are the important concepts are scrutinized (Mensah, Nguyen, & Prattipati, 2006).

Transparency level 2 (accounting methods) examines accounting principles (GAAP) used to measure transactions are identifiable and understandable. Information needed to judge transparence includes clear identification of the nature of and reasons for each GAAP selection and application, and disclosure of any non-GAAP applications. Verifiability and comparability are examined at this level (Mensah, Nguyen, & Prattipati, 2006).

Transparency Level 3 (discretionary accruals) sees to it that estimates made by management are identifiable and understandable economic substance and not biased. Information on all material estimates made, and the basis and procedures used for each for each estimate, conveniently displayed in a table are the information needed to assess the transparency of the financial reports. Verifiability and comparability are also examined (Mensah, Nguyen, & Prattipati, 2006).

Transparency Level 4 (economic substance) is when both the portfolio of GAAP selection and estimates reflect economic substance of events. Financial statements provide a table disclosing all GAAP selection, application, and estimates made. Alternative measures and their pro-forma effects are also needed to evaluate transparency. Absence of bias, representational faithfulness, and comparability are assessed (Mensah, Nguyen, & Prattipati, 2006).

Transparency Level 5 (forecasting) is when the numbers in the financial statements are comparable to previous periods and predictive of the future. To evaluate this, the history of changes in GAAP selection and application, history of changes in assumptions and procedures underlying estimates, history of significant changes in classifications, and related effects on reported time-series data, classification of permanent and transitory items in income and cash flows are needed. Consistency is enhanced at this level (Mensah, Nguyen, & Prattipati, 2006).

Finally, transparency level 6 (integration) is when the financial statements are organized to maximize access and integration of information by analyst. Intelligent organization within the financial statements, use of tables, references and cross-references, dictionary of unusual jargon, to clarify and integrate information in the financial statements are needed to evaluate transparency at this level (Mensah, Nguyen, & Prattipati, 2006).

In the process of implementation of corporate transparency, as the complement of the concept of transparency, there arises the concept of “disclosure”. Transparency plays a crucial role for the increasing of an investor’s confidence. With regard to a high investor’s confidence, it is an indispensable issue for the constituting and the developing of a strong capital market. Together with transparency and disclosure of the characteristics of a successful management, they have a close relationship with the directly accounting applications (Atabey & Çetin, 2012).

Disclosure refers to the process and methodology of providing the information and market policy decision known through timely dissemination and openness (Lepadatu & Pîrnau, 2009). Better disclosure reduces a firm's cost of capital. Ho and Wong (1999) also point out that increased information disclosure in the annual report reduces a firm's cost of capital by reducing information asymmetry and meeting the information needs of users (Lee, 2012).

The importance of disclosure in terms of the development of capital markets can be summarized through the succeeding statements. Disclosure is a strong instrument for the protection of investors. It helps for drawing capital and increasing confidence for markets. Weak disclosure leads to unethical behaviors in capital markets and spoil market integrity. This condition damages not only companies but also economy as a whole, too. Inadequate and unclear information can increase capital cost, ruining the operating of capital market. Reliable and well-timed information increases decision makers’ confidence in a company’s body and it enables that they take successful decisions for company that directly affects development andprofitableness (Atabey & Çetin, 2012).

It is beneficial to state that we use the concept of “willingly disclosure” in order to include all the disclosures done out of the obliged by various regulations. Voluntary disclosure increases with the presence of a voluntary audit committee and in larger companies. It seems that the proportion of non-executive directors on boards, the proportion of family members on boards, the presence of role duality and the existence of an audit committee are all important factors when examining voluntary disclosure in several countries the level of voluntary disclosure is higher in larger companies and where a voluntary audit committee exists (Al-shammari & Al-sultan, 2010).

Voluntary disclosure as “a special case of game theory”, means that entities tend to disclose favorable information and not to disclose information unfavorable to the entity. Research has to consider both, firms’ incentives to disclose and the reasons for non-disclosure, in order “to interpret silence” – as when a seller does not answer a particular question from a buyer, or when an employer finds a gap period in the personal resume of a job candidate (Dye, 2001).

As voluntary disclosure empirically appears to be insufficient to eliminate market failures and to protect unsophisticated investors, accounting information is considered a “public good” or a governable externality, which demands and justifies mandatory disclosure. This is evidenced by the fact that “in successful markets and economies, firms’ reporting and disclosure activities are often heavily regulated” (Leuz & Wysocki, 2008).

Verrecchia distinguishes three disclosure research categories: association-based disclosure which considers the market impacts of disclosure, related to investors decisions and to trading volume; discretionary based disclosure, examining how managers/firms exercise discretion in disclosing information; and efficiency-based disclosure, examining unconditionally optimal disclosure arrangements (as a Pareto optimum) (Verrecchia, 2001). For Verrecchia, a disclosure theory has to integrate the three categories; however, in more efficient markets, as in the US, disclosure improvements are only incremental and not easy to detect (Santos, Ponte, & Mapurunga, 2014)

But whether it is obligatory or willingly, all the developments acquired with disclosure applications will eventually help for the increasing of the total transparency (Atabey & Çetin, 2012).

Firms may attempt to conceal information or offer vague, misleading information during periods of poor performance. Existing research in this area, such as Benesh and Peterson (1986) and Brown (1998), often focuses on analyst biases associated with profits and losses, usually finding that analyst biases are greater for loss firms. Other research by Lang and Lundholm (1993) indicates firms disclose more in periods of good stock return performance (Ciccone, 2000).

Many researchers believe that greater disclosure reduces a firm’s cost of capital, possibly through less estimation risk, increased liquidity, or higher institutional ownership. Apart from cost of capital considerations, if management holds some good news that should result in a stock price increase, the incentive to disclose the information clearly exists. Additionally, a firm may also want to establish a reputation for credible disclosure, so they are better able to provide signals to the market. A country enacts accounting regulations to motivate firms to provide investors with valuable, relevant information. Regulations include financial reporting requirements, audit standards, generally accepted accounting principles (GAAP), and stock market disclosure requirements (Ciccone, 2000).

Various factors influence corporate disclosure, such as ownership structure as it determines the level of monitoring. More monitoring is required with dispersed shareholding, and therefore disclosure is expected to increase in cases of dispersed shareholding (Schadewitz & Blevins, 1998).

Researchers argue that larger firms tend to have a more dispersed shareholding, and higher information asymmetry could lead to a higher cost of capital, which then requires more disclosure to mitigate this effect. Bujaki and McConomy (2002) find that large firms tend to disclose more in their annual reports than smaller firms. Chow and Wong-Boren (1987) also expect larger firms to disclose more information. It has been argued that higher debt levels are associated with lower levels of disclosure(Rahman, 2002) since debt holders do not demand the same level of disclosure of public information as shareholders (Tsamenyi , Enninful-Adu, & Onumah, 2007).

As long as the quality and the quantity of the information disclosed increase, uncertainties about the value of company are removed. With a disclosure in a better quality, a company can draw longer-timed investors, and it enables to a more widely analysis, and the credibility and the level of accountability of management increase. It should be made a decision whether the increasing of transparency will lead to increase economic benefit or not, and if it’s decided the increasing of transparency is necessary, then, it should be determined the obligations about which information will be disclosed and how these information will be disclosed by which institutions. Regulatory policies and corporate infrastructure should be shaped according to the conditions of the concerned market, and in this context, it should be taken care that all disclosure applications, including accounting policies, are developed as intended for the increasing of “Reliability” of information that is presented as a final aim (Atabey & Çetin, 2012).

Firm-level disclosures provide useful information to analysts and that disclosures reduce uncertainty and lack of consensus about firms’ future economic performance. Accounting standard setters, regulators, investors and accountants are interested in whether variations in financial reporting regimes, including accounting rules and how they are enforced, matter to users of financial statements. The four important elements of the financial reporting environment are the annual report disclosure levels, degree of flexibility in local accounting standards (i.e., the availability of many accounting choices), extent of accrual accounting, and enforcement of accounting standards (Hope, 2001)

Full disclosure in financial reporting requires companies to supply additional financial facts when necessary wherein it can improve transparency or clarity of financial elements being reported. According to recent Commission findings, corporations do not release certain types of financial information on a timely basis, nor do they report a sufficient amount of information (Stanko, 2001).

The SEC has addressed these deficiencies by releasing Regulation Fair Disclosure and with a proposed regulation, supplementary financial information. These directives will influence the amount of information being reported as well as the timing of its release. Each of these initiatives should enhance the quality of financial reporting. Regulation FD prevents companies from releasing financial information early to their security analysts or institutional investors. This will create a more balanced portfolio of information held by all market participants including the average investor, analysts, and institutional investors. It is an attempt to regulate the conduct of analysts, there is no doubt this rule will level the information playing field (Stanko, 2001).


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The Accountant's Role in Corporate Governance. Global, Unified. Transparency and Disclosure Criteria for Financial Reporting
Post graduate
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accountant, role, corporate, governance, global, unified, transparency, disclosure, criteria, financial, reporting
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Michelle Simbulan (Author), 2021, The Accountant's Role in Corporate Governance. Global, Unified. Transparency and Disclosure Criteria for Financial Reporting, Munich, GRIN Verlag,


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