The Concept of Voluntary Disclosure - Coursework Example

THE CONCEPT OF VOLUNTARY DISCLOSURE by Student’s Name Code + Course Name Professor’s Name University Name City, State Date The concept of voluntary disclosure Voluntary disclosure refers to information disseminated in a company’s financial statements beyond the legally required disclosures (Kumar, Wilder and Stocks 2008). Meek et al. (1995) defines voluntary disclosure as information disseminated in a company’s financial statements out of free choice by the management where it deems the information to be pertinent in meeting the decision making requirements of the users of such statements. There are both benefits and drawbacks of voluntary information disclosures (Hossain and Hammami 2009). As a result, some companies deliberate on whether to engage in voluntary disclosures or not. According to Ferguson (2002), where the benefits outweigh the direct and indirect costs of voluntary information disclosures, then a company should consider disclosing such information in its annual reports. The aim of making voluntary information disclosures in a company’s financial statements is to afford the users of such statements additional insights regard the company’s long-term sustainability. Besides, voluntary information disclosures help in addressing information asymmetries as well as conflicts that arise as a result of the agency relationship between the owners, investors and managers (Boesso and Kumar 2007). Companies have greater discretion over what information to provide in voluntary disclosures as well as the extent and scope of such information (Van der Laan 2009). Such considerations are informed by managerial incentives that vary from company to company (Healy and Palepu 2001). The benefits of voluntary information disclosures include an enhanced awareness level regards a company’s potentials to various classes of investors as well as greater economic efficiencies (Hossain and Hammami 2009) as well as enable better communication between the management of a company and its investors (Tian and Chen 20009). In an effort to understand some of the incentives and motivations for voluntary disclosures, a number of theories have been proffered. These include the accountability theory, legitimacy theory and stakeholder theory (Van der Laan). The stakeholder theory is concerned with the incentive to disclose information because it is through information that a company is able to woo and convince various stakeholders with the aim of gaining their backing and approval or to suppress any resistance and or discontentment that they may have (Van der Laan 2009). The stakeholder theory recognizes the fact that some stakeholders are more important to a company than others due to their resource contributions that is vital for the survival of the company (Deegan and Rankin 2006). As such, it is important for the management to disclose information to them to ensure their continued resource contributions. The legitimacy theory holds that companies are persistently engaged in efforts aimed at ensuring that their operations are carried out within the societal norms and requirements. As a result, companies aim at ensuring that their actions in line with socially constructed norms, values and beliefs in order to establish some congruence between their operations and the socially acceptable behaviour (Van der Laan 2009). The legitimacy theory is concerned with the entire society and holds that information disclosure is carried out in order to link a company’s economic actions with the society’s values and norms. Moreover, the legitimacy theory is based on the concept of the existence of a social contract between a company and the society in which it operates (Deegan and Rankin 2006). As Van Laan (2009) notes, the legitimacy of a company’s operations is in unsteady state such that if the company perceives its legitimacy to be below desirable levels, then voluntary disclosure is necessary to disseminate information needed to legitimize its operations and overall existence (Van der Laan 2009). According to Deegan and Rankin (2006), the legitimacy theory holds that the society will only allow a company to engage in actions that meet its values, norms and expectations. Failure to meet the society’s values and expectations has the consequence that the society will withdraw its support for the company through actions such as product boycotts. The theory is based on the idea that information disclosure helps to enhance its perceived public image (Deegan and Rankin 2006). This is particularly important where a company’s performance and actions are perceived to be short of public expectations. Voluntary disclosure is aimed at altering the public perceptions about the company or altering the society’s expectations in a manner that aligns them with its operations (Van der Laan 2009). Legitimacy Theory aims at developing an association between voluntary disclosures and societal expectations (Deegan and Rankin 2006). Accountability theory holds that management has an obligation to account for those actions they have a responsibility to oversee (Deegan and Rankin 2006). Under social responsibility theory, voluntary disclosures are considered obligatory rather than as a response to social and market demands (Deegan and Rankin 2006). Negative and positive voluntary disclosures There are some factors that may determine whether a company will disclose more negative or positive voluntary disclosures. For instance, Graham et al. (2005) argues that managers will in most cases avoid making voluntary disclosures that have the potential to negatively affect the competitive position of their company. Such information includes those that can reduce the market demand for its products or services as well as those that may increase the cost of capital. Generally, such information is referred to as proprietary information (Shehata 2014). In addition, companies will in most cases avoid voluntary disclosers that may be adversely utilized against them by regulators and the politicians. However, there are circumstances when a company may prefer to make voluntary disclosures that are negative (Shehata 2014). These include where there is a potential to be subjected to litigation proceedings for failure to disclose particular information that is negative. Where there are concerns that the managers will be subjected to punitive legal penalties, then such managers will disclose necessary information, even if it is negative, to avoid such penalties. Positive disclosures are intended to indicate that a particular company is better than its peers or competitors so as to appeal to investors and enhance their reputation (Shehata 2014). As such, I expect companies to disclose more positive information and only choosing to disclose negative information when the consequences of non-disclosure are detrimental. Voluntary disclosures made in Cochlear’s editorial annual report Voluntary Disclosure Page number Identified theory/theories Positive or negative New Product Launches 4 Stakeholder Positive Growth Initiatives 4 Stakeholder Positive Manufacturing and Supply Chain management 9 Stakeholder Positive Innovation 9 Stakeholder Positive Intellectual Property Rights 9 Stakeholder Positive Further Regulatory Approvals 5 Stakeholder Positive Volatility in Important Markets 5 Stakeholder/Accountability negative Shifting Economic Power from West to East 5 Stakeholder/Accountability Negative Evasive Economic Growth in Developed Nations 5 Stakeholder/Accountability Negative Non-Military Use 9 Legitimacy Positive Quality Assurance 9 Accountability/Legitimacy Positive Environmental awareness Support 6 Accountability/Legitimacy Positive Green Star Rating of its Global Headquarters 6 Legitimacy Positive Social Support Initiatives 6/7 Legitimacy Positive Employee Engagement 8 Legitimacy Positive Table 1: Cochlear Ltd.’s Voluntary Disclosures 2014. Cochlear Ltd engages in a number of voluntary disclosures as a way of communicating with various stakeholders. In its 2014 annual reports, the company made a number of voluntary disclosures that are outlined in Table 1 above. This section presents justifications for the association of the various disclosures with a particular theory. The first set of voluntary disclosures comprises those associated with the stakeholder holder. These include the launch as well as expected launch of various new product lines aimed at supporting its growth strategies. Others include regulatory approvals for its new products, growth initiatives, innovative strategies, supply chain management and intellectual property rights protection. Such association with the stakeholder theory is informed by the fact that the information is most often intended to gain the support of its key stakeholders. Such information is voluntarily disclosed to send some signals of future expectations and prospects of the company, so as to gain critical support such as financial resources necessary to sustain the operations of the company. For instance, by disclosing the number of registered intellectual property rights, the company succeeds to inform its stakeholders of its future sustainability since its products are protected by law. Others such as new product launches and growth strategies signal to investors of rosy growth potential with the probability of generating greater returns. Ths information entices the stakeholders to continue supporting the company with the promise of better results and returns into the near future. The second set of voluntary disclosures is associated with accountability theories. As Deegan and Rankin (2006) state, the accountability theory holds that the management in some instances has an obligation to disclose some information voluntarily due to the responsibility they have been given. Such responsibilities require them to account for some of the results that the company will post. For instance, the management has a responsibility to engage in profitable ventures that can deliver higher returns for the company’s shareholders. However, where the company is unable to deliver on this responsibility, them the company should provide explanations to justify the state of affairs of the company, where it differs from expectations. By Cochlear Ltd disclosing information such as market volatility, shifting economic power and lower economic growth in developed markets, they intend to account for lower performance and growth rates. As such, such information effectively highlights why the company may record lower-than-expected sales or revenue growths in these markets. The third sets of voluntary disclosure are associated with legitimacy theory. Van der Laan (2009) explains that legitimacy theories hold that a company voluntarily discloses some information in order to align its operations with societal values, norms and expectations. This is in order to avoid social backlash and legitimize its operations. For instance, by disclosing information on employee engagements, environmental awareness, social support initiatives and non-military use of its products, the company is trying to communicate that its operations are in line with social expectations and contribute to the overall benefit of the society rather than disadvantaging it. Others are associated with more than one theory due to the fact that they simultaneously communicate two distinct but overlapping messages. For instance, by stating that its products undergo quality assurance, the company is trying to allude to the fact they are responsible for the safety of their products and that such quality should be relied upon as the basis for purchasing their products. Conclusion From the analysis of Cochlear Ltd.’s voluntary disclosures, it is clear that most of its disclosures have communicated positive information that is intended to its superior performance so as to appeal to investors and enhance its reputation. However, the company has also disclosed negative information such as volatile and low growth markets as well shifting economic power to the East. As per my analysis, there is a greater incentive for companies to disclose more of positive information than negative information, unless where failure to disclose such information has the potential to result in legal penalties. Such tendency to disclose positive information reduces the reliability of voluntary disclosures since there is a clear bias in what type of information companies disseminate in their voluntary disclosures. Reference List Deegan, C and Rankin, M 2006. Australian financial accounting. Sydney: McGraw-Hill Education. Ferguson, M. J., Lam, K. C., & Lee, M. G. (2002). Voluntary disclosure by state-owned enterprises listed on the stock exchange of Hong Kong. Journal of International Financial Management and Accounting, vol. 13, no. 2, pp. 125−152. http://www.researchgate.net/publication/227601251_Voluntary_Disclosure_by_Stateowned_Enterprises_Listed_on_the_Stock_Exchange_of_Hong_Kong/file/5046351e941c50d457.pdf Healy, P. M., & Palepu, K. G. (2001). Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature. Journal of Accounting and Economics, vol. 31, pp. 405−440. http://tippieweb.iowa.uiowa.edu/accounting/mcgladrey/winterpapers/kothari1.pdf Hossain, M and Hammami, H 2009. “Voluntary disclosure in the annual reports of an emerging country: The case of Qatar.” Advances in Accounting, vol. 25, no. 2, pp. 255-265. http://qspace.qu.edu.qa/bitstream/handle/10576/10439/Voluntary%20disclosure%20in%20the%20annual%20reports%20of%20an%20emerging%20countryThe%20case%20of%20Qatar.pdf?sequence=1 Kumar, G, Wilder, WM and Stocks, MH 2008. “Voluntary accounting disclosures by US-listed Asian companies.” Journal of International Accounting Research, vol. 7, no. 1, pp. 25−50. http://aaajournals.org/doi/abs/10.2308/jiar.2008.7.1.25 Meek, GK, Roberts, CB and Gray, SJ 1995. “Factors influencing voluntary annual report disclosures by U.S., U.K. and continental European multinational corporations.” Journal of International Business Studies, vol. 26, no. 3, pp. 5−572. http://www.jstor.org/stable/155561 Shehata, NF 2014. “Theories and determinants of voluntary disclosure.” Accounting and Finance Research (AFR), Vol. 3, no. 1, pp. 18-26. http://www.sciedu.ca/journal/index.php/afr/article/download/3837/2319 Tian, Y., & Chen, J. (2009). Concept of voluntary information disclosure and a review of relevant studies. International Journal of Economics and Finance, Vol. 1, no. 2, pp. 55-59. http://www.ccsenet.org/journal/index.php/ijef/article/viewFile/3360/3059 Van der Laan, S 2009. “The role of theory in explaining motivation for corporate social disclosures: voluntary disclosures vs ‘solicited’ disclosures.” Australasian Accounting Business and Finance Journal, Vol. 3, no. 4, pp. 15-29. http://ro.uow.edu.au/cgi/viewcontent.cgi?article=1062&context=aabfj Read More