Financial reporting and corporate governance disclosures of Saudi banks - Essay Example

Financial reporting and corporate governance disclosures of Saudi banks Research Proposal Title: Financial reporting and corporate governance disclosures of Saudi banks Background to Context As economic recession sets in and economies around the globe face uncertain faith at the hands of slowing down economic activity many fear that there still high possibilities of financial institutions getting bankrupt and eventually shutting down their operations. There is a sense of mistrust between the management of these financial institutions and shareholders who have pledged billions of dollars against the information these financial institutions make public in the annual reports or quarterly reports. Market analysts made predictions regarding the future performance of these stocks on regular feedback they receive from the internal sources. However, all this seems rather meaningless as financial institutions fall prey to the mismanagement and miscalculation on the part of the top management of these institutions. Shareholders who have no role in deciding their own faith in all this are turning to the regulators to come up with a definite measure to make companies’ management responsibility for their decisions and actions. In the US regulators have already taken strict measures to ensure that financial reporting is transparent and accountability could be ascertained. The need for corporate governance is clearer than ever as it is believed that better disclosures could actually help the government and shareholders to react more quickly. However there is a lack of global standard on corporate governance disclosures and Saudi banks that follow IFRS for financial reporting do not have mandatory obligations to make corporate governance disclosures yet they are doing so in order to improve their image and shareholders confidence. Objective The objective of the proposed is to assess the quality of financial reporting and corporate governance disclosures made by Saudi Banks. Project Aim Keeping in view the objective of the proposed research major Saudi banks listed on Tadawul (www.http://www.tadawul.com.sa/) have been selected for investigating different issues pertaining to financial reporting and corporate governance disclosures. The proposed research will conduct investigation by examining the annual reports of these banks and present important findings regarding the accounting principles and treatment of different elements of financial statements. Furthermore, the role of management and disclosures made by the banks on internal controls and corporate governance will be compared to form an opinion and also identify the factors which influence the content and frequency of such information disclosed to shareholders. This research is unique in a way that it looks at the shareholders perspective of corporate governance disclosures of banks. This research holds importance for readers as it will allow them to understand why it is emphasized by regulators that financial institutions must ensure credibility and usefulness of financial reporting and to what extent corporate governance disclosures affect financial decisions made by the shareholders. This proposed research will attempt to educate readers to understand and identify the information which they should seek out before making important decisions. Research Hypothesis H1: Saudi banks are increasingly making voluntary disclosures of corporate governance in their annual reports and online Research Question 1. Why corporate governance disclosures are sought after by shareholders and regulators? 2. What information is provided by banks under corporate governance disclosures? 3. In what forms corporate governance disclosures are made public by banks? 4. How shareholders’ value corporate governance disclosures made by banks? 5. Do corporate governance disclosures made by Saudi banks under review adhere to the standards and principles laid out by Basel II either explicitly or implicitly? Literature Review Theoretical Framework: Corporate governance has been defined in several ways. The corporate governance is considered as “the set of institutions that determines how the residual claims are distributed between those who have participated in the generation of profits” (Gutiérrez-Urtiaga, 2004). In respect of the corporate reproting Shleifer & Vishny (1996) provides a clear statement to elaborate corporate governance as “a form in which stakeholders make sure they will obtain a return of their investment”. This implies that companies need to develop and implement corporate governance policies and practices to ensure that shareholders can have the confidence in the decisions made by managers and expect returns on the investment. Overall good corporate governance could be viewed as “the subset of those practices that are welfare enhancing for the economy” (Arun & Turner, 2009). The emphasis on corporate governance took its lead when in the early 2000 the US corporate sector was hit by a series of major corporate scandals involving management and those who were responsible for ensuring integrity in the financial reporting. These corporate failures were mainly argued as a resultant of not enough supervision and regulatory role played by the government. The accounting profession was also blamed for having weak conceptual framework allowing managers to manipulate their financial reporting in favor of attracting investment from shareholders and eventually collapsing due to unveiling of major frauds involving external auditors assisting managers to cover up the internal mismanagement of financial reporting. The US corporate sector was seen as vulnerable and arguments led in favor of tougher regulations over corporate governance. There have been several studies aimed at evaluating the role of good corporate governance practices including McMullen (1996); Abbott, Parker, & Peters (2004) and Klein (2002) suggesting that companies can improve the quality of financial reporting and mitigate the risk of misreporting of earnings and cases of fraud. Amongst prominent literature regarding the corporate governance there has been a significant contribution by Weimer and Pipe (1999) who were of the opinion that the role of corporate governance has not successful signified because of the lack of existence of a coherent framework. This led to greater investigation into forming taxonomy of corporate governance and its particular characteristics that need to be assured to build shareholders’ confidence. These characteristics include “(1) the prevailing concept of the firm, (2) the board system, (3) the salient stakeholders able to exert influence on managerial decision-making, (4) the importance of stock markets in the national economy, (5) the presence or absence of an external market for corporate control, (6) the ownership structure, (7) the extent to which executive compensation is dependent on corporate performance and (8) the time horizon of economic relationships” (Weimer & Pape, 1999). Furthermore, the enactment of US SOX 2002 could be seen as one of the critical laws leading to major transformation in the way management is held for its actions and decisions and prevent auditors from taking exposure in their clients business making them highly dependable on the earnings from their clients. The mandatory requirements for corporate governance received initial opposition from the industry participants (Romano, 2004) however with the growing awareness of this law has led to its integration into corporate governance policies adopted by international regulatory bodies. There are seven interrelated elements within organizational framework that the SOX 2002 has affected including those related to oversight, managerial, compliance, audit, advisory, assurance and monitoring (Turner & Rezae, 2007). This has established ways of improving financial reporting and efficiency and effectiveness of controls and supervision. Previous Literature The importance of the financial reporting is beyond any doubt, and, it should be emphasized that the real necessity of this procedure is discovered in the research by Alnodel and Hussainey (2006), who stated that financial reporting is required for providing the actual and relevant information on the matters of the financial position of the bank. Originally, this information is required for the financial management team of the bank in order to control the financial flows and balance tendencies. Thus, the conclusions, decisions and implementations are performed basing on these reports. In the light of this consideration, it should be emphasized that the financial reporting should be performed in a clear and understandable form is the main claim for the reporting, and, as Levine (2003) stated, the reported assets of the banking system in Saudi banks are closely associated with the financial position of the banking structure in general. Moreover, the reported data is crucial for the further financial performance of the bank. Originally, the entire reporting system is individual for any company, and the system of the banking structure is one of the most complex systems. Therefore, it should be emphasized that the general tendencies and requirements were studied by Levine (2003), and the disclosure level is regarded as one of the key aspects of the reporting system. Thus, an important innovation, which is found in several Saudi banks, is the encoding of the reported information, for the reports could entail the sufficient information, and it could not be deciphered by the competent, if some information is intercepted. As for the types of the information, which is included into reports, and information, important for the entire reporting system, it should be stated that this information depends on the financial tendencies and requirements of the financial market, or the market, within which the banks operate. Thus, industrial banks include the information on the price variations for the raw materials and manufactured production. Real estate banks consider the information on the land rent and purchase prices, the costs of the working force, materials, insurance and the necessity to improve and empower the constructions against natural disasters. Thus, the issues of the international standards also should be discovered in the main paper, as these standards regulate the entire process of reporting, and simplifies the international communication of the banks, if reporting is adjusted through the state borders. Finally, there is strong necessity to emphasize that the original value of the reporting should be studied more thoroughly, and the forecasts on the matters of the further development should be emphasized. Originally, few researchers have regarded these issues, nevertheless, the review of the tendencies of corporate governance may be used for making at least simple forecast on the future tendencies in reporting. Trayler (2007) in his report suggested that the complexity of finance and financial reporting of financial institutions make it difficult for stakeholders to develop an understanding of the business and there is a strong element of trust which maintains relationships between them. It has become increasingly important for banks to make useful corporate governance disclosures which also suggest that the content of such disclosure vary significantly for banks when compared to other businesses. Several factors have been identify by different researches in particular those conducted by Caprio and Levine (2002); Levine (2003) and Macey and O’Hara, 2003(2003) that makes corporate governance disclosures different for banks. These factors include the role of banks, relationship with depositors, asset structure, state ownership, tougher industry regulations etc. Hawkamah, the Institute for Corporate Governance, has laid down policy for Arab banks on regarding corporate governance disclosures. It requires the central banks of MENA member countries to ensure that adequate corporate governance disclosures promote good transparency and allow market scrutiny where regulators and stakeholders can actually monitor management’s activities. The guide lines provided by Basel II for encouraging corporate governance disclosures by banks emphasize on determining the effectiveness and sufficiency of internal controls and also require external auditors to carry details investigative activities to provide high level assurance to stakeholders (OECD – Hawkamah, 2009). Alnodel and Hussainey (2006) in their report presented their findings regarding online corporate governance disclosures made by companies. The comparison which was made on sector wise basis suggested that banks are making more online corporate governance disclosures than any other sector. Followed by the companies in the service sector and lastly those companies operating in the industrial sector. The content of corporate governance disclosures varied also acrosss different sectors however the information provided by companies is based on attractive presentations regarding how businesses are governed and who are responsible for the task. Researchers were also of the opinion that the corporate governance disclosures made by Saudi companies did not meet match up the evolution of such disclosures in other economies. They also identified factors which determine the extent of corporate governance disclosures by compoanies which include the size of the company, its finance, ownership, profitabilitiy etc. Other studies which evaluated the use of internet to make corporate governance disclosures suggested that there are certain difficulties and problems with the online reporting. These come in the form of higher costs of making real time reporting, insufficient skills, integrity and security of the information provided over the internet (Trites and Sheehy 1997; Al- Said 2006). Research Methodology The process of selection of a research methodology is a crucial one and the outcome of the research is based on the tools and techniques used by the research. The appropriateness of research method therefore determines expectations regarding the results to be achieved from the research. Over the years several academic research methodologies have been suggested and tested which could be applied to different fields of study. However, each research methodology has its own set of limitations which could be taken into account before deciding on a particular research methodology Saunders et al (2007). There are several major paradigms of conducting a research including positivistic and phenomenological paradigms that are considered for this research. Positivistic paradigm is based on quantitative research which is based on testing the existing research hypotheses and carrying out statistical testing to draw conclusions (Saunders et al 2007). While on the other hand phenomenological paradigm is based on qualitative research methodology. This methodology allows the researcher to gather and interpret data to understand the behavior of a certain group and does not test out predetermined research hypothesis using statistical methods. The outcome of the research is a descriptive analysis of findings and concluding on a particular aspect of the behavior and generalizing to a larger group (Wright 2006). It is to be understood that both approaches have their applications and limitations which need to be considered. Moreover, the inductive and deductive approaches need to be considered where inductive allows analysis of a particular case or scenario and presents understanding of different issues and then generalizes findings to a broader set of scenarios. Deductive approach on the other hand initiates from a discussion of broader scenario and then assesses the hypothesis based on the information collected and applies it to a specific set of circumstances (Colwell 2006). There are two types of sources for data collection – primary and secondary sources. Primary data is first hand information that is specific and relevant to the subject topic and is collected from conducting interviews, survey questionnaire, focus group etc. Secondary data is extracted from already available sources including websites, journals, articles, research papers, reports, etc (Wrenn 2001). Proposed Reseach Methodology After briefly reviewing the literature on research methodology the research methodology for the current study is suggested here. The proposed research will adopte deductive approach based on phenomenological paradigm. The research will collect qualitative data using both primary and secondary data sources to find suitable answer for the research questions and form a conclusion on the research hypothesis selected for this study. Primary Data Primary Data will be collected using survey questionnaire (Bradburn et al. 2004). The survey will be carried out after seeking approval from the instructor. All efforts will be made to ensure that respondents to be contacted for conducting this research are aware of the purpose of the study and their rights to participate or withdraw from the survey. The survey will be required to be completed within a given time framework and according to the provided instructions. The aim of the survey questionnaire is to assess the role of financial reporting and corporate governance disclosure from shareholders’ pespective. This would help to establish shareholders responses regarding the importance of accuracy, completeness and validity of information regarding management’s responsibility related to the information published in the financial reports of banks. The survey questionnaire will comprise of both closed ended and open ended questions. The questions that will be asked in the questionnaire will be designed in a way they will inquire from respondents the extent of corporate governance disclosures made by the company and the value of such disclosures to shareholders in assisting them to evaluate the company’s business and financial position. Certain questions will also target the understanding of shareholders of such disclosures by banks. Weaknesses in corporate governance disclosures will also be addressed. Sample Population As mentioned major Saudi banks will be reviewed in this research and therefore shareholders details will be requested from these banks so that survey questionnaire can be send to them. A sample of 100 shareholders will be selected who will be randomly picked from the list provided by these banks. There are issues of biasness, time and incompetency of respondents to complete the survey questionnaire. Therefore, the study will only include those responses that are complete and approved by the instructor. These shareholders will be sent a questionnaire via email along with request letter on university’s letter head. Survey Results Analysis The survey questionnaire will comprise of both close ended and open ended questions. The close ended questions will include demographic questions regarding the respondents. The second set of questions will be based on Likert Scale which will be set out in a way so that different aspects of financial reporting and corporate governance are addressed in general and in particular to Saudi banks. The third set of questions will be descriptive which will be aimed at gathering information regarding the potential problems, weaknesses and recommendations to be suggested by shareholders. The responses will be analyzed using Likert Scale modeling to provide average responses supported by graphs and tables. The descriptive answers will be summarized and important conclusions will be presented in the later chapter. Recommendations will form part of the final chapter of the report. Limitations The proposed research methodology is subject to various constraints and limitations which are considered important and it is therefore necessary to identify them so that the extent of outcome could be set out and determined in advance. However, utmost efforts will be made to ensure that the accuracy and validity of the report can be maximized. The most obvious limitation is related to the lack of resources available to the researcher. The cost of conducting the research is borne by the researcher therefore it has been ensured that it is kept at the lowest levels. Furthermore, the proposed research has a time limitation. The preparation of questionnaire, seeking approval from the instructor and conducting the actual survey will take a longer period. However, to restrict the time framework all efforts will be made to carry out the survey as soon as possible. The survey questionnaire has certain advantages however it has also been suggested that the interview technique could have been more useful than email questionnaires in judging the psychological impact of financial reporting and corporate governance disclosures made by Saudi banks on the decisions made by shareholders. It is further advised that face to face communication yields more effective results than other forms of communications. Furthermore, errors in responses could have been less for this less using interview. However, due to convenience sampling and ease of conducting research survey questionnaire has been selected. But it should also be understood that the element of random selection could cause problems including distortion of results, improper responses, misunderstanding of requirements and most importantly biasness by respondents (Trochim 2006). Besides the above identified problems there are certain limitations which cover researcher’s own knowledge and interpretation skills that could affect the quality, accuracy and relevance of the research. It is therefore part of the disclaimer of the research that no investment or financial decision must be based on the research results and is therefore subject to the readers’ own will and interpretation of the presented results. Structure of Report Chapter 1: Introducing the background, objective and scope of the dissertation. Chapter 2: Identifying and discussing literature and Basel II requirements related to corporate governance disclosures by financial institutions. Chapter 3: Underlining various research methodologies suitable for the current project and selecting the most suitable research approach and highlighting the sources for data collection that are used for this project. Chapter 4: Presenting findings from survey questionnaire collected from shareholders of two banks under review and drawing important summary on different factors. Chapter 5: Drawing conclusions, limitations and recommendations from the current research project. List of References Abbott, L., S. Parker, and G. Peters. "Audit committee characteristics and restatements." Auditing: A Journal of Practice & Theory 23, no. 1 (2004): 69-87. Al- Said, K. (2006, September 28). Measurement of the degree of disclosure in internet website: an application on Saudi joint-stock companies. Riyadh News Paper , [online]. Alnodel, A. and Hussainey, K. (2006). Corporate Governance Online Reporting by Saudi Companies: A Sector Specific Analysis. Riyad: King Saud University. Arun, T. G., and J. Turner. Corporate governance and development: reform, financial systems and legal frameworks. New York: Edward Elgar Publishing, 2009. Bradburn et al., N. (2004). Asking Questions: The Definitive Guide to Questionnaire Design - For Market Research, Political Polls, and Social and Health Questionnaires. San Francisco: Jossey-Bass. Caprio, G. J. and Levine, R. (2002). Corporate Governance of Banks: Concepts and International Observations, Financial Sector Governance: The Roles of the Public and Private Sectors . Washington DC: The Brookings Institution. Colwell, R. (2006). MENC Handbook of Research Methodologies. New York: Oxford University Press. Gutiérrez-Urtiaga, M. "A Contractual Approach to the Regulation of Corporate Directors Fiduciary Duties." Journal of Corporate Ownership and Control, 2004: 72-80. Klein, A. "Audit committee, board of director characteristics, and earnings management." Journal of Accounting & Economics 33, no. 3 (2002): 375-400. Levine, R. (2003). The Corporate Governance of Banks: A Concise Discussion of Concepts and Evidence, Discussion Paper No. 3,. Washington: Global Corporate Governance Forum. Macey, J. R. and O’Hara, M. (2003). The Corporate Governance of Banks. Economic Policy Review , 91–107. McMullen, D. "Audit committee performance: An investigation of the consequences associated with audit committees." Auditing: A Journal of Practice & Theory 15, no. Spring (1996): 87-103. OECD – Hawkamah. (2009). Policy Brief on Corporate Governance of Banks. Dubai: Hawkamah. Romano, R. The Sarbanes-Oxley Act and the Making of Quack Corporate Governance . New Haven, CT : Yale Law School, 2004. Saunders et al, M. (2007). Research Methods for Business Students. Essex: Pearson Education. Shleifer, A., and R. W. Vishny. A Survey of Corporate Governance. Cambridge, MA : National Bureau of Economic Research, 1996. Trayler, R. (2007). A survey of corporate governance in banking: characteristics of the top 100 world banks. In B. E. Gup, Corporate governance in banking: a global perspective (pp. 184-209). Cheltenham: Edward Elgar Publishing . Trites, G. and Sheehy, D. (1997, March 10). Electronic disclosure making a hit on the net. CA Magazine , [online]. Trochim, W. (2006). Types of Surveys. [Online]. Available from: Research Methods Knowledge Base: [Accessed 1 Nov 2009] Weimer, J., and J. C. Pape. "A Taxonomy of Systems of Corporate Governance." Corporate Governance, April 1999: 152-166. Wrenn, B. E. (2001). Marketing research: text and cases. New York: Haworth Press. Wright, R. (2006). Consumer Behaviour. New York: Cengage Learning EMEA . Turner, L., and Z. Rezae. Corporate governance post Sarbanes-Oxley . New York: John Wiley and Sons, 2007. Appendix I: Survey Questionnaire Dear Participant, This survey questionnaire is being conducted as a part of my Bachelor of Science research “Financial reporting and corporate governance disclosures of Saudi banks” and it sole purpose is purely educational. This is hereby declared that the responses collected from this survey will only be used to establish important findings regarding level of employee autonomy which will result in employee satisfaction. Participants have the right to withdraw from this survey at any time. All questions are required to be answered Survey Questionnaire Name (if you do not wish to disclose please leave it empty) ____________________________________ Number of Share Holdings ____________________________________ City / Town ____________________________________ Gender Male............................................................ Female........................................................ The following questions are aimed at gathering your feeling about each of the following matters (Please circle one number for each question) Overall Assessment Disagree Agree Strongly Strongly Do you have an understanding of bank’s responsibility for corporation governance disclosures? 1 2 3 4 5 Are you satisfied with the content of corporate governance disclosures made by your bank? 1 2 3 4 5 Do corporate governance disclosures by bank affect your investment decisions? 1 2 3 4 5 Likert Scale Questions Disagree Agree Strongly Strongly Your bank’s corporate communications are frequent 1 2 3 4 5 Your bank makes corporate governance disclosures 1 2 3 4 5 Your bank makes disclosures regarding the role of board and the management 1 2 3 4 5 Your bank makes disclosures regarding the selection process directors board 1 2 3 4 5 Your bank makes disclosures regarding related party transactions 1 2 3 4 5 Your bank provides details of corporate governance plans 1 2 3 4 5 Your bank provides details of salaries, dividends and pension plans offered to their directors 1 2 3 4 5 You bank allows access to information on strategy and finances 1 2 3 4 5 Your believe that management of your bank performs their duties responsibly 1 2 3 4 5 Your bank provides details of audit committee and its role 1 2 3 4 5 Your bank provides details of internal auditors report 1 2 3 4 5 Your bank provides details of minutes from shareholders meetings 1 2 3 4 5 Are there any suggestions to improve corporate governance disclosures? Yes  No  ____________________________________________________________________________________________________________________________________________________________ ____________________________________________________________________________________________________________________________________________________________ Read More