The International Journal of Accounting 40 (2005) 399 422

Corporate mandatory disclosure practices in Bangladesh

M. Akhtaruddin
School of Management, University Science Malaysia, USM-11800, Pulau Pinang, Malaysia

Abstract This study reports the results of an empirical investigation of the extent of mandatory disclosure by 94 listed companies in Bangladesh. It also reports the results of the association between companyspecific characteristics and mandatory disclosure of the sample companies. The results indicate that companies in general have not responded adequately to the mandatory disclosure requirements of the regulatory bodies. It has been found that companies, on average, disclose 44% of the items of information, which leads to the conclusion that prevailing regulations are ineffective monitors of disclosure compliance by companies. Company age appears to be an insignificant factor for mandatory disclosure. And there is little support for industry size as a predictor of mandatory disclosure except where size is measured by sales. Then it is marginally significant. Profitability was also found to have no effect on disclosure. And status, i.e., whether a company is modern or traditional also has no effect on mandatory disclosure. D 2005 University of Illinois. All rights reserved.
Keywords: Bangladesh; Mandatory disclosure; Annual report; Disclosure index; Regulatory framework; Information; Listed companies

1. Introduction In recent years, the issue of corporate disclosure has received a great deal of attention from many researchers (for example, see Benjamin & Stanga, 1977; Carol & Pownall, 1994; Cooke, 1989; Forker, 1992; Inchausti, 1997; Ingram & Frazier, 1980; Lang & Lundholm, 1993; Singhvi & Desai, 1971; Wallace, 1988). Why corporations should and do disclose information is articulated in various theories, namely, stakeholder theory, agency theory,
E-mail addresses: akhtar@usm.my, akhtar249@yahoo.com. 0020-7063/$30.00 D 2005 University of Illinois. All rights reserved. doi:10.1016/j.intacc.2005.09.007

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legitimacy theory, and political economy theory (Choi, 1973). While different theoretical perspectives make different arguments, they all agree that companies release information mostly for traditional user groups such as shareholders, creditors, financial analysts, and security consultants who find this information useful when making investment decisions (Cooke, 1989). The agency theory implies that companies increase disclosure in order to mitigate conflicts between shareholders and managers. In addition, companies wishing to enhance their firm value may do so by increased disclosure (Lobo & Zhou, 2001). Corporate disclosure is, however, subject to potential pressures from regulatory bodies. Disclosure is generally made in company annual reports through the statements or accompanying notes. Although other means of releasing information, such as medial release, interim reporting, letters to shareholders, and employee reports, are used by the companies, the annual report is considered to be the major source of information to various user-groups (Marston & Shrives, 1991). Nevertheless, all parts of the annual reports are not equally important to all users. The income statement is believed to be the section most preferred by investors, whereas cash flow statement and balance sheet are the most useful sections to bankers and creditors (Eccles & Mavrinac, 1995; Ho & Wong, 2001). Likewise, users of accounting information weight audit reports, directors reports, accounting policies, and historical summary differently. The annual report should contain information that will allow its users to make correct decisions and efficient use of scarce resources. Much prior research has focused on corporate transparency and capital market development. Since the fall of Enron in the United States, there has been a wider recognition of the importance of corporate transparency and disclosure. The effective functioning of capital markets, however, significantly depends on the effective flow of information between the company and its stakeholders. Information disclosure is seen as a means to improve marketability of shares, to enhance corporate image, and to reduce the cost of capital (Meek, Roberts, & Gray, 1995). Companies provide information on the ground that such disclosure will not respond to the negative impact on the company image (Choi, 1973). It is seen that a company discloses information in line with legislative frameworks (Alam, 1989; Karim et al., 1998). Brownlee et al. (1990) argue that regulatory agencies should be more concerned with the full and fair disclosure of information than with the specific accounting methods used to measure or report economic transactions. The Companies Act 1994 provides the basic requirements for disclosure and reporting applicable to all companies incorporated in Bangladesh (Government of Bangladesh, 1993). The Act requires companies to prepare financial statements in order to reflect a true and fair view of the state of affairs of the company. The Securities and Exchange Commission (SEC), another regulatory body, requires all listed companies to comply with accounting standards promulgated by the Institute of Chartered Accountants of Bangladesh (ICAB), in addition to its own disclosure provisions (Government of Bangladesh, 1993). Disclosure provisions of the Security Exchange Rules are, in fact, restricted only to companies listed on the stock exchanges. It is often alleged, however, that company annual reports do not comply with the disclosure requirements stipulated by the regulatory agencies, resulting in poor disclosure compliance by the listed company (Ahmed & Nicholls, 1994; Hossain, 2000; Karim, 1996). Considerable research (e.g., Benjamin & Stanga, 1977; Cooke, 1989; Inchausti, 1997; Lang & Lundholm, 1993; Meek et al., 1995; Singhvi & Desai, 1971; Wallace, Naser, &

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Mora, 1994) has been undertaken in the recent past to enhance our understanding of the factors influencing disclosure practices in Western society. Little is known about this phenomenon in developing countries, particularly in Bangladesh. Moreover, prior research focuses mostly on voluntary disclosures. There is little empirical evidence that looks explicitly at mandatory disclosures, especially since the 1994 Companies Act. Again, Hossain and Taylor (1998) used company reports that were prepared before the enactment of the Companies Act 1994. On the other hand, Hossain (2000) specifically investigated the compliance of International Accounting Standards (IASs) adopted in Bangladesh. He found that compliance with the disclosure practices mandated by the three regulatory bodies (Companies Act 1994, disclosure requirements of the stock exchange, and the approved IASs) in Bangladesh is rare. This paper investigates the disclosure practices of listed companies in Bangladesh to see how they comply with mandatory rules established by the three regulatory bodies. In addition, it examines the association between company characteristics and the extent of disclosure. The findings of the study would be of immense interest to listed companies, investors, and those involved in standard setting processes. The remainder of the paper is organized as follows. Section 2 discusses the regulatory framework for disclosure in Bangladesh. Section 3 presents a review of the literature and develops the studys hypotheses. The research method is outlined in Section 4. Section 5 presents the results. Finally, Section 6 presents the conclusions, possible policy implications of the results, potential limitations and directions for future research.

2. The legal framework for disclosure Corporate reports generally include information in conformity with reporting and disclosure laws, because laws require them to provide minimum amount of information to facilitate evaluation of the securities. Every country, in general, has its own regulatory framework that governs disclosure in corporate reports within that country. In Bangladesh, corporate disclosure is governed by a number of statutes. For example, companies limited by liabilities are guided by the Companies Act 1994. The extent and nature of disclosures of the listed companies are influenced by Securities and Exchange (SEC) Rules 1987 (Government of Bangladesh, 1987), the IASs adopted by the Institute of Chartered Accountants of Bangladesh (ICAB) and the disclosure provision of the Companies Act 1994 (Government of Bangladesh, 1994). These three regulatory bodies provide the framework for corporate disclosures in Bangladesh. There is, however, no one set of generally accepted standards based on these three sources. Again, industries like railways, electricity, insurance, and banks have their own distinct regulations that govern disclosures in their annual reports. Disclosures are also influenced by Nationalized Order, 1972, Banking Companies Act (Government of Bangladesh, 1991), and Income Tax Ordinance 1984 (Government of Bangladesh, 1984). Like other countries of this region, Bangladesh adopted the Companies Act 1913 of the then British India. This Act was in force in Bangladesh before the promulgation of the Companies Act of 1994, which is largely influenced by the British Companies Act. The Companies Act 1913 required limited public companies to submit an annual balance sheet containing

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a summary of their capital, liabilities, and assets. But no specific formats were prescribed. Profit and loss accounts were prepared without mentioning the nature of activities in detail. These two statements needed to be audited and presented at the annual general meeting for approval prior to publication. The fundamental weakness of the regulation is that it does not provide any guidelines regarding the contents or how the value of the respective items has been arrived at. The Companies Act 1994 made major alternations to the financial reporting practices and disclosures of limited liability companies (Ahmed & Kabir, 1995). Under the new law both statements also have to be audited and reported before the annual general meeting. The statements can be prepared either horizontally or vertically. The law requires that fixed assets are to be shown at cost or valuation. The provisions for depreciation are the annual charge to be disclosed separately. The required disclosures are classified and specified in far more detail and include reserves and the changes that occurred during the year, directors remuneration, commission, tax provision, and the flow of foreign currency. Section 185 of the Companies Act provided mandatory items to be disclosed on the balance sheet and income statement and Section 186 provides a list of information items that must be disclosed in the directors report (Government of Bangladesh, 1994). Legislative requirements prior to 1994, however, failed to indicate the actual level of corporate disclosure. No particular formats were prescribed and even the necessary contents of the accounting reports were not specified. In contrast, the Companies Act 1994 included many provisions, which are mandatory and, some of those are also required by the approved IASs (Hossain & Taylor, 1998). The accounting profession in Bangladesh is guided by two professional institutes, namely, the Institute of Chartered Accountants of Bangladesh (ICAB) and the Institute of Cost and Management Accountants of Bangladesh (ICMAB). The financial audit is done by members of ICAB and the cost audit by members of ICMAB. However, both are under the control of the Ministry of Commerce Bangladesh. The two institutes are run and managed by council members, who are elected internally, and representatives from the government. The council is responsible for the development of the accounting profession in Bangladesh. Moreover, the ICAB has been given the sole authority to develop and issue accounting and reporting standards and to monitor their application throughout the country. Stock exchange authority governs disclosure in company reports as a part of listing requirements. At the time of independence in 1971, Bangladesh inherited only one stock exchange, the Dhaka Stock Exchange (DSE). It was formed in 1954 and registered as a limited liability company. The Chittagong Stock Exchange (CSE), another stock exchange of the country, was set up in 1999 and functions in Chittagong. Both stock exchanges are regulated under the Securities and Exchange Rules 1987 and the Companies Act. Stock exchange companies must disclose the following information in compliance with SEC regulations: company history, outline of business, profile of top employees, profile of directors, information on capital, changes in share capital, number and types of shareholders, audited financial statements, consolidated statements, post-balance-sheet events, holdings in associate and subsidiary companies with relative percentage and payment of dividends. The stock exchange thus places a continuing disclosure and reporting obligation on listed companies. Security exchange authority has, therefore, a

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positive role in determining the level of disclosure in company reports (Wallace & Naser, 1995). It is recognized that IASs issued by the International Accounting Standards Committee (IASC, 2001) have made important contributions toward harmonization in accounting and reporting practices in individual countries. The IASC has, however, no authority to enforce the accounting practices of its member countries. The implementation of accounting standards is left to the local accountancy bodies. In countries where professional accounting institutions are not strong, the implementation of accounting standards will not be effective. The professional bodies may persuade the government to amend the law so that the standards issued by the IASC can be adopted. It should be noted that IASC was reconstituted (April 01, 2001) and is now known as the International Accounting Standards Board (IASB). The Institute of Chartered Accountants of Bangladesh as a member of this body (IASB) is entrusted with the task of adoption and enforcement of standards in Bangladesh. The Technical and Research Committee of the ICAB selects, reviews, and modifies the standards, where necessary, to conform to local requirements. Members of the ICAB comply with the adopted accounting standards and disclosure provisions of the Companies Act, as well as the disclosure requirements of the stock exchanges. Like the IASC, the ICAB are, however, recommendatory in nature, as the ICAB has no legislative power to enforce compliance with the disclosure requirements of the accounting standards they issue (Hossain, 2000). Since members of the ICAB are kept constantly aware of the development of accounting and auditing standards, they therefore contribute to the improvement of financial reporting in Bangladesh. Once accounting standards adopted by the ICAB gain mandatory status through the SECs directives they become applicable to all listed companies. Specifically, all listed companies are to abide by accounting standards adopted by the ICAB and hence, accounting standards are mandatory only for the companies listed on the stock exchange. The SEC in Bangladesh plays a central role in monitoring and enforcing mandatory disclosure compliance of listed companies. Listed companies are required to prepare financial statements in accordance with the approved IASs along with the disclosure provisions of the Companies Act and the stock exchanges. The SEC also prescribes penal provisions for non-compliance. These include: barring the auditor who conducted the noncomplying audit from acting as an auditor for a listed company for a period of up to five years; fining the auditor and the company officer up to one thousand taka for noncompliance with stipulated provisions under the Companies Act. Like the U.S. Securities and Exchange Commission (SEC), the SEC in Bangladesh uses a review process to monitor and enforce compliance with mandatory disclosure requirements. The primary objectives of monitoring company annual reports are to examine whether they adhere to regulatory frameworks and to encourage compliance. In contrast to the U.S. SEC that uses a hard approach, the SEC in Bangladesh employs a lenient approach to enforce compliance. The weak enforcement approach of the SEC may lead to the withholding of mandatory disclosure information. To enforce existing rules, the SEC Bangladesh has the power to suspend companies or remove their listing privileges if they do not comply with the listing requirements. The power to reward the reporting entity is also embedded in the enforcement process. Since the SEC Bangladesh hardly ever imposes sanctions for noncompliance of mandatory disclosures, better enforcement procedures appear warranted.

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3. Literature review and hypothesis development The demand for published financial information of companies has increased worldwide as users of the information become more aware. But often disclosure does not serve the need of the users because managers are likely to consider their own interests when exercising managerial discretion. In fact, this might enhance the disclosure gapthe difference between expected and actual disclosures, also known as the principalagent problems. In other words, improved disclosure reduces the gap between management and the outside world, enhances the value of stock in the capital market, increases liquidity, reduces cost, and so on (Cooke, 1989; Hossain, 2000; Karim, 1996). One striking feature in corporate reporting is that a company generally provides information to discharge specific obligations: to society, investor, supplier, creditors, and legal authorities. However, the decision to provide or not provide certain information is likely to be influenced by a variety of factors. Prior research has examined factors like size, profitability, and listing status to find out their links with disclosure. Cooke (1989), for example, examines three categories of companies, namely, unlisted, listed, and multiple listed, and suggests that disclosure is lower for unlisted companies than listed companies, and that disclosure by listed companies is lower than that of multiple listed companies. Lang and Lundholm (1993) suggest that disclosures are higher for larger firms. Lobo and Zhou (2001) demonstrate that companies that are performing well are likely to provide more information than poorly performing companies. Also, cultural value is no less important a determinant of disclosure. For example, in countries, which support a culture that has a high sense of secrecy, management is less likely to pursue a high level of disclosure (Gray & Vint, 1995). Earlier research has examined various company attributes and their association to the levels of disclosure. The present study focuses on the level of disclosure in relation to the age, size, status, and profitability of the companies. Additionally, prior studies (Owusu-Ansah, 1998; Wallace & Naser, 1995) define mandatory disclosure as the presentation of a minimum amount of information required by laws, stock exchanges, and the accounting standards setting body to facilitate evaluation of securities. Similarly, the present study concentrates on mandatory disclosure for items of information required by the Companies Act 1994, the listing rules of the stock exchanges, and the approved IASs that listed companies in Bangladesh to disclose those in their annual reports. 3.1. Size Prior studies have identified size as significantly associated with the level of disclosure (Cooke, 1989; Hossain, 2000; Lang & Lundholm, 1993; Owusu-Ansah, 1998). The size variables considered in these studies include sales, total assets, number of employees, and number of shareholdings. In the present study, the size of the company was determined by taking into account the capital employed and the annual sales of the company. Capital employed is the total of net worth and long term loans. Alternatively, it is defined as total of fixed assets (net of depreciation) and net working capital, or total net assets less current liabilities. Sales as a proxy for size, is equal to net annual sales. Consistent with prior research, it is hypothesized that there is a significant association between company size and the extent of disclosure. Larger companies may tend to disclose

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more information than smaller companies in their annual reports due to their competitive cost advantage (Lang & Lundholm, 1993; Lobo & Zhou, 2001). 3.2. Age For this study, I conjecture that company age is a critical factor in determining the level of corporate disclosure. Older companies with more experience are likely to include more information in their annual reports in order to enhance their reputation and image in the market. Thus, I infer a positive association between the age of the company and the level of disclosure. That is, old companies disclose information to a greater extent than that of new companies. Companies are classified into three categories for this variable: companies registered prior to 1 January 1972 are grouped as bvery oldQ companies; companies registered after 1 January 1972 but before 1 January 1986 are boldQ companies; and companies registered after 31 December 1985 are bnewQ companies. 3.3. Industry type Association between the level of disclosure and industry types provides mixed evidence. Cookes (1989) findings report that manufacturing companies disclose more information than other types of companies. But the findings of Inchausti (1997) and Owusu-Ansah (1998) provide no evidence of this association. I use industry type as an explanatory variable in this study, because disclosures differ from one industry type to another. For this study, companies have also been divided broadly into two categories: traditional and modern. Traditional companies are food, textile, jute, synthetic, paper, cement, and sugar. Bangladesh has a long history in these industrial activities which use old technologies for the most part. Financial institutions tend to place the companies in the traditional. Modern companies, which tend to place use new technologies include engineering, pharmaceuticals, chemicals, and metal alloys. The hypotheses drawn for this variable would be: A particular type of company discloses different amount of information than that of other types of company. 3.4. Profitability Previous research (Hossain, 2000; Inchausti, 1997; Karim, 1996; Owusu-Ansah, 1998; Wallace & Naser, 1995; Wallace et al., 1994) use profitability as a determinant of disclosure in corporate annual reports. However, empirical results from the research are mixed. Findings of Wallace et al. (1994), Karim (1996), Owusu-Ansah (1998), and Hossain (2000) suggest that companies having higher profitability disclose more information than those with lower profitability. Also, the relationship between these two variables is found to be positive in a study by Wallace and Naser (1995). Additionally, researchers have used net profit to sales, earnings growth, dividend growth, return on assets, and return on equity as proxies for profitability. In the present study, the rate of return on capital employed and sales have been used as a measure of profitability. It is hypothesized that companies with a higher rate of return (either on

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capital employed or sales) disclose information to a greater extent than companies with a lower rate of return on capital employed. Thus, the hypothesis developed for the study is as follows: H1. There is a significant positive association between a number of company characteristics in respect of size, age, industry type, profitability and the extent of mandatory disclosure. 4. Method 4.1. Selection of sample This study covers companies listed both on the Dhaka Stock Exchange (DSE) and the Chittagong Stock Exchange (CSE). The total number of companies listed on either stock exchange at the end of 1999 was 212. These companies fall into 11 categories: banks, engineering, food and allied products, pharmaceuticals and chemicals, paper and printing, fuel, jute, service and real estates, insurance, and miscellaneous. As the study is limited to only non-financial manufacturing companies, the companies under the categories of banks, insurance, service and real estates were excluded. The number of companies was thus reduced to 174. The addresses of these companies were collected from the DSE and letters were prepared and sent to the 174 companies requesting them to send a copy of their annual report published in the year 1999. Responses from the company offices were very poor. Only seven annual reports were available by post. I then decided to visit the company head offices in order to obtain reports. This yielded another 87 annual reports of non-financial companies. These 94 (7 + 87) companies whose annual reports were collected, constitute the sample of the study. Hence, the actual sample represents about 54% of population of non-financial companies listed on the stock exchanges. The comparative distribution of the companies in the population and the sample are given in Table 1.

Table 1 Distribution of sample by industry type Industry type Population Number Engineering Food and allied product Fuel and power Jute Textile Pharmaceutical and chemicals Paper and printing Cement Miscellaneous 22 33 4 7 42 25 8 5 28 174 % 12.6 19.0 2.3 4.0 24.1 14.4 4.6 2.9 16.1 100.0 Sample Number 19 16 2 0 24 16 1 4 12 94 % 20.2 17.0 2.1 0.0 25.5 17.0 1.1 4.3 12.8 100.0

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4.2. Construction of the disclosure index Although there are several ways of communicating company information, such as interim reporting, press releases, letters, etc., the annual report is still considered the major medium disclosing information. It has been argued that the information contained in the report usually differs from company to company. Selection of proper items of information that are expected to be disclosed in the annual report is not an easy task. I consulted the mandatory disclosure checklist used in prior studies while preparing the disclosure index for this study. However, the disclosure index employed in this study is based mainly on the three regulatory sources in Bangladesh. They are, as previously stated, the Companies Act 1994, disclosure requirements of the stock exchanges, and the approved IASs. As each source is separate, I included most of the requirements of each source in the disclosure index. The disclosure index was finalized after consultation with the relevant experts. Appendix 1 presents the disclosure index. Table 2 shows the distribution of 160 items of information across the annual report: balance sheet items 41%, income statement 28%, accounting policies 14%, historical summary 12%, and directors report 5%. 4.3. Scoring the disclosure items There are two methods for determining the level of corporate disclosure: weighted and unweighted approaches (Cooke, 1989). The weighted approach allows distinctions to be made for the relative importance of information items to the users (Inchausti, 1997). The advocates of this approach are of the opinion that all items of information are not equally important and, therefore, allocation of weights is done somewhat arbitrarily by the researchers. Another approach and the one adopted for present study is the unweighted approach. This approach is based on the assumption that each item of disclosure is equally important. Additionally, all disclosure items are equally important to the average users (Wallace, 1988). Specifically, attention is given to all users of annual reports rather than particular user groups. Here items of information are numerically scored on a dichotomous basis. Score one is assigned if a company discloses an item of information. In the case of non-disclosure the score is zero. An unweighted index is defined as the ratio of the number of items a company actually

Table 2 Distribution of index items No. of Items Balance sheet items Income statement items Accounting policies items Directors report items Historical summary items 66 44 23 08 19 160 % 41 28 14 05 12 100

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discloses to the total that it could disclose. The total disclosure (TD) score thus arrived at for a company is additive as follows: TD
n X i1

di

Where, d = one if the item d 1 is disclosed; zero, if the item d 1 is not disclosed; n = number of items. A major issue for the weighted approach is that if different user groups are asked to weight the importance of various items, they may give weight the same items of information differently. The weighted approach has, in fact, encountered several problems. Prior studies, which have examined both weighted and unweighted approaches, draw similar conclusions about the methods (Choi, 1973; Inchausti, 1997). The equal weighting system is, therefore, viewed to be superior to the differential weighting system (Owusu-Ansah, 1998) and for that reason this study uses the unweighted disclosure index approach to measure the level of corporate mandatory disclosures. Similar studies in other countries also have used the unweighted disclosure index approach (Owusu-Ansah, 1998; Wallace & Naser, 1995). But the unweighted approach should be employed with a caveat. One main problem of this approach is that a company may be penalized by assigning a score of zero for the absence of an item of information that is not applicable to it. In order to overcome this problem, the relevance of each absent item needs to be investigated and then classified as non-disclosure for a relevant item of reporting and non-applicable otherwise. For companies having nonapplicable items, the use of a relative index is suggested (Owusu-Ansah, 1998). The relative index approach is the ratio of what a particular company actually disclosed to what the company is expected to disclose. In spite of the subjective discrimination between non-disclosure and non-applicable items, this approach is considered to be a more accurate measure than one that assumes that all companies are identical and, therefore, no difference need exist in disclosure requirements. This approach has been employed in several prior studies (see, e.g., Cooke, 1989; Inchausti, 1997; OwusuAnsah, 1998; Wallace & Naser, 1995; Wallace et al., 1994). 4.4. Test of hypothesis In order to test the hypothesis I used both non-parametric and parametric statistics. Cooke (1989) used these two approaches in his study. A non-parametric analysis was used for measuring the disclosures of an individual company based on indexes and the level of disclosure practices. This approach used chi-square, and Lambda. Another approach used based on the mean of each category of company, is the contingency coefficient of the correlation. The contingency coefficient of the correlation along with chi-square is considered useful to measure association. When the expected value of one or more cells in the table is less than five, however, chi-square is not a meaningful way to measure association. In that situation, an alternative measure, Lambda, overcomes the limitation of the expected frequencies (Cooke, 1989, p. 201). Lambda varies between zero and one, where zero indicates no association and one

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indicates that the variables are perfectly associated.The regression technique used to test H1 is as follows: TDE a B1 Size B2 Age B3 Profit B4 Industry e Expected sign (+) (+) (+) (+) Where: TDE =total disclosure score received from each company a =the constant, and e =the error term

5. Results and discussion 5.1. Level of disclosure and disclosure performance by age The study reveals that disclosure compliance is poor among listed companies. They disclosed an average of 43.53% of the items selected. The minimum score found in the study is 17.3% and the maximum is 72.50%, showing a decreasing trend in the level of corporate disclosure with an increase in the disclosure score. This finding compares favorably to Hossain and Taylors (1998) findings where the mean score is 29.33. Compliance with accounting standards disclosure by listed companies was better in another study by Hossain (2000), where the average compliance level is 69.05% with a minimum and maximum level of 35.85% and 94.34%, respectively. Nevertheless, conformity with mandatory disclosure by Bangladeshi firms is low compared to firms in other countries. For example, the average mandatory disclosure for Zimbabwe firms is 74.43% (Owusu-Ansah, 1998). Whether or not company age influences the level of disclosure is examined by using lambda analysis (Table 3). For purposes of this analysis, the sample companies are
Table 3 Disclosure of information by age Disclosure index Age of the company Very old company Up to 20 2130 3140 4150 5160 6170 71 and above Total v2 12.213 1 4 1 4 2 12 Significance .429 Old company 3 14 8 10 7 1 43 Contingency coefficient .0339 New company 1 4 16 12 5 1 39 1 8 34 21 19 10 1 94 k .000 Total

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Table 4 Disclosure of information by status Disclosure index Status of the company Traditional Up to 20 2130 3140 4150 5160 6170 71 and above Total v2 10.162 7 17 11 9 2 46 Significance .118 Modern 1 1 17 10 10 8 1 48 Contingency coefficient .312 1 8 34 21 19 10 1 94 k .000 Total

classified as very old, old, and new companies depending on when they first registered with the Registrar of Companies. The results did not support the hypothesis that old companies will provide more information than new ones. 5.2. Disclosure performance by status Disclosure was expected to depend on the status of a company. Modern companies are likely to disclose more information than that of traditional companies. Table 4 shows that out of 94 companies, 49% falls in the category of traditional companies and the remainder 51% in the category of modern companies. It can also be seen from the table that 24% of traditional and 40% of modern companies have a score of more than 51%. Lambda reveals no association between disclosure and status of the companies. 5.3. Size-wise disclosure Corporate size can be represented by many different indicators. Karim (1996) uses annual sales, total assets, and market value of the firm to measure size, whereas Hossain (2000) uses sales turnover and total assets as size variables. In this study capital employed and annual sales are used as the measures of company size. The relationship between size and disclosure is shown in Tables 5 and 6. Larger companies are expected to disclose more information. As can be seen from Table 5, at 5160% the disclosure level of 21% have capital employed of Tk. 100 to 200 million. The same percentage was also found for companies with Tk. 200 to 400 million, whereas 53% of the companies have capital employed at the Tk. 400 million and above level. Again, for ten companies at the 61% to 70% disclosure level, 50% have capital employed of Tk. 200 to 400 million, 20% of Tk.400 to 800 million, and 30% of Tk.1600 million and above. From Table 6 it can be seen that no company with sales of less than Tk. 100 million 51% to 60% level. Out of the 19 companies at this level, 37% had sales of Tk. 200 to 400 million, and 37% had sales of 400 to 800 million. Three companies had sales of Tk. 800 to

M. Akhtaruddin / The International Journal of Accounting 40 (2005) 399422 Table 5 Disclosure of information by size Disclosure index Up to 20 2130 3140 4150 5160 6170 71 and above Total v2 64.631 Total capital employed Up to 50 50100 100200 1 3 7 1 1 1 7 1 6 8 4 2 9 3 4 5 23 3 8 7 2 1 21 k .183 1 1 3 3 5 5 1 1 200400 400800 8001600 1600 and above

411

Total

12

19

1 8 34 21 19 10 1 94

Significance .002

Contingency coefficient .638

1600 million and one company had sales of Tk. 1600 million and above. At the disclosure levels of 61% and above there are no smaller companies. This analysis indicates that the size of the company in regard to capital employed and sales does have a little impact on the disclosure of information. Lambda, too, reveals the same conclusion. However, the influence of size was found to be significant in the studies of both Karim (1996), and Hossain (submitted for publication). 5.4. Profitability and disclosure The profitability variable is used by many researchers (Hossain, 2000; Inchausti, 1997; Karim, 1996; Owusu-Ansah, 1998; Wallace & Naser, 1995; Wallace et al., 1994), although the measures of profitability were not similar in all these studies. These studies used net profit to sales, rate of return on assets, earnings growth, and dividend stability. The two profitability measures used in this study are net profit on capital employed and net profit
Table 6 Disclosure of information by size Disclosure index Up to 20 2130 3140 4150 5160 6170 71 and above Total v2 79.592 Annual sales Up to 50 1 4 12 2 50100 1 2 4 100200 200400 400800 3 2 6 7 2 20 k .217 8001600 1600 and above 1 8 34 21 19 10 1 94 Total

9 3 1

9 4 7 4 24

19 Significance .000

13

2 3 1 1 7

1 3 4

Contingency coefficient .677

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Table 7 Profitability and the level of disclosure Disclosure index Up to 20 2130 3140 4150 5160 6170 71 and above Total v2 77.950 Net profit on capital employed Loss 1 8 11 3 Up to 2 24 48 816 1632 32 and above 1 8 34 21 19 10 1 94 Total

9 3 1 1 14

4 3 1

7 4 4 2 17

23

3 7 7 6 1 23 k .167

1 5 1 7

1 1 2

Significance .000

Contingency coefficient .673

on sales. The relation between net profit on capital employed and the disclosure index is presented in Table 7. About 25% of the companies under study suffered losses, whereas 32% enjoyed profits between 8% and 32% on capital employed. At these profit levels, 20% of the companies fall at the 60% and below disclosure level, and 12% face at the disclosure level of 61% and above. Thus, analysis indicates a very low degree of association between net profit on capital employed and corporate disclosure. An examination of the association between net profits on sales and the disclosure level also reveals that association was not significant enough to reject the null hypothesis (Table 8). Lambda accepts a low level of association between disclosure and profitability in terms of both net profits on capital employed and net profits on sales. Both Karim (1996) and Hossain (2000) found a positive association between profitability and disclosure. The finding of the present study is not incongruent with them; it shows a low level of association between profitability and disclosure. According to Zubaidah and Koh (1999), a more profitable company could have disclosed more information in order to improve its image. The standard
Table 8 Profitability and the level of disclosure Disclosure index Up to 20 2130 3140 4150 5160 6170 71 and above Total v2 75.337 Net profit on sales Loss 1 8 11 3 Up to 2 24 48 816 1632 Net profit 32 and above 1 8 34 21 19 10 1 94 Total

8 3 2 1 14

4 5 2

5 5 7 2 19

4 1 7 6 18 k .150

1 4 1 2 8

23

11

Significance .000

Contingency coefficient .667

M. Akhtaruddin / The International Journal of Accounting 40 (2005) 399422 Table 9 Descriptive statistics Mean Disclosure index Age of the company Status of the company Total capital employed Size of annual sales Net profit on capital employed 3.88 2.29 1.51 3.71 3.60 3.34 Std. deviation 1.23 .68 .50 1.61 1.74 1.79

413

N 94 94 94 94 94 94

deviation of each group is approximately equal suggesting that the equal variance assumption is met (see Table 9, descriptive statistics). The degree of variability in the case of age and status of the company is much lower compared to other variables in the study. Thus we can reject the null hypotheses that there is no association between disclosure and size and between disclosure and profitability. 5.5. Multivariate test Regression analyses were run using ordinary least squares (OLS) estimates and are reported in Table 10. Estimates of regressions are substantially better than that of univariate analysis. Regression has been used in much previous research (e.g., Cooke, 1989; Owusu-Ansah, 1998; Wallace & Naser, 1995; Wallace et al., 1994). The results of the estimation procedure report that company size, profitability, and the intercept have a statistically significant effect on the extent of mandatory disclosure, but at different levels.
Table 10 Regression results Coefficient of multiple regression Coefficient of determination (R 2) Adjusted R 2 Standard error Analysis of variance Sum of squares Regression Residual Variables in the equation Unstandardized coefficients b (Constant) Age of the company Status of the company Total capital employed Size of annual sales Net profit on capital employed Net profit on sales 1.789 .195 .298 3.603 4 .307 .170 .134 Std. error .537 .136 .184 .100 .108 .120 .107 Standardized coefficients b .108 .121 .005 .432 .246 .189 3.328 1.431 1.614 .036 2.833 1.420 1.254 .001 .156 .110 .971 .006 .059 .213 t Sig. 81.711 60.002 df 6 87 Mean square 13.619 .690 F 19.746 .759 .577 .547 .830

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The intercept is significant at the .001 level. Company age is significant at the .15 level, whereas profitability is significant at .05 level. The disclosure score, a continuous variable, is used as the dependent variable. The disclosure score for each company is related to company characteristics, the independent variables for the study, such as age, status, size and profitability. The four company attributes were measured on a continuous scale. The explanatory power of the OLS model, as indicated by the adjusted R 2, is 54.7% ( p b .001). The R 2 is .577, which reveals that the model is capable of explaining a 57.7% variability in disclosing information in the annual reports of the selected companies. The F statistic indicates that the model employed to explain the variations in mandatory disclosure in company annual reports is significant at the conventional levels ( p b .01). The results show that some variables are significant in explaining disclosures. Companies that are larger in size measured by annual sales ( p b .01) are likely to disclose more information. The positive association between company size and mandatory disclosure is consistent with prior findings (see, e.gAhmed & Nicholls, 1994; Cooke, 1989; Meek et al., 1995; Owusu-Ansah, 1998; Wallace & Naser, 1995). Lang and Lundholm (1993) also report that disclosure is higher for larger firms. It is argued that larger firms provide more information because they are likely to face lower cost of disclosure (Ho & Wong, 2001). Furthermore, since larger firms tend to disclose more to meet the increased demand in reducing uncertainty about quality and expected return, they arguably face lower competitive cost of disclosure (Ferguson, Lam, & Lee, 2002). The hypothesis that companies having higher profitability disclose more information than companies with lower profitability is supported ( p b .05). Lang and Lundholm (1993) suggest that well-performing firms provide more information in the annual report than do the poor-performing firms. The positive effect of profitability on financial disclosure is consistent with Wallace et al. (1994), Karim (1996), Owusu-Ansah (1998), and Hossain (2000). The managers of profitable firms are motivated to disclose more information to appease shareholders, to enhance company image leading to marketability of shares, and above all to justify their compensation (see Meek et al., 1995; Zubaidah & Koh, 1999). The t-statistic of industry type is insignificant, indicating that it has a negligible effect on the mandatory disclosure practices of the sample companies. It is consistent with results of Owusu-Ansah (1998), where firms are classified into four broad heads, namely, mining, conglomerate, manufacturing, and others. Inchaustis (1997) findings also do not support an association between industry type and level of disclosure. Similarly, company age was not found to be as significant a predictor of compliance with mandatory disclosure as expected. An older company was expected to disclose more mandatory information than a younger one. For this study company age is measured from the date of registration with the Registrar of Companies not from the listing date. A listed company has to comply with disclosure and reporting regulations and may require some time to adapt to the new disclosure environment. Public companies having pre-listing experience may, therefore, have no link to a specific level of disclosure. This needs further investigation. Owusu-Ansah (1998) finds a positive association between company age and mandatory disclosure. He defines company age as the experience gained by public companies during the listing periods. Thus, the possible explanation for his findings is that company age in terms of listing status is related to mandatory disclosure.

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6. Conclusions, limitations, and suggestions for future research The aim of this study is to examine the level of mandatory disclosure made by listed companies in Bangladesh. It also investigates the factors that influence mandatory disclosure practice. The findings would be used to improve the quality of corporate disclosure by Bangladeshi companies. The study finds that many corporate annual reports do not meet the disclosure requirements of the regulatory bodies in Bangladesh. On average, the sample companies disclose information on only 43.53% of the items asked for indicating poor compliance with the mandatory rules. This result is better than the findings of Hossain and Taylor (1998), where the mean score is 29.33%. A later study, Hossain (2000), is more encouraging, with average compliance rates for accounting standards disclosure reported at 69.05% with a range of 35.85% to 94.34%. These results indicate that listed companies in Bangladesh place more emphasis on IASs disclosures. This may be the result of the ICABs efforts to persuade its members who work as either professional accountants or auditors to comply on the results of the ICABs monitoring. Nevertheless, the available literature reveals that overall compliance with mandatory disclosure by Bangladeshi firms is low compared to firms from other countries. For example, the average mandatory disclosure for Zimbabwe firms is 74.43% (Owusu-Ansah, 1998). The lack-lustre disclosure performance by Bangladeshi firms can be attributed to organizational culture, poor monitoring, and lapse in enforcement by the regulatory body. Disclosure decisions are culture-driven (El-Gazzar, Philip, Finn, & Jacob, 1999). Ho and Wong (2001) argue that in countries where the culture supports a high level of secrecy, managements become less transparent and are less likely to favor a high level of disclosure. Further analysis is required to impound cultural factors. With regard to regulations, Karim et al. (1998) suggest that at present they are ineffective when it comes to monitoring disclosure practices in Bangladesh. Again, regulations alone, according to Ho and Wong (2001), can do little to ensure disclosure because companies view that disclosure excellence lies in the hands of regulatory bodies who work for safeguarding the companys value for shareholders. What the regulatory bodies need to do is to create an environment that helps become aware of the companies consequences of nondisclosure of adequate information in the annual reports. This study examines the relationship between mandatory disclosure and four corporate attributes; i.e., company age, status, size, and profitability. The four company attributes were measured on a continuous scale. Analysis reveals that the age of the company is not a factor for disclosure. The investigation did not support the hypothesis that old companies will provide more information than new companies. Similarily, company status has no effect on disclosure. Contrary to prior findings (Cooke, 1989; Meek et al., 1995; OwusuAnsah, 1998), this study finds little support for the relationship between size and the level of disclosure, however, except in respect to sales, where size is marginally significant. The same result is found in the case of disclosure and profitability. Based upon the findings of this study, the following observations and recommendations have been outlined which may be useful to company managers, financial analysts, investors, and policy makers for the capital market development of the country: ! Companies disclose more information on the cost of sales, providing details of expenses, but there is less compliance with disclosure regulations. Steps should

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be taken to ensure that mandatory information items are covered in the annual report. ! The Securities Exchange Commission has already introduced a rewardpunishment program to ensure that listed companies disclose adequate information in their annual reports. The enforcement program, however, has not been effective. A committee could be formed representing investors, financial institutions, and academicians to appraise the published accounts and give their observations. ! The Companies Act 1994 does not include a provision for publication of either a Statement of Sources and Application of Funds or a Statement of Cash Flow. The IAS7, however, adopted a cash flow statement for use in Bangladesh. This standard allows a cash flow statement to be prepared in two ways, viz. the direct or indirect method. The Companies Act should also include a provision about the preparation of cash flow statements. The Bangladeshi capital market is not efficient and well structured. An increase in the flow of free and accurate disclosure would help the capital market develop. Government needs to come forward to protect the interests of the different user groups. ! The responsibility of the auditor is to check whether the accounts are prepared in accordance with accounting policies and requirements of the Companies Act 1994. He or she has to state his or her opinion that the audited accounts give a true and fair view of the state of affairs of the company. Audit reports should also state whether or not disclosure rules are properly complied with. ! With a view to improving disclosure level, an Accounting Board should be set up by the Government with members from both from the Institute of Chartered Accountants of Bangladesh and the Institute of Cost and Management Accountants of Bangladesh. In addition to the adoption of accounting standards and the development of accounting in Bangladesh, the board should have the responsibility of determining the degree of compliance with the disclosure regulations. ! An accounting court could be created to deal with litigations regarding the disclosure of information. An individual who has a direct interest in the annual reports of a company could bring a charge of non-compliance with the disclosure requirements. ! The present study is limited to only 54% of the companies listed on the stock exchanges. Future research could investigate disclosure performance of all the listed companies. Research could also explore the variations in disclosure between listed and unlisted companies. Examining similar research issues within different industry sectors would also be an interesting extension of this study. This might reveal interesting results in terms of variations within the industrial sectors. ! Any opinion survey of users of company annual reports could be conducted. Such a survey would provide additional insights on corporate disclosure practices in Bangladesh. ! Finally, this study covers the annual reports for a single year only. Additional research is needed to assess the trends of disclosure and to know whether the quality of disclosure has improved over time.

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Appendix A. Disclosure index

Historical summary 1. A brief description of the nature and principal activities of the company and its subsidiaries 2. The country of incorporation and the address of the registered office 3. Names of the top employees, lines of authority and their remuneration 4. List of directors 5. Outside affiliations of the directors 6. Audited financial statements (balance sheet and profit and loss account) 7. Audit report 8. Report of the chairman or CEO 9. Statement of cash flows 10. Holdings in associates and subsidiaries with the relative percentage 11. Statement of changes in the share capital 12. Number and types of shareholders 13. Names and size of holdings of largest shareholders 14. Significant changes in the companys or its subsidiaries fixed assets and the market value of land, if the value differs substantially from the book value 15. The date when the financial statements were authorized for issue and who gave that authorization 16. Post-balance-sheet events 17. Discussion of major factors which will influence next years results 18. Forecast of company performance 19. Comparative balance sheet for two years Balance Sheet Items 20. The total carrying amount of inventories 21. Inventories are sub-classified as merchandise, production supplies, materials, work in progress, and finished goods 22. Inventories carried at net-realizable value 23. Amount of inventories pledged as security for liabilities 24. Cash and cash equivalents 25. The components of cash and cash equivalents should be disclosed and a reconciliation of the amounts in the cash flow statement with the equivalent items reported in the balance sheet should be presented 26. Trade and other receivables 27. Receivables are analyzed by amount from trade customers, from other members of the group, and from related parties 28. Advances and loans to staff or directors 29. Advances and loans to partnership firms in which the company or any of its subsidiaries is a partner 30. Advances recoverable in cash or in kind or for value to be received, e.g., rates, taxes, and insurances, etc. 31. Interest accrued on investment 32. Provision for provident fund scheme 33. Secured short-term borrowings 34. Unsecured short-term borrowings 35. Unpaid dividends 36. Provision for doubtful debts 37. Trade and other payables 38. A brief description of the nature of the contingent assets/liabilities 39. Provision for taxation 40. Provision for proposed dividends 41. Provision for gratuity 42. Provision for contingencies 43. Provision for insurance, pension, and similar staff-benefit schemes (continued on next page)

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Appendix A (continued) 44. 45. 46. 47. 48. 49. 50. 51. 52. 53 54 55. 56. 57. 58. 59. 60. 61. 62. 63. Provision for liabilities Deferred tax liabilities Classification of assets and liabilities Aggregate value of intangible assets Breakup of intangible assets Aggregate amount of investments Investment in subsidiary companies Investment in associated companies Investment in quoted and unquoted shares other than group Investment in government securities Value of land and buildings Amount of the leasehold property Reconciliation between the total of minimum lease payments at the balance sheet date and their present value Cost of furniture and fittings Expenditure upon development of property Patents, trade marks, and designs A company with subsidiaries should annex a set of consolidated financial statements to its own financial statements Minority interests in the consolidated financial statements to be shown separately Total carrying amount of property, plant, and equipment The measurement bases used for determining the gross carrying amount of property, plant, and equipment. When more than one basis has been used, the gross carrying amount for that basis in each category should be disclosed A reconciliation of the carrying amount of property, plant, and equipment at the beginning and end of the period showing additions/disposals/acquisitions/impairment losses The existence and amounts of restrictions on title, property, plant, and equipment pledged as security for liabilities Accumulated impairment losses at the beginning and end of the period The amount of commitments for the acquisition of property, plant and equipment In case of revaluation of property, plant, and equipment it should include: the firms policy on revaluation; the basis used to revalue the assets; and the effective date of revaluations Research and development costs recognized as an asset The amount of goodwill/negative goodwill arising on the acquisition The gross amount of depreciable assets and the related accumulated depreciation Non-current interest-bearing liabilities Loans from directors Long-term liabilities are disclosed separately showing the nature of the recipients such as secured loans, unsecured loans, inter-company loans, and loans from associated companies The amount of borrowing costs capitalized during the period The capitalized rate used to determine the amount of borrowing costs eligible for capitalization Share capital: authorized, issued, subscribed, called up and paid up Number of shares hold by directors A reconciliation of the number of shares outstanding at the beginning and at the end of the year Par value per share, or that the share have no par value The rights, preferences, and restrictions for each class of share including restrictions on the distribution of dividends and the repayment of capital Shares in the enterprise held by the enterprise itself or by subsidiaries or associates of the enterprise If any shares or debentures have been issued, the number, class, and consideration received and the reason for the issue Particulars of any option or unissued share capital A description of the nature and purpose of each reserve

64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85.

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Income Statement 86. Sales/revenue, aggregate amount 87. Amount of revenue in each significant category of revenue 88. The cost of inventories sold during the period. 89. Finance costs 90. Share of results of jointly controlled entity and associates 91. Profit or loss from ordinary activities 92. Any exceptional or unusual credits or charges 93. Profit or loss arising from sale or disposal of fixed assets 94. Break up of income from investments 95. Directors remuneration 96. Auditors remuneration for services as auditors 97. Amount paid to or receivable by third parties in respect of services rendered by any past or present directors to the company or its subsidiaries 98. Recognition and depreciation/amortization of tangible assets 99. Recognition and depreciation/amortization of intangible assets 100. The amount adjusted to net profit or loss due to change in accounting policy 101. The amount of the correction recognized in net profit or loss for the current period 102. The effect of the acquisition/disposal of subsidiaries on the financial position 103. The net profit or loss for the periods 104. The tax expense (income) related to profit or loss from ordinary activities should be presented on the face of the income statement 105. The major components of tax expense (income) should be disclosed separately 106. Tax expense relating to extraordinary items 107. Brokerage and discount on sales other than the usual trade discounts 108. The amount set aside to any reserve but not including provisions made to meet any specific liability, contingency, or commitment 109. Amount set aside or provisions made for meeting specific liability, contingency, or commitment 110. Workmen and staff welfare expenses 111. Separate disclosure of staff remuneration not less than Tk. 36,000 112. Commission or other remuneration payable separately to a managing agent or his associate 113. Research and development costs recognized as an expense 114. Disclosure of pension costs 115. Payment for gratuity 116. Information regarding the licensed capacity, installed capacity, and actual production 117. Expenditure in foreign currency on account for royalty, know-how professional consultation fees, interest, and other matters 118. Value of percentage of all imported and local raw materials, spare parts, and components consumed 119. Amount remitted in foreign currencies on account of dividends to non-resident shareholders, the number of shares held by them, and the year for which the dividend is being paid 120. Foreign exchange earnings for export of goods (FOB price, royalty, know-how professionals and consultation fees, interest and dividends, other income and its nature 121. Advertisement expenditure 122. Social security costs 123. Pension costs contribution plan 124. Contributions in excess of Tk. 50,000 made to government approved charities or other charities 125. Basic earnings per share 126. Diluted earnings per share 127. The amounts used as the numerators in calculating basic and diluted earnings per share, and a reconciliation of those amounts to the net profit or loss for the period 128. The weighted average number of ordinary shares used as the denominator in calculating basic and diluted earnings per share, and a reconciliation of these denominators to each other 129. Comparative profit and loss accounts for two years (continued on next page)

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Appendix A (continued) Accounting Policies 130. The measurement basis used in preparing the financial statements 131. The reason and nature of a change in an accounting policy 132. Statement of compliance with approved IASs 133. Basis of consolidation 134. The accounting policies adopted in measuring inventories, including the cost formula used. 135. The accounting policies adopted for the recognition of revenues 136. The accounting policies adopted for research and development costs 137. The amortization methods used and the useful lives or amortization rates used for research and development costs 138. Disclose firm policy for foreign currency risk management 139. The depreciation methods used 140. The useful lives or the depreciation rates used 141. Method of valuing goodwill 142. The methods used to account for investments in associates 143. Accounting policy for borrowing costs 144. Accounting policy for actuarial gains and losses 145. Treatment of retirement benefits 146. Treatment of preliminary expenses 147. Methods of advance payments 148. Purchase policy 149. Sales policy 150. Deferred taxation system 151. Conversion or translation of foreign currencies 152. Treatment of contingent liabilities Directors Report 153. The state of the companys affairs 154. Amount proposed to carry to any reserve 155. Recommended dividend 156. Material changes and commitment affecting the financial position of the company that occurred between the year and the date of report 157. Changes in the nature of the companys business during the year 158. Changes in the companys subsidiaries or in the nature of their business 159. Changes in the classes of business in which the company has an interest 160. Explanation and information of every reservation, qualification, or adverse remark in the auditors report

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