Corporate Compliance with Non-Mandatory Statements of Best Practice: The Case of the ASB Statement on Interim Reports

ABSTRACT

This paper contributes to our understanding of compliance with non-mandatory statements of best practice. Specifically, we examine the efficacy of agency-related mechanisms on the degree of disclosure compliance with the ASB Statement on interim reports. Using data drawn from a sample of 259 UK companies listed on the London Stock Exchange, we show that although overall disclosure compliance is high (74.5% of the items of information being disclosed), companies do not fully comply with the ASB Statement on interim reports. We employ an ordinary least square (OLS) regression model to establish whether selected company-specific and corporate governance characteristics (proxying for agency-related mechanisms) are related to the degree of disclosure compliance. Our results indicate that multiple listing, company size, interim dividend and new share issuance are positively associated with the degree of compliance. We also find that the degree of disclosure compliance is positively associated with auditor involvement, audit committee independence and audit committee financial expertise. These results have important implications for policy because they suggest that whilst agency-related mechanisms may motivate compliance with best practice non-mandatory statements, full compliance may be unattainable without regulations.

Acknowledgements

We appreciate the helpful constructive comments and suggestions from Russell Kinman, Professor David B. Citron and participants at the 2005 BAA Conference in Edinburgh, Scotland. We also acknowledge the insightful comments and suggestions provided by the two anonymous reviewers. However, any errors and omissions of fact or mistakes in interpretation remain solely our responsibility.

Notes

1. The role of the UITF is to opine on emerging accounting issues for which no standards exist, whilst the FRRP is responsible for enforcement of the accounting standards issued by the ASB.

2. The OFR provides a framework for companies to discuss and analyse business activities, including the main factors underlying their financial performance and position in order to assist users to assess the future potential of the business (ASB, 1993). The ASB Statement (ASB, 1997) seeks to encourage companies to provide more information in interim reports than just the summary income statement and an explanatory note required by the listing requirements. It sets out the minimum interim report disclosure guidelines as including a management commentary, income statement, balance sheet, cash flow statement, statement of recognised gains and losses, segmental information, and accounting policies and notes to the accounts. Finally, the Statement on Preliminary Announcements (ASB, 1998) is intended to supplement the mandatory requirements which require listed companies to release certain information to the market as soon as the annual results are known with some degree of certainty.

3. With effect from May 2000, the authority to issue listing requirements was transferred from the London Stock Exchange to the UK Listing Authority.

4. We were provided with all the responses to the Exposure Draft: Statement on Interim Reports by the Accounting Standards Board.

5. For example, the International Federation of Accountants (IFAC), in its strategic plan 2005–2008, also notes the intention to develop best practice statements in critical areas, such as enterprise governance (see Colman, 2004).

6. Prior studies provide evidence suggesting that our results of compliance with the ASB statement on interim reports may be generalised to other non-mandatory best practice statements. For example, Lang and Lundholm (1993) find a high correlation among the scores for different disclosure types: annual disclosures, quarterly disclosures and public relations disclosures. Gelb (2002) also provides evidence to support this. These results indicate that companies are generally consistent across all aspects of their disclosures.

7. Note that this and all subsequent hypotheses are stated in their alternative form.

8. It is important to note that the relationship between auditor involvement and compliance with the ASB Statement may not be clear. For example, companies that have a commitment to compliance are likely to engage an external auditor. However, it seems reasonable that once external auditors are engaged, they are more likely to encourage their clients to comply with best practice statements. From an agency costs perspective, external auditors incur agency costs related to lost reputation and therefore have incentives to protect their reputation capital (Baiman, 1990). We do not examine this endogenous relationship in our study, and thus the results need to be interpreted in that context.

9. Only non-financial companies are selected in this study because financial companies face additional requirements from regulators such as the Bank of England, which may not be faced by non-financial companies (Cooke, 1991). Our definition for financial companies includes banks and insurance companies (including managed funds and investment trusts).

10. From the total listed companies, all financial and insurance companies were eliminated and this resulted in 1,201 non-financial companies. The sample was then determined based on the table developed by Krejcie and Morgan (1970) (see Sekaran, 2000).

11. For example, if a company did not have discontinued operations, it was not penalised for not discussing this item in the interim report.

12. The larger the VIF, the greater the difference between the coefficients estimated in the regression equation and the true coefficient. A VIF greater than 10 indicates a serious multicollinearity problem (Field, 2000).

13. K-S Lilliefors with significance of > 0.05 indicates that the distribution is approximately normal (Field, 2000).

14. Cooke (1998) proposes the normal scores method as the most appropriate in transforming data-sets that reveal non-linear monotonic relationships between the independent and dependent variables.