European Journal of Developing Country Studies, Vol.9 2010 ISSN(paper)2668-3385 ISSN(online)2668-3687 www.BellPress.

org

Corporate Governance and Financial Reporting Disclosures: Bangladesh Perspective

Dr. Md. Shamimul Hasan

Assistant Professor, Department of Business Administration World University of Bangladesh, Dhaka, Bangladesh,

Dr. Syed Zabid Hossain

Professor, Department of Accounting and Information Systems, University of Rajshahi,
Former Pro-vice Chancellor, University of Khulna, Bangladesh

Dr. Robert J. Swieringa

Professor of Accounting, Anne and Elmer Lindseth Dean Emeritus, John Graduate School of Management, Cornell University, Ithaca, New York, Former Board Member of FASB

ABSTRACT
Financial reporting disclosures are very essential to the shareholders of a company because they frequently use these disclosures for their economic decisions about the business enterprise. Board of directors, corporate management and external auditor may have an influence on financial reporting disclosures. From this perspective, the study investigates the influence of corporate governance on financial reporting disclosures. The results show that corporate governance is significantly associated with the extent of financial reporting disclosures. External auditor, multilisting and profitability are significantly (5 percent level) associated with overall financial reporting disclosures index. Keywords: Bangladesh, financial reporting disclosure, corporate governance

1. Introduction
This research investigates the influence of corporate governance on corporate financial reporting disclosures. The scandals of high profile companies such as Enron, WorldCom, Tyco and some other firms in the U.S, have realized the question of the effectiveness of monitoring mechanisms in organizations (Raphaelson and Wahlen, 2004). Corporate governance refers to the structures and processes for the direction and control of companies.

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European Journal of Developing Country Studies, Vol.9 2010 ISSN(paper)2668-3385 ISSN(online)2668-3687 www.BellPress.org Good governance contributes to sustainable economic development by enhancing the performance of companies and increasing their access to outside capital. Corporate governance reduces emerging market vulnerability to financial crises, reinforces property rights, reduces transaction costs and the cost of capital, and leads to capital market development. Weak corporate governance frameworks reduce investors confidence, and can discourage outside investment. Also, as pension funds continue to invest more in equity markets, corporate governance is crucial for preserving retirement savings (World Bank: 2009). Corporate governance is affected by the relationships among participants in governance system. Controlling shareholders, which may be individuals, family holdings, bloc alliances, or other corporations acting through a holding company or cross holdings, can significantly influence corporate behavior. As owners of equity, institutional investors are increasingly demanding a voice in corporate governance in some markets. Individual shareholders usually do not seek to exercise governance rights but may be highly concerned about obtaining fair treatment from controlling shareholders and management. Creditors play an important role in a number of governance systems and can serve as external monitors over corporate performance. Employees and other stakeholders play an important role in contributing to the long-term success and performance of the corporation, while governments establish the overall institutional and legal framework for corporate governance (OECD: 2004). In Bangladesh, January 10, 2011 is called Black Monday because the stock market collapsed on that date and has not yet recovered. Though a lot of measures have been taken by the Securities and Exchange Commission (SEC), Dhaka Stock Exchange (DSE), Chittagong Stock Exchange (CSE), Bangladesh Bank (BB), and Ministry of Finance (MoF), there is no result of these efforts. Almost every day of the year 2011, small investors were engaged in many activities, including procession, press-conference, hunger-strike, block the roads, and close the stock market trade as a part of their expression of frustration. They solicited intervention of the Prime Minister for stabilizing the market. Even they expressed their anguish and frustration by opening their chest and inviting government officials to shoot them. The probe report opined that there are many issues that are responsible for collapse of the market. Governance of SEC and other institutions could not satisfy the probe committee (PC). One of the main recommendations of the committee was the removal of chairman, executive director and directors of SEC (SMIR, 2011). This recommendation clearly indicates

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European Journal of Developing Country Studies, Vol.9 2010 ISSN(paper)2668-3385 ISSN(online)2668-3687 www.BellPress.org a red flag for corporate governance. Whereas, SEC is the only regulating authority of the listed companies that regulates annual financial reporting disclosures of the companies, it is expected that the financial reporting disclosures of the companies are not regularly monitored. Under these crucial circumstances, investors believe that the capital market in Bangladesh is volatile up till now. Good corporate governance is an important prerequisite for attracting the patient capital needed for sustained long-term economic growth, and can lead to better relations with workers, creditors, and other stakeholders. Corporate ownership is concentrated and companies are often controlled by a small number of related shareholders. A few companies have dispersed ownership. Most securities in Bangladesh are held by individuals- the controlling family or members of the public rather than institutions or other companies: 43 percent of market is held by sponsors who are from the founders families, and 38 percent is held by the public at large. Sponsors often have management and or board positions in companies. Institutional investors hold only 10 percent of the market but are sometimes represented on company boards. Foreigners hold 1 percent of the market (World Bank: 2009). There is no single model of corporate governance (OECD: 2004). The SEC issued Guidelines on Corporate Governance in 2006. Listed companies are required to comply or explain. The Guidelines cover some key topics, including the functioning of the board, and internal and external controls. The Guidelines do not deal with other aspects of corporate governance, including shareholder rights. Compliance is at its early stage in 2007, about 33 percent of companies declared full compliance with the Guidelines and 60 percent declared partial compliance (World Bank: 2009). There are no provisions for punitive measures for noncompliance of any one of the conditions mentioned in the notification. Only comply or explain basis is not enough in Bangladesh for ensuring good governance. Although financial information disclosed by the Bangladeshi companies is increasing day by day, the reliability of this reporting is decreasing day by day due to lack of practices of corporate governance. Adherence to corporate governance practices will help improve the confidence of investors, reduce the cost of capital, underpin the good functioning of financial markets, and ultimately induce more stable sources of financing (OECD: 2004). Good governance in the corporate sector is a burning issue in Bangladesh.

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European Journal of Developing Country Studies, Vol.9 2010 ISSN(paper)2668-3385 ISSN(online)2668-3687 www.BellPress.org In this paper we argue that there is obviously an influence of corporate governance on corporate financial reporting disclosures index. The researchers commence their analysis by measuring overall disclosure index by twenty non-financial companies included in DSE. The researchers use a comprehensive measure of disclosure that captures the nature and extent of information and are able to glean insights about the disclosures index. This would be the first known study to examine the association between corporate governance and overall financial reporting disclosures index. The weak form of corporate governance in Bangladesh allows the researchers to (1) overview corporate financial reporting practices by non-financial

companies listed in DSE, (2) identify different aspects of corporate governance , and (3) to examine the association between corporate governance and corporate financial reporting disclosures index. Next, the researchers test hypotheses about the relationship between corporate governance and corporate reporting disclosures index. The researchers capture the impact of corporate governance using three measures, such as dependent variable (corporate financial reporting disclosures index), independent variables, and linkage between dependent and independent variables. Present examination of the relationship between corporate governance and corporate financial reporting disclosures index extends the literature on the determinants of corporate reporting disclosures index. Previous researches have investigated a range of factors potentially associated with disclosures including board independence, dominant personality, board size, institutional ownership, external auditors, general public ownership, leverage, asset size, profitability, multilisting, and number of shareholders. However, the influence of corporate governance on corporate financial reporting disclosures index has not been examined previously. Present finding of significant relationship between external auditor and corporate reporting disclosures index supports the tenets of principal-agent theory and demonstrate the potential for this powerful and legitimate stakeholder group to influence corporate financial reporting disclosures index in Bangladesh. Several other factors found to be associated with corporate financial reporting disclosures in prior researches have been controlled. A final contribution of this research relates to the growing body of literature on corporate governance (external auditor engagement) and corporate financial reporting disclosures. Present study extends this area of research by investigating and finding support for the role of external auditor in relation to corporate financial reporting disclosures. The research provides robust 23

European Journal of Developing Country Studies, Vol.9 2010 ISSN(paper)2668-3385 ISSN(online)2668-3687 www.BellPress.org empirical evidence in support of claims in the literature that external auditors demand can drive corporate action. The remainder of the paper is organized as follows. The next section reviews the prior literature and develops the hypotheses for the study. Section 3 outlines the data and method, section 4 presents the results of the analysis and Section 5 concludes.

2. Literature Review and Hypotheses Development

2.1 Prior Literature One function of financial reporting is to restrain management to act against the shareholders interest (Watts and Zimmerman, 1978). Due to increasing complexity of business today, there is a demand for disclosure of more comprehensive information in the annual report as both potential and existing investors make their economic decision by using this information. In the global investor opinion survey of McKinsey & Company (2002) on corporate governance issues, a majority of the investors agree that corporate governance remains a great concern with strengthening the quality of accounting disclosures as a top priority. Majority of institutional investors is willing to pay a high premium for companies having good governance. The survey also provides evidence that a majority of respondents (71 percent) states that accounting disclosures are the most important factor that influences their investment decisions and 52 percent of respondents identify that improving financial reporting quality is a governance priority for policymakers. Good governance goes hand-in-hand with reduced risk of financial reporting problems and other bad accounting outcomes (Hermanson, 2003). Information disclosed by the companies in their annual report can be used as important input in various corporate governance mechanisms (Bushman and Smith, 2001). Good governance by board of directors can influence financial reporting disclosures, which in turn has an important impact on shareholders confidence (Levitt, 1998 and 2000). There has been a considerable debate in recent times about the need for strong corporate governance (McConomy and Bujaki, 2000), with the countries around the world drawing up guidelines and codes of practice to strengthen governance (Cadbury, 1992;

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European Journal of Developing Country Studies, Vol.9 2010 ISSN(paper)2668-3385 ISSN(online)2668-3687 www.BellPress.org Corporate Governance Code of Bangladesh, 2006). The rationale for this emphasis can be linked to growing concerns over the integrity of stock markets (International Federation of Accountant IFAC, 2010; Millstein, 1999). Previous studies have shown that good corporate governance reduces adverse effects of earnings management as well as likelihood of creative financial reporting arising from fraud or errors (Beasley, 1996; Dechow, et al, 1996; McMullen, 1996). Traditionally, the external auditor has also played an important role in improving the credibility of financial information (Mautz and Sharaf, 1961; Wallace, 1980). The differences in corporate governance across countries emerge as a result of the variations in the ownership structure and understanding the effects of various ownership structure variables is vital to shed light on corporate governance and control process of firms under difference national types of institutional arrangements (Li, 1994). Recent empirical works on the association between traditional financial reporting disclosures and corporate governance Chen and Jaggi (2000) and Eng and Mark (2003). Chen and Jaggi (2000) find a positive association between the proportion of independent non-executive directors and the comprehensiveness of information in mandatory financial disclosure of Hong Kong companies. Eng and Mark (2003) find that lower managerial ownership and significant government ownership are associated with increased disclosure and that an increase in outside directors reduces the corporate disclosure of firm listed on the Stock Exchange of Singapore. In Malaysia, one-man or family run companies (Halim, 2001) and significant government equity holdings (Abdullah, 2006) distinguish the ownership pattern of Malaysian companies that may complicate the corporate governance systems. Extensive occurrence of individual and family run companies tends to discourage professionalism, encourage non-compliance and facilitate creative accounting as well as to result in severe conflicts of interests (Halim, 2001). 2.2 The Variables and Hypotheses Development 2.2.1 Dependent Variable: An Overall Disclosures Index (ODI) of sample companies was used as the dependent variable and several corporate governance and control variables were used as the

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European Journal of Developing Country Studies, Vol.9 2010 ISSN(paper)2668-3385 ISSN(online)2668-3687 www.BellPress.org independent variables to test the influence or impact of the corporate governance variables over the ODI. 2.2.2 Primary Independent Variables (Corporate Governance Variables): 1. Board Independence (bi) 2. Dominant Personality (dp) 3. Board Size (bs) 4. Institutional Ownership (io) 5. General Public Ownership (gp) 6. External Auditor (ea) 2.2.3 Secondary Independent Variables (Control Variables) 1. Leverage (lvg) 2. Asset Size (asstsz) 3. Profitability (profitab) 4. Multi Listing (multilis) 5. Number of Shareholders (shareholders) Board Independence The board, which comprises a number of independent directors, has a greater monitoring and controlling ability over management (Fama and Jensen, 1983). The state of independence is met when a director inter alia is neither holding significant ownership nor holding any executive position in the company (Bursa Malaysia, 2006). In Bangladesh, SEC corporate guidelines stated that one-tenth of the total number of the companys board of directors, subject to a minimum of one, should be independent directors. But in Malaysia, if a company has only three board members, two of them are required to be independent (Bursa Malaysia, 2006). Fama and Jensen (1983), Ho and Wong (2001), Cheng and Courtenay (2004) and Norita and Shamsul-Nahar (2004) found a significant positive association. On the other hand, Eng and Mark (2003), Gul and Leung (2004) and Barako et al. (2006) found a negative association. This variable is taken in this study as an independent variable and the hypothesis is as follows:

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European Journal of Developing Country Studies, Vol.9 2010 ISSN(paper)2668-3385 ISSN(online)2668-3687 www.BellPress.org Ho: There is no association between board independence and overall disclosures index. CEO Duality / Dominant Personality The corporate governance literature has emphasized the need to separate the position of CEO (chief executive officer) and board chairman to guarantee the board independence and improve transparency (Jensen, 1993). In this respect, Dechow et al. (1996) revealed that the duality CEO-chairman increases the likelihood of violating the accounting principles in American firms. Byard et al. (2006) indicated that the presence of a CEO who serves also as the board chairman is associated with poor quality of financial information. Similarly, Beeks et al. (2004) and Firth et al. (2007) reported that the financial reporting is more relevant in the case of separating the positions of CEO and board chairman for British and Chinese firms. Nevertheless, other authors did not detect a significant association between CEO duality and financial reporting (Ahmed et al., 2006; Bradbury et al., 2006; Petra 2007). CEO duality is considered as an independent variable in this study and the hypothesis is as under: Ho: There is no association between CEO Duality and overall disclosures index Board Size The number of directors is an important factor in the board of directors effectiveness. A larger board size may bring a greater number of directors with experience (Xie et al., 2001) that may represent a multitude of values (Halme and Huse, 1997) on the board. On the contrary, a reduced number of directors imply a high degree of coordination and communication between them and managers (Jensen, 1993). Chaganti et al. (1985) claimed that smaller boards are manageable and more often play a role as a controlling function whereas larger boards may not be able to function effectively as the board leaves the management relatively free. Indeed, Vefeas (2000), Ahmed et al. (2006) and Bradbury et al. (2006) found that large board size reduces the information content of income and intensifies the earning management respectively for American, Singapore and New Zealand firms. However, several authors argued that the high number of directors ensures the value relevance of financial statements (Byard et al., 2006), while others did not confirm this link (Firth et al., 2007). The study by Bonn (2004) found no relationship between board size and firm performance. She further argued that the board size only measures the factual number of

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European Journal of Developing Country Studies, Vol.9 2010 ISSN(paper)2668-3385 ISSN(online)2668-3687 www.BellPress.org directors without capturing their task. Hence, one could argue that it is the skills and knowledge base that the board brings to the firm not the number. In contrast, Dwevedi and Jain (2005), found an insignificant positive relationship. They conclude that larger boards are in a position to improve the governance of the company. As such, board size is used as an independent variable in the current study and the hypothesis is as follows: Ho: There is no association between board size and overall disclosures index. Institutional Ownership Considering the influence of shareholder activism in governance reforms is important to obtain insight into governance practices (Daily et al., 2003). To date, institutional investors participation has emerged as an important force in corporate monitoring mechanism to protect minority shareholders interest. The significant increase in the institutional shareholdings has led to the formation of a large and powerful constituency to play a significant role in corporate governance. In the UK, institutional investors own between 65 to 75 percent of the UK stock market, which suggest a prominent role that institutional shareholders can play as an agent to the governance systems (Mallin,2003). To mitigate the problems associated with conflict between controlling owners and minority shareholders in Asian firms, the involvement of institutional investors equity participation may improve corporate governance practices (Claessen and Fan, 2002). Concentrated shareholdings by institution provide an incentive for diligent monitoring as they have the resources, expertise and stronger incentives to actively monitor the actions of management and prevent managers opportunistic behavior (Wan Hussin and Ibrahim, 2003). Institutional shareholders are often characterized in academic research as sophisticated investors who have advantages in acquiring and processing information compared with other investors (Bartov et al., 2000; Jiambalvo et al., 2002). Consequently, institutional investors can be more effective as traders and monitors than can small, diffuse retail investors. Intuitional investors could actually prefer that information not be broadly disseminated because they are concerned about either a decline in the quality of the information communicated or a loss of their information advantage (NIRI, 2000). Recent studies indicate a negative relation between institutional ownership and voluntary disclosure (Kelton et.al. 2004). While examining the determination of a firms decision to provide shareholders access to conference calls, Bushee at al. (2003) find that firms that provide open conference calls

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European Journal of Developing Country Studies, Vol.9 2010 ISSN(paper)2668-3385 ISSN(online)2668-3687 www.BellPress.org have a lower institutional ownership than firms that do not provide open calls. Institutional ownership is accepted in the present study as an independent variable and the hypothesis is as given below. Ho: There is no association between institutional ownership and overall disclosures index. General Public Differences in the proportion of a firm that is owned by outsiders may account for some of the observed differences - in the comprehensiveness of mandatory disclosure, because the greater number of people who need to know about the affairs of a firm, the greater will be the details required of an item of information and the more comprehensive the disclosure of a firm will be (Apostolou and Nanopoulos, 2009). Leftwich et al. (1981) suggested that issuing financial reports could solve monitoring problems associated with increases in the proportion of the firm owned by outsiders. If this is true, one would expect to find from a population of reporting firms that, as the number of shareholders or the proportion of the firm owned by outsiders increases, the financial information disclosed in annual reports will become more comprehensive. It is expected that if a company has a large proportion of public ownership, the political cost will be bigger and the company will decide to disclose more information. General Public is an independent variable and the hypothesis isHo: There is no association between general public and overall disclosures index. External Auditor The external audit can be an effective control mechanism to monitor the managers and guarantee the integrity of financial reports (Jensen and Meckling, 1976; Watts and Zimmerman, 1983). The appointment of an independent external auditor can reduce the probability of earnings manipulation by shrinking managerial opportunism (DeAngelo, 1981; Becker et al., 1998; Chung et al., 2003). In practice, the auditor reputation or quality is associated with being part of or affiliated with a major international auditing firm (Brown et al., 2010). Several authors advocated that financial information is more reliable for BIG 4 clients in comparison with other companies (Teoh and Wong, 1993; Becker et al., 1998). In Bangladesh, there are six audit firms that have international links. The following table presents the list of those audit firms:

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European Journal of Developing Country Studies, Vol.9 2010 ISSN(paper)2668-3385 ISSN(online)2668-3687 www.BellPress.org Table-3: International Link of Audit Firms Name of the firm Rahman Rahman Haq and Co. Hoda Vasi Chowdhury and Co. S.F. Ahmed and Co Howlader Younus and Co. A Quasem and Co. M.J. Abedin and Co. International firm with which linked KPMG Delloite Haskins and Sells Earnest and Young Arther Young Cooper and Lybrand Moor Stephen

External auditor is an independent variable and our hypothesis isHo: There is no association between external auditor and overall disclosures index.

Leverage Business enterprises may borrow from different sources. Lending institutions always want to ensure security of their supplied funds. Lenders want reliable information about borrowers. That is why borrowers usually furnish more information in their annual reports to meet the information needs of creditors, investors and other stakeholders. So, there is an association between the amount of loan and the level of disclosure of the reporting entity. Considering, these things, a few disclosure studies were conducted to examine the association, if any, between gearing ratio and corporate disclosure level. Ahmed and Nicholls (1994) and Chow and Wong-Boren (1987) have found no significant association between leverage ratio and the extent of voluntary disclosure in Bangladesh and Mexico respectively. Karim (1996) and Belkaoui et al. (1977) have observed a significant negative relationship between the mentioned variables. On the contrary, Robbins and Austin (1986) had found a significant positive correlation between debt and municipal disclosures. Leverage is selected as an independent variable and our hypothesis isHo : There is no association between leverage and overall disclosures index. Asset Size

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European Journal of Developing Country Studies, Vol.9 2010 ISSN(paper)2668-3385 ISSN(online)2668-3687 www.BellPress.org Many disclosure studies e.g., Chow and Wong-Boren (1987); Cooke (1991, 1992 and 1993); Ahmed and Nicholls (1994) suggest that there is a significant relationship between company asset size and the extent of voluntary disclosure. Ahmed and Courtis (1999) carried out a meta-analysis of 28 disclosure studies and found that a significant association exists between corporate size and disclosure levels. Marston and Shrives (1996) reviewed a number of disclosure studies and reached the same conclusion. Therefore, asset size is selected as an independent variable and our hypothesis is Ho : There is no association between asset size and overall disclosure index. Profitability Profitability affects the level of disclosures. Adelberg (1979) found that the narrative disclosures were deliberately made complex to communicate bad news and made more lucid and easily understandable to communicate good news. As profits are always good news to the investors and other stakeholders, therefore, management discloses more information about this variable in their annual reports. Profitability was used by a number of researchers as an independent variable for fluctuations in disclosure level. There are mixed results found about the association between profitability and disclosure. Singhvi (1967), Singhvi and Desai (1971), Inchausti (1997), Raffournier (1995), Wallace and Naser (1995), Cerf (1961),

Hossain (1998), Razzaque (2004), Ahmed (2009) and Hasan (2011) found a positive association between profitability and the extent of disclosure. But, Belkaoui and Kahl (1978) found a negative association between them. Again, McNally et al. (1982), Malone et al. (1993), Meek et al. (1995), Suwaidan (1997), and Abd Elsalam (1999) found no association between them. Profitability is used as an independent variable and our hypothesis is Ho : There is no association between profitability and overall disclosures index.

Multiple Listing The capital orientation of companies may also influence companies in making differential disclosure. Voluntary disclosures may be associated with the objective of raising capital (Horngren, 1957; Cooke, 1991). Listing status may also be viewed as a screening scenario. Firms listed in more prestigious markets may provide signals to customers, suppliers and

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European Journal of Developing Country Studies, Vol.9 2010 ISSN(paper)2668-3385 ISSN(online)2668-3687 www.BellPress.org creditors about the strength of the company and that may also encourages brand recognition. It also provides signals about the future prospects of the company (Mittoo, 1992). That also impacts on the perceptions of other groups like government and local authorities, consistent with Roberts et al. (1998); Wallace, Naser and Mora (1994) are also in the same opinion. Listing status has been tested and identified to be significant by Firth (1979), Cooke (1989), Meek and Gray (1989), Wallace et al. (1994), Hossain et al. (1995), Meek et al. (1995) and Inchausti (1997). Multiple listing is used as an independent variable and our hypothesis is Ho : There is no association between multiple listing and overall disclosures index. Shareholders Shareholders are the real owners of a company. They are also treated as internal and external stakeholders. They have direct interest to the company. They can change the management and appoint new agents if they believe that the existing management is not managing the entity efficiently. It is expected that a large number of shareholders will exert more pressure on management. Number of shareholders is an important factor in determining the corporate disclosure level (Alam, 2008) and as such it is taken as independent variable in this study. The hypothesis is-

Ho: There is no association between number of shareholders and overall disclosures

index.

3. Methodology
3.1 Selection of Sample Stratified sampling technique was used as our populations were heterogeneous and it reduces the sampling error. Each business segment was considered as a stratum and accordingly four stratums had been selected purposively and five companies were then selected from each stratum as shown in the following table. Table -1: Distribution of Population and Sample Size of the Companies
Stratum Textile Pharmaceuticals Cement Population Size 12 13 7 Sample Size 5 5 5 Sample as percent of Population 42 38 71 Percent of total Sample 25 25 25

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European Journal of Developing Country Studies, Vol.9 2010 ISSN(paper)2668-3385 ISSN(online)2668-3687 www.BellPress.org
Food & Allied Total 8 40 5 20 63 214 25 100

Total size of population was 40 and sample size was 20 which represent 50 percent of total population. The sample size in terms of percentage of population was dissimilar and the percent of sample size of each stratum was equal i.e., 25 percent. 3.2 Selection of Disclosure Items A draft check list was prepared that provided the basis for a survey with yes / no questions that was used to select the individual items for the final checklist. Finally, two-hundred items were used to measure a company disclosure score. The 200 items reflect the following disclosure items of an annual report.
Table -2: Summary of Draft and Final Disclosure Checklist
Total Items (Draft) Number 25 25 30 30 26 14 48 22 220 % 11 11 14 14 12 6 22 10 100% Items accepted (Final) Number 20 15 28 27 26 14 48 22 200 % 10 8 14 14 13 7 24 11 100%

Parts General Disclosure Items Company Profile Items Directors Report Items Financial Highlight Items Accounting Polices Items Income Statement Items Balance Sheet Items Cash Flow Statement Items Overall Disclosure

Disclosure Key GDI CPI DRI FHI API ISI BSI CFSI

Percentage of items accepted 80 60 93 90 100 100 100 100 91%

3.3 Scoring the Disclosure Items Various approaches are available to develop a scoring scheme to determine the disclosure level of corporate annual reports. The items were considered equally important to disclose and hence a dichotomous unweighted approach was used for scoring. If a company discloses an item it will be awarded one and if not it will be awarded zero. 3.4 Developing Overall Disclosure Index

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European Journal of Developing Country Studies, Vol.9 2010 ISSN(paper)2668-3385 ISSN(online)2668-3687 www.BellPress.org Partial Compliance Unweighted Approach was used to measure the overall disclosure index. This is the first time that this approach is used in Bangladesh to measure the overall disclosure index because the level of compliance of the companies is not the same. The formula is as follows:

Where, PCJ = Total compliance score for each company and Xi = Level of compliance with each part of disclosure requirement. Rj = Total number of disclosure part of each company.

6. Statistical Analysis 6.1 Descriptive Statistics for Surveyed Companies

Descriptive analysis of a company is essential in order to measure the company performance in disclosing information in the annual report. In this overall disclosure indexes, standard deviation, coefficient of variation and rank of the companies have been calculated. Ranking has been made on the basis of coefficient of variation of the company; the lowest coefficient of variation means the company is more consistent in disclosing information in annual report and received upper rank.

Table-3: Descriptive Statistics of Surveyed Companies

Serial No.
Descriptive Statistics

Company Name

Rank

Mean

SD

CV

ODI

Textile Segment:
1 2 3
HR Textile Mills Limited BEXTEX Limited Apex Weaving and Finishing Ltd 12 5 8 0.56 0.76 0.66 0.26 0.14 0.14 0.46

0.67
0.19 0.22 0.63

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European Journal of Developing Country Studies, Vol.9 2010 ISSN(paper)2668-3385 ISSN(online)2668-3687 www.BellPress.org
4 5
Saiham Textile Mills Ltd. Alltex industries limited 11 8 0.49 0.69 0.16 0.15 0.33 0.22

Pharmaceuticals Segment:
6 7 8 9 10
IBN SINA LIBRA SQUARE BEXIMCO ORION 7 3 4 10 10 0.74 0.73 0.80 0.71 0.62 0.16 0.13 0.14 0.18 0.16 0.21 0.17 0.18 0.26 0.26 0.72

Cement Segment:
11 12 13 14 15
Heidelberg cement Bangladesh Ltd. Meghna Cements Mills Ltd. Aramit Cement Ltd. Confidence Cement Ltd. Lafrage Surma Cement Ltd. 1 11 9 2 9 0.81 0.62 0.62 0.63 0.65 0.10 0.20 0.15 0.09 0.15 0.12 0.33 0.24 0.14 0.24 0.67

Food and Allied Segment:

16 17 18 19 20 Apex Foods Ltd Fu-Wang Foods Ltd Gulf Foods Ltd Fine Foods Ltd Rahima Foods Corporation Ltd
2 8 6 9 11

0.74 0.66 0.65 0.61 0.65

0.10 0.15 0.13 0.15 0.21

0.14 0.22 0.20 0.24 0.33

0.66

6.2 Descriptive Statistics for Independent Variables There is diversity of the levels of financial disclosures across companies. The overall financial disclosures index score assigned to the companies had a mean disclosure index of 67 percent, a standard deviation of 0.07, a maximum score of 81 percent, and a minimum score of 49 percent. Hence, the aim of the analysis was to identify the variables, both quantitative and qualitative, that were responsible for such variations in the level of financial disclosures. The descriptive statistics for the dependent and independent variables are presented in the following table. Table- 4: Descriptive Statistics for Dependent and Independent Variables Variables Odi N 20 Minimum 0.49 Maximum 0.81 Mean 0.67 Std. Deviation 0.08

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European Journal of Developing Country Studies, Vol.9 2010 ISSN(paper)2668-3385 ISSN(online)2668-3687 www.BellPress.org Bi Dp Bs Io Gp Ea Lvg Asstsz profitab multilis sholders 20 20 20 20 20 20 20 20 20 20 20 0.00 0.00 4.00 0.00 12.35 0.00 0.00 14.74 -15.66 0.00 545.00 60.00 1.00 11.00 83.90 68.33 1.00 1.00 12218.00 156.56 1.00 65556.00 17.50 0.30 7.15 28.42 37.65 0.25 0.75 2272.72 21.87 0.95 13567.25 12.21 0.47 2.01 23.03 16.07 0.44 0.44 3914.73 41.19 0.22 17622.87

6.3 Correlation Matrix and Multicollinearity Analysis Pearsons Pair Wise Product Moment Correlation Coefficient (r) is computed in order to examine the correlation between dependent and independent variables. A correlation matrix of all the values of r for the independent variables along with the dependent variables had been constructed by using Statistical Package for Social Science (SPSS), which is shown in the following table. Table- 5: Correlation Matrix
Variable Odi Bi Dp Bs Io Gp Ea Lvg Astsz Pftab Multilis sholders odi 1 -0.10 0.37 0.21 0.30 0.05 0.48* 0.43* 0.33 0.54** 0.54** 0.42* bi 1 -0.14 -0.44* -0.01 -0.26 -0.17 0.11 -0.27 -0.21 0.06 -0.22 Dp Bs Io Gp ea lvg astsz pftab multilis sholders

1 -0.44* -0.19 0.10 0.13 0.38 -0.04 0.20 0.15 0.13

1 0.62** -0.13 0.37 0.16 0.76** 0.39* 0.02 0.42*

1 -0.57** 0.34 0.36 0.57** 0.45* 0.12 0.13

1 -0.07 -0.44* -0.22 -0.09 -0.16 0.17

1 0.33 0.45* -0.04 0.13 0.41*

1 0.32 0.26 0.40* 0.39*

1 0.39* 0.12 0.64**

1 0.05 0.31

1 0.12

* Correlation is significant at the 0.05 level (1-tailed). **Correlation is significant at the 0.01 level (1-tailed).

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European Journal of Developing Country Studies, Vol.9 2010 ISSN(paper)2668-3385 ISSN(online)2668-3687 www.BellPress.org Multicollinearity in the independent variables had been diagnosed through bivariate analysis. The above table represents the correlation matrix of the dependent and independent variables. Judge et al. (1985) and Bryman and Cramer (1997) suggested that simple correlation between independent variables should not be considered harmful until they exceed 0.80 or 0.90. The highest value of the observed correlations is 0.76; therefore, the observed correlations are not harmful. These finding suggest that multicollinearity between independent variables is unlikely to pose a serious problem in the interpretation of the results of the multivariate analysis.

6.4 ANOVA Technique

One way ANOVA technique was used to have a concrete outcome of accepting or rejecting the hypothesis. The following table shows the ANOVA and the level of significant at 5 percent. Table- 6: ANOVA (b) model 1 Regression Residual Total
a b dependent variable: odi

sum of squares 0.097358001 0.021241999 0.1186

df 11 8 19

mean square 0.008850727 0.00265525

F 3.3332935

sig. 0.049186143

predictors: (constant), sholders, multilis, io, bi, dp, ea, gp, profitab, lvg, asstsz, bs

The table-6 gives us a direction regarding the acceptance or rejection of hypothesis. P value indicates that there is a significant relationship between corporate governance and overall disclosure index. Therefore, null hypothesis (Ho) is rejected.

6.5 Empirical Model It is already observed from the above analysis that there is a relationship between corporate governance and the extent of disclosure, but the effect of each variable on the disclosure level is still unknown at this stage. The following Ordinary Least Square (OLS) regression model is developed in order to identify the effect of each variable on the disclosure level.

Where, 37

European Journal of Developing Country Studies, Vol.9 2010 ISSN(paper)2668-3385 ISSN(online)2668-3687 www.BellPress.org ODI = Overall Disclosure Index = the intercept = the error term In regression analysis, the enter method of Statistical Package (SPSS) was used in order to verify the influence of independent variable that were chosen for the study over the dependent variable. The summary output of the model for the all sample companies is shown in the following table. Table 7: Model Summary
Model 1 R .906(a) R Square 0.821 Adjusted R Square 0.575 Std. Error of the Estimate 0.05153

a Predictors: (Constant), sholders, multilis, io, bi, dp, ea, gp, profitab, lvg, asstsz, bs

The adjusted coefficient of determination of R2 indicates that around 57 percent of the variation in the dependent variable is explained by variations in the independent variables. Thus the model is capable of explaining 57 percent variability of disclosed information in the annual reports of sample companies.

Table- 8: Coefficients (a)

Unstandardized Coefficients B 0.438 0.001 0.007 -0.005 0.000 0.001 0.092 0.006 0.000 0.001 0.161 0.000 Std. Error 0.175 0.002 0.072 0.025 0.001 0.001 0.038 0.056 0.000 0.000 0.058 0.000 Standardized Coefficients Beta 0.093 0.042 -0.118 0.038 0.250 0.519 0.032 -0.058 0.611 0.455 -0.003 2.495 0.340 0.097 -0.189 0.131 0.944 2.414 0.103 -0.138 2.500 2.752 -0.012 0.037 0.743 0.925 0.855 0.899 0.373 0.042 0.921 0.894 0.037 0.025 0.991

Model

Variables (Constant) Bi Dp Bs Io Gp Ea Lvg Asstsz Profitab Multilis Sholders

Sig.

Dependent Variable: odi

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European Journal of Developing Country Studies, Vol.9 2010 ISSN(paper)2668-3385 ISSN(online)2668-3687 www.BellPress.org It is observed that external auditor, profitability and multi listing are significantly associated with disclosures level. The coefficient of external auditor, profitability and multi listing are statistically significant at 5 percent level. The board independence, board size, dominant personality, institutional ownership, general public, leverage, assets size, and number of shareholders are not statistically significant even at 10 percent level. 6. Discussions The purpose of the current study is to examine the level of financial disclosures among Bangladeshi companies and its association with corporate governance characteristics. On the whole, the study concludes that the level of financial disclosures in Bangladesh is increasing gradually but it is still below the level of expectation. Besides, the reliability and transparency level of financial disclosures is very low and hence the confidence level of external users is also at a very low stage. Therefore, shareholders do not use the information provided in the annual report in making their economic decisions as they do not have confidence on it. The study found that there is an association between corporate governance characteristics and the level of financial disclosures. The authors used six corporate governance variables in the current study. Only the association between external auditor and the level of financial

disclosures is found significant. In support of agency-theory and involvement of competent auditors, the authors provide evidence of the ability of a competent auditor to influence corporate financial disclosures reporting. World Bank report stated that audits are not reviewed in Bangladesh and many market participants are skeptical of audit quality. There are some key weaknesses in the non-financial disclosure frame work, especially in the disclosure of ownership and control. Other variables such as board independence, board size, dominant personality, institutional ownership and general public are not significantly associated with the level of financial disclosures. The weakness of these variables indicates that corporate governance structure of Bangladesh is weak. World Bank (2009) assessed corporate governance scenario in Bangladesh. According to the report, some companies have one independent director, some have none, board size is about 6 to 8 members, ownership is concentrated by a small number of related shareholders- sponsors held 43 percent of the market, general public held 38 percent and institutional investors held 10 percent. The WB report clearly shows that board 39

European Journal of Developing Country Studies, Vol.9 2010 ISSN(paper)2668-3385 ISSN(online)2668-3687 www.BellPress.org independence, board size, institutional ownership and general public are not in a position to influence corporate financial reporting disclosures. The more powerful the stakeholders, the more prepared the company to adapt to meet the stakeholders expectations (Cotter, 2011). According to this statement, only concentrated ownership has the power to influence the level of corporate financial reporting disclosures in Bangladesh. Stakeholders theory typically views the world from the perspective of the management of the organization who are concerned strategically with the continued success of the company (Roberts, 1992). External users rely on the report provided by external auditor as they cannot access to the information of companies directly. These external users would like to have more relevant and reliable information which is used in making their economic decisions. According to agency theory, there exists a conflict of interest between concentrated ownership and external users. Again, as per stakeholder theory, a companys continued existence needs the support of its stakeholders and their approval must be sought and the activities of the corporation be adjusted to meet their expectations (Cotter, 2011). Thus, the management of corporations always tries to make them successful by providing a rosy picture of companies. Under these circumstances, the opinion about the financial disclosures of external auditor plays an important role to the external users. The primary objective of appointing an external auditor is to protect the right of external stakeholders by producing a true and reliable audit report. In Bangladesh, external auditors work for clients like other employees and their activities cannot protect the right of external stakeholders and this is the only reason for which external stakeholders do not fully rely on annual report in making their economic decisions. It is commonly believed that auditors are working only for their own incentives and companies disclose information only to comply with the SEC rules and regulations. But, SEC does not examine the compliance of financial disclosures and corporate governance code. Consequently, the image of external auditor in Bangladesh is degrading day by day. Although concentrated ownership has the power to influence the level of corporate disclosures but they do not have sufficient knowledge about accounting and financial reporting in Bangladesh. External auditor (an expert in accounting, reporting and auditing) is the only authority (as per the Companies Act. 1994) to certify the financial statements of limited companies. External stakeholders are to rely on the audit report. Obviously, the audit report is an influential factor about level of disclosures, reliability, relevancy, consistency, transparency and so on. But, 40

European Journal of Developing Country Studies, Vol.9 2010 ISSN(paper)2668-3385 ISSN(online)2668-3687 www.BellPress.org external users do not have faith on audited financial statements and disclosures. In the International Conference of Chartered Accountants in Dhaka, the Honourable President of the Peoples Republic of Bangladesh Md. Zillur Rahman (2010) warned the professional accountants that The government mostly depends on direct and indirect taxes to meet budget expenditure but many individuals or institutions for avoiding the tax amounts prepare their balance sheets in ways which do not reflect the real accounts,. Again in 19th Convocation organized by ICAB, President Md. Zillur Rahman (2011) urged the Chartered Accountants to show utmost honesty and integrity alongside their professionalism in preparing the financial statements for government and corporate entities. He opined that the professional Chartered Accountants must always work to ensure transparency and accountability. Therefore, the result of our study is fully supported by the assumptions of external stakeholders and others.

7. Conclusion
It is evident from the above discussion that external auditor, a corporate governance variable, can significantly influence the level of corporate financial disclosures. Other variables, such as, board independence, board-size, dominant personality, institutional ownership and general public are not meaningfully associated with the level of financial disclosures. As such, the corporate governance structure in Bangladesh is not at the acceptable level. Finally, there is a potential limitation in the present study that needs to be acknowledged. Board competencies, family ownership, managerial ownership, competencies of audit committee members and so on have not been included in corporate governance variables as these disclosures were not available in the corporate annual report. There are also some key weaknesses in the non-financial disclosure frame work, especially in the disclosure of ownership and control (WB, 2009). 7. Opportunities for Further Research Findings of this study warrant further investigation on corporate governance scenario in Bangladesh. An empirical study can be conducted by applying survey method as the data required to measure corporate governance is not available in corporate annual reports. In this context, it is essential to collect data by using governance & transparency index (GTI).

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European Journal of Developing Country Studies, Vol.9 2010 ISSN(paper)2668-3385 ISSN(online)2668-3687 www.BellPress.org Acknowledgement The authors acknowledge the involvements and comments of following well-known researchers in the field: Richard Heaney, University of Western Australia, Zahirul Hoque, La Trobe University, Australia, Kamran Ahmed, La Trobe University, Australia, Asheq Rahman, Massey University, New Zealand, Omar Al Farooque, University of New England, Australia, Jill Solomon, Kings College, London, UK

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