Information disclosure by companies can be provided in a number of
ways and are of different types. There is mandated and voluntary
disclosure. Mandatory requirements are prescribed by regulations bodies,
and it's the minimum level of information the company must provide
to shareholders and other users. All over the world, many countries have
adopted International Financial Reporting Standards (IFRSs), making it
one of the most significant regulatory changes in the history of
accounting. As of May 2011, 123 countries require IFRSs for domestic
listed companies (Deloitte, 2011). The expected benefits of adopting the
IFRSs are: (1) More efficient formulation of domestic accounting
standards, improvement of their international image, and enhancement of
the global rankings and international competitiveness of local capital
markets; (2) Better comparability between the financial statements of
local and foreign companies; (3) No need for restatement of financial
statements when local companies wish to issue overseas securities,
resulting in reduction in the cost of raising capital overseas; (4) For
local companies with investments overseas, use of a single set of
accounting standards will reduce the cost of account conversions and
improve corporate efficiency.
IFRS are principles-based standards, interpretations and the
framework (1989) adopted by the International Accounting Standards Board
(IASB). Many of the standards forming part of IFRS are known by the
older name of International Accounting Standards (IAS). IASs were issued
between 1973 and 2001 by the Board of the IASC. On April 1, 2001, the
new IASB took over from the IASC the responsibility for setting IASs.
The IASB has continued to develop standards calling the new standards
IFRS. However, the IASB is only responsible for formulating IFRSs but
does not have a regulatory body with enforcement authority to ensure the
consistent application of IFRSs. Once the standards are adopted, the
IASB relies on national regulatory bodies to monitor the implementation
and consistent application (Nobes, 2008).
The most important change in the field of accounting in Bahrain is
that according to a 2007 self-assessment performed by the Bahrain
Accountants Association, under the Commercial Companies Law, listed and
unlisted companies in Bahrain are required to prepare annual financial
statements in full compliance with IFRSs issued by the IASB. The
objective of this research is to examine empirically the level of
compliance with mandatory IFRSs disclosure requirements for companies
listed on Bahrain Stock Exchange (BSE) for year 2010, and to determine
the factors affecting the compliance of Bahraini companies with IFRSs.
This is the first empirical study to investigate whether Bahraini listed
companies comply with IFRSs disclosure requirements, identifying some
factors associated with the level of compliance. This paper therefore is
the first empirical study carried out on Bahraini data and contributes
to understanding the level of compliance with IFRSs disclosure
requirements and its determinants.
The remainder of this paper is organized as follows. The next
section present a short review of the growing literature, then the
hypotheses presented in section three. This is followed by discussion of
methodology of research. Section five reports the results of the study.
Finally, section six summarizes the main conclusions of the study.
2. LITERATURE REVIEW
There are two accepted global financial reporting languages, the US
Generally Accepted Accounting Principles (US GAAP) and the IAS. IAS are
increasingly recognized as having reached a level of maturity and they
are used in the preparation of financial statements of many global
companies and accepted by securities markets in many countries of the
word (IASC, 2000). Although IASC operates since 1973, researches related
to the level of compliance with IAS/IFRS disclosure requirements began
around the year of 1998. Since, that there has been an increased
interest in studying the level of compliance with IAS/IFRS disclosure
requirements, and investigating various determinants of companies'
There was a lot of concern for the way accounting is developing as
a theory and as a practical implementation in the context of
globalization. That motivated the researchers' interest in IAS/IFRS
adoption (both mandatory and voluntarily) all over the world. The
findings of previous studies (e. g. Daske et al., 2008; Hodgdon et al.,
2008; Christensen et al., 2008; and Akman, 2011) suggest that compliance
with IFRSs requirements reduces information asymmetry and improve the
quality of accounting information disclosure. Improving the quality of
disclosures makes the capital allocation process more efficient and
reduces the average cost of capital. However, some of the prior studies
showed a great deal of non-compliance with IAS requirements in various
fields (e. g. El-Gazzar et al., 1999; Street and Gray, 2002; Tower et
al., 1999), and other studies documented problems in IAS/IFRS compliance
such as Taplin et al. (2002) in six Asia Pacific countries, and Dahawy
et al. (2002) in Egypt. While, other studies such as Street and Bryant
(2000) and Glaum and Street (2003) focus on cross-listed companies
seeking to identify significant differences between US listed and non
listed companies. Findings indicate that the overall level of disclosure
is greater for companies with US listings.
Dumontier and Raffournier (1998) found that firms which voluntarily
comply with IAS are larger, more internationally diversified, less
capital intensive and have a more diffuse ownership. They conclude that
political costs and pressures from outside markets play a major role in
the decision to apply IAS. Karamanou and Nishiotis (2005) found a
positive, statistically and economically significant effect of increased
disclosure, in general, and IAS adoption, in particular, on firm value.
Renders and Gaeremynck (2007) stated that "IFRS adoption leads to
increased disclosure and reduced accounting choices, resulting in a loss
of private benefits for company insiders, this loss depends on the level
of investor protection, in countries with strong laws or extensive
corporate governance codes IFRS is more likely adopted".
Jermakowicz and Gornik-Tomaszewski (2006) provide insight into the IFRS
adoption, they found that the process of IFRS adoption is costly,
complex, and burdensome, and the complexity of IFRS as well as the lack
of implementation guidance and uniform interpretation is key challenges
in their adoption.
Glaum and Street (2003) investigate the extent to which companies
listed on Germany's New Market comply with IAS and US GAAP
disclosure requirements in their year-2000 financial statements. They
found the compliance levels range from 100% to 41.6%, with an average of
83.7%. The average compliance level is significantly lower for companies
that apply IAS as compared to companies applying US GAAP. Also, they
found that the overall level of compliance with IAS and US GAAP
disclosures is positively associated with firms being audited by Big 5
auditing firms and with cross-listings on US exchanges. Cuijpers and
Buijink (2005) found that firms voluntarily using non-local GAAP are
more likely to have more geographically dispersed operations, and they
are more likely to be domiciled in a country with lower quality
financial reporting and where IASs is explicitly allowed as an
alternative to local GAAP.
Moya and Oliveras (2006) found that the impact of initial adoption
of IFRS was both individually and overall significant. In the same time
that impact differs between sectors of economy. Hope et al. (2006) found
that countries with weaker investor protection mechanisms are more
likely to adopt IFRS, and they concluded that IFRS represent a vehicle
through which countries can improve investor protection and make their
capital markets more accessible to foreign investors. Gassen and
Sellhorn (2006) by analyzing the determinants of voluntary IFRS adoption
by publicly traded German firms during the period 1998-2004, they found
that size, international exposure, dispersion of ownership are important
factors in the voluntary and mandatory IFRS adoption.
Street and Gray (2002) found that there is a significant extent of
non-compliance with IAS, and there is a significant positive association
with a U.S. listing or non listing, being in the commerce and
transportation industry, referring exclusively to the use of IAS, being
audited by a Big audit firms, and being domiciled in China or
Switzerland. Hodgdon et al. (2008) found that, the level of compliance
with IFRSs is negatively associated with the analysts' earnings
forecast errors. Daske et al. (2008) found the adoption of IFRSs lead to
capital market benefits only in countries where legal enforcement is
strong and where companies have incentives to be transparent. Hodgdon et
al. (2009) examine the level of disclosure compliance by companies from
developed countries with non US listings that claim to have complied
with IASs in 1999 and 2000, they found that the level of compliance is
0.58 and 0.64 in 1999 and 2000 respectively, and the level of disclosure
compliance with IASs is associated positively with company size, auditor
type and negatively with profitability.
Dahawy (2009) examine the disclosures of financial statements of
the most actively traded 41 companies listed on the Cairo and Alexandria
Stock Exchange, using a disclosure checklist issued by the Egyptian
Capital Market Authority. The results reveal that the degree of
disclosure by Egyptian companies is affected by the highly secretive
Egyptian culture, and affected by the degree of affiliation of the
auditor with an international firm. Al-Shammari et al. (2008)
investigate the level of compliance with IAS in the Gulf Cooperation
Council (GCC) member states during the period 1996-2002. The results
show that, over all the years, UAE recorded the highest level of
compliance with average of 0.80, followed by Saudi Arabia, Kuwait, Oman,
Bahrain, and Qatar with averages of 0.78, 0.75, 0.74, 0.73, and 0.70
respectively, and the level of compliance is associated with company
size, age, internationality and leverage.
Ballas and Tzovas. (2010) investigates the compliance of Greek
firms to IFRS disclosure requirements, they found that on average, firms
comply with about two-thirds of the disclosure requirements, and the
compliance is positively and significantly influenced by listing status,
while the univariate analysis indicated that the larger firms exhibit
higher compliance rates. Recently, Al-Shammari, (2011) examine the level
of disclosure compliance with IFRSs by 168 companies listed in the
Kuwait Stock Exchange for the financial year ending in 2008, Al-Shammari
found that the level of compliance is 82%, and the level of compliance
is associated positively with company size, age, internationality and
auditor and negatively with liquidity. Another recent study by Akman,
(2011) investigates whether the differences in financial disclosure due
to culture have diminished after the use of IFRS. Using data from
Australia, France, Germany, Italy, Netherlands and United Kingdom, Akman
found that the effect of culture still prevail on the amount of
disclosure even after the use of IFRS. The findings suggest that,
although the disclosure in the financial statements improves after the
use of IFRS, the impact of culture on the disclosure level continues to
play an important role.
As shown above, the level of compliance with IFRS disclosure
requirements are the focus of an increasing amount of attention by
researchers in both developed as well as developing countries. However,
few numbers of studies has been undertaken in developing countries that
deal with IFRS disclosures. The contribution of this study is to
examines the level of disclosure compliance with IFRS by companies
listed on the Bahrain Stock Exchange which has not been the focus of
previous researches. Prior studies Al-Basteki, (1995) examined the
voluntary adoption of IASs by Bahraini corporations, Joshi and
Al-Mudhahki, (2001) examined the compliance of Bahraini listed Companies
with only IAS-1, Joshi and Sayel (2003) examined the adoption of ISA by
small and closely-held companies, Al-Shammari et al. (2008) examined
Bahrain as one of the GCC member states, and they investigate the level
of compliance in 14 standards relevant to the GCC, Joshi et al (2010)
examined the compliance with International Auditing Standards by
auditors in Bahrain. While, the current study includes all listed
companies in year 2010, and it examine the level of compliance with
mandatory IFRSs disclosure requirements, and it uses a comprehensive
compliance index based on all IFRS applicable to Bahrain.
In the light of the agency theory framework and the empirical and
the theoretical literature, I have found a series of relationships,
which other authors have also previously found, between the level of
disclosure compliance with IFRS and certain characteristics of firms.
In almost all disclosure studies, the size of the company has
featured as an important determinant of disclosure levels (e.g.,
Belkaoui-Riahi, 2001; Chow and Wong-Boren, 1987; Lang and Lundholm,
1993; Owusu-Ansah, 1998; Firth, 1979; Wallace and Naser, 1995; Depoers,
2000; Juhmani, 2006; Hossain and Reaz's, 2007; and Barako, 2007),
and there is a general agreement that a positive relationship between
the size of a firm and its extent of disclosure is to be expected. This
association can be explained by agency theory, which proposes that
larger firms have higher agency cost because of a more complex
organizational structure and subject to more political costs thus use
disclosure to reduce agency cost. On other hand proprietary costs are
smaller in the larger firm, therefore there are fewer incentives to hold
back information, and information disclosed by them is the primary
source of information for their competitors, while small firms should be
reluctant to make a full disclosure of their activities. It can also be
assumed that large firms are more sensitive to political costs and,
consequently, will disclose more in order to allay public criticism or
government intervention in their affairs. Most studies have reported a
positive association between firm size and level of disclosure
compliance with IFRSs (e.g., Gassen and Sellhorn, 2006; Hodgdon et al.,
2009; Ballas and Tzovas, 2010; and Al-Shammari, 2011).
Based on the above discussion, it can be expected that large firms
to comply with IFRSs more than small firms, accordingly the following
hypothesis is developed.
H1: The extent of disclosure compliance with IFRSs is positively
associated with Bahraini firm's size.
The agency theory has been used by previous researches to argue
that potential transfers of wealth from debtholders to stockholders can
take place in highly leverage firms. Jensen and Meckling (1976) argued
that agency conflicts are exacerbated by the presence of bondholders in
a firm's capital structure. To protect their economic interest,
agency theory predicts that restrictive covenants may be written into
debt contracts. Therefore, agency theory suggests that the level of
information disclosure increases as the leverage of the firm grows.
Ahmad and Nicholls (1994) argued, that in countries where financial
institutions are a primary source of company funds, there is an
expectation that companies, which have large sums of debt on their
balance sheet, will disclose more information in their annual reports.
Also, such companies tend to disclose detailed information to enhance
their chance of getting funds from financial institutions. This is
similar to the Bahrain environment in which financial institutions play
an active part in the provision of funds to borrowers, some of which are
the listed companies.
The empirical evidence on relationship between information
disclosure and leverage has provided mixed results, some studies have
reported a positive association (e. g. Bradbury, 1992; Malone et al.,
1993; Naser, 1998; Al-Shammari et al. 2008), other studies reported a
negative relationship (e. g. Meek et al, 1995; and Juhmani, 2006).
However, most of previous studies found no significant relationship
between leverage and the level of information disclosure (e. g. Chow and
Wong-Boren, 1987; Ahmad and Nicholls, 1994; Raffournier, 1995;
Inchausti, 1997; Depoers, 2000; Hossain et al., 1994; McKinnon and
Dalimunthe, 1993; Tower et al. 1999; and Barako, 2007). Based on the
above discussion, it can be expected that firms with higher leverage to
comply with IFRSs to reduce agency costs, to reassure debtholders that
their interests are protected, accordingly the following hypothesis is
H2: The extent of disclosure compliance with IFRSs is positively
associated with Bahraini firm's leverage.
The rationale for an influence of profitability on information
disclosure is obvious. Profitable companies have incentives to
distinguish themselves from less profitable companies in order to raise
capital on the best available terms. Therefore, more profitable
companies can be expected to disclose more information than
non-profitable companies. Prior empirical studies have shown that
profitability influences the extent of disclosure in annual reports
(Wallace and Naser, 1995; Inchausti, 1997; Owusu-Ansah, 1998). Inchausti
(1997) argued from the perspective of agency theory, that management of
a very profitable firm will use information in order to obtain personal
advantages. Therefore, they will disclose detailed information as a
means of justifying their position and compensation package. Skinner
(1994) argued that, although it is expected that firms will increase the
amount of information disclosed when it is favorable, it is normal to
find firms that disclose more information when the result is
unfavorable. This has been justified as an attempt to prevent litigation
costs or loss of management reputation. Lang and Lundholm (1993)
suggested that the direction of the relationship is not clear. However,
it is more likely that the management of a profitable enterprise will
disclose more information to the market to enhance the value of the
firm, as this also determines their compensation as well as the value of
their human capital in a competitive labour market.
Most of the prior empirical research found no significant
association between profitability and the level of information
disclosure (e.g., Meek et al., 1995; Malone et al., 1993; Juhmani, 2006;
and Barako, 2007). Glaum and Street (2003), and Ali et al. (2004)
reported no relationship between profitability and the extent of
mandatory compliance with IASs disclosure requirements, while, Hodgdon
et al. (2009) reported a negative relationship. The Bahraini evidence
regarding the influence of profitability on the level of disclosure
compliance with IFRSs is tested by the following hypothesis.
H3: The extent of disclosure compliance with IFRSs is positively
associated with Bahraini firm's profitability.
Age of the Company
Company age has often been used in previous studies examining
disclosure variability. The rationale for selecting this variable lies
in the possibility that old firms might have improved their financial
reporting practices over time (Alsaeed, 2006), and old firms try to
enhance their reputation and image in the market (Akhtaruddin, 2005).
Bukh et al. (2005) used company age as a proxy for risk in the sense
that the more established companies are less risky. From this
perspective, the extent of a company's disclosure is expected to be
related to how many years it has been in business. Owusu-Ansah, (1998)
states that, the competition argument proposes that young firms are not
likely to disclose full information about their financial results and
position, because this may prove to be harmful if sensitive information
is disclosed to the established competitors and the costs of processing
information are likely to be more onerous for younger companies than for
older companies. Accordingly, there might be a positive relationship
between the age of the firm and the extent of a company's
compliance with IFRSs. The empirical evidence on the relationship
between information disclosure and age of firms has provided mixed
results. For example, Bukh et al. (2005) and Hossain and Reaz's
(2007) have reported no association between company age and the level of
information disclosure, while, Al-Shammari, (2011) reported a positive
association between firm age and level of disclosure compliance with
IFRSs. The Bahraini evidence regarding the influence of firm age on the
level of disclosure compliance with IFRSs is tested by the following
H4: The extent of disclosure compliance with IFRSs is positively
associated with age of Bahraini company.
Audit Firm Size:
Auditors could influence the level of information disclosed by
companies (Watts and Zimmererman, 1986). It hypothesized that large
audit firms are more likely to associate with clients that disclose a
high level of information in their annual reports (Malone et al., 1993).
DeAngelo (1981) and Beaty (1989) argued that larger audit firms invest
more to maintain their reputation as providers of quality audit than
smaller audit firms. Therefore, larger firms have a greater incentive to
discover and report a breach in the client's accounting system
because client financial statements issued with errors and inadequate
disclosures would diminish the reputation of larger audit firms more
than of smaller firms. Ahmaed and Nicholls (1994) argued that larger,
more well-known audit firms apply more influence over the information
disclosure policies of companies than smaller and lesser-known audit
The empirical evidence on relationship between information
disclosure and size of audit firms has provided mixed results. For
example Craswell and Taylor (1992), Mora and Rees (1998) and Raffournier
(1995) have reported a significant association. While, other studies
such as Malone et al. (1993), Hossain et al. (1994), Depoers (2000), and
Juhmani (2006) have reported no significant association between audit
size firms and level of information disclosure. Large audit firms are
expected to deal with multinational companies conducting their business
activities over the world. Therefore, their work is more likely to be
influenced by IASs and it is expected that their clients will provide
more level of information in their annual reports. In light of the above
discussion, the following hypothesis is developed.
H5: The extent of disclosure compliance with IFRSs in Bahraini
companies audited by large auditing firms more than those audited by
small auditing firms.
4.1 Study Sample:
In order to meet the objective of the current study to measure
Bahraini companies' compliance with the mandatory IFRSs disclosure
requirements, and identifying the factors associated with the level of
compliance. I used the annual reports for year 2010 the most recent year
for which financial statements were available. Due to the relatively
small number of companies listed in Bahrain Stock Exchange (BSE) all
companies listed in year 2010 considered for inclusion in the survey.
Companies listed on the BSE are classified according to their activity
in the market and allow GCC and foreign investors to invest in their
shares. Companies are distributed among the following sectors:
Commercial Banks; Investment; Services; Insurance; Industrial; Hotels
At the end of 2010, there were 50 companies listed on BSE, 44
Bahraini companies and 6 non-Bahraini companies. The 44 Bahraini
companies make up the initial sample for this study. However, one
company is eliminated from the list of companies because of suspension,
and two companies are eliminated because of incomplete data. Therefore,
the final sample consists of 41 Bahraini companies listed on BSE.
4.2 Data Collection and Data Analysis:
The data for measuring the dependent and independent variables
investigated in this study were manually collected from the sampled
companies' annual reports that were downloaded from the official
website of the Bahrain Stock Exchange. The data analyzed through the use
of bivariate correlation and linear regression analysis using SPSS
software. Consistent with prior IFRSs compliance literature, ordinary
least-squares regression is used to investigate the relationships
between the level of compliance with IFRS disclosure requirements
(dependent variable) and the five corporate characteristics (independent
4.3 Selection of IFRSs
To achieve the objective of this study all the IFRSs that are in
issue during the study period were intended to be included. However,
seven standards (i.e., IFRS 1, IAS 12, IAS 19, IAS 26, IAS 29, IAS 34,
and IAS 41) were excluded. Bahrain has made IFRSs mandatory since 2007,
therefore, IFRS 1 does not apply because its objective is to prescribe
the procedures when an entity adopts IFRSs for the first time as the
basis for preparing its financial statements. IAS 12 is excluded,
because there is no income tax in Bahrain. The objectives of IAS 19 and
IAS 26 do not apply to Bahraini companies because all Bahraini listed
companies must follow labor law with respect to employee benefits and
retirement benefits. IAS 29 is excluded, because the Bahraini economy is
not a hyperinflationary economy. IAS 34 is not applicable, because this
study related to annual reporting. IAS 41 is excluded because there is
no agriculture listed firms in Bahrain. Other standards (i.e., IFRS 2,
IFRS 3, IFRS 6, IAS 11, IAS 17, IAS 20, and IAS 31) were excluded
because it is not applicable to Bahraini listed companies. Accordingly
in this study the 27 selected IFRSs were the most applicable to Bahraini
4.4 The dependent variable (Disclosure Compliance Index):
Previous disclosure studies construct different disclosure indices,
some researchers use self-constructed checklists, whereas some use
checklists developed by others. Disclosure checklists either include
only voluntary disclosure items or both voluntary and mandatory
disclosure items. As in most of prior IFRSs compliance studies (e. g.
Tower et al., 1999; Street and Bryant, 2000; Glaum and Street, 2003;
Al-Shammari et al., 2008; Hodgdon et al., 2009), this study used a
self-constructed index consisting mainly of mandatory disclosure items,
the checklist was based on 27 IFRSs, which represent the most applicable
standards to Bahraini listed companies. The checklist was developed
based on the requirements shown in IFRSs published by the IASB.
Ultimately, the checklist includes 224 disclosure items.
Data for the index were extracted from the annual reports of
Bahraini companies for year 2010. The full annual report was read and
data hand collected by the author to ensure consistency in coding. To
measure compliance with IFRS mandatory disclosure requirements two
approaches were employed by prior studies, the first approach is to use
a dichotomous procedure in which each disclosure item on the checklist
was assigned a value of one if it is disclosed and zero if it not
disclosed, when a disclosure is deemed irrelevant for a specific
company, then the item is ignored in the computation of the index for
that company, such an approach has been employed in many previous
studies. The second approach is to employ a weighted disclosure index,
Cooke (1989) acknowledged that this procedure would introduce an element
of subjectivity. Therefore, this study employs the commonly used
Disclosure scores are calculated for each company and used as the
dependent variable in the regression model. In the disclosure model used
in this study, the total of IFRS disclosure score for a company is equal
to the number of items disclosed in its annual report (if a particular
item were not mentioned in the annual report, it would be treated as not
applicable). A disclosure index was then created to measure the relative
level of IFRS disclosure after scoring the total disclosure score of
each firm. The index is a ratio of the actual scores obtained by a firm
to the maximum score possible.
4.5 The Independent Variables
This section describes how the independent variables are measured.
Five company characteristics were examined for their association with
the level of Bahraini companies' compliance with the mandatory
IFRSs disclosure requirements. The five independent variables were
measured, using data obtained from the 2010 annual companies'
reports as follows:
1. Firm size was measured as the companies' total of assets.
2. Leverage was measured as the ratio of the companies' total
liabilities to the companies' shareholders' equity.
3. Profitability defined as return on equity (ROE), measured as the
ratio of the companies' net income to the companies'
4. Age of the company was measured as number of years since
5. Audit firm size was measured as in most of the studies by the
dichotomic variable "size of auditing firm" that can take the
value 1 or 0, 1 if the company is audited by international (large) audit
firm, and 0 if the company is audited by local (small) audit firm.
4.6 Model Development:
In order to assess the effect of each independent variable on the
dependent variable (i e. the level of Bahraini companies'
compliance with the mandatory IFRSs disclosure requirements), the
following multiple linear regression model was fitted to the data.
DI = [[beta].sub.0] + [[beta].sub.1] TA + [[beta].sub.2] LEV +
[[beta].sub.3] ROE + [[beta].sub.4] CA + [[beta].sub.5] AFS + e
DI = Disclosure Index;
TA = Total Assets;
LEV = Leverage;
ROE = Return on Equity;
CA = Company Age
AFS = Audit firm size;
e = error term.
5. DISCUSSION OF THE RESULTS
Table 1 show the descriptive statistical tests results of all
variables for the sample of companies. The table presents the minimum,
maximum, mean, and standard deviation for dependent variable (DI) all
independent variables in the regression models. The results show that,
the level of compliance with mandatory IFRSs disclosure requirements
range from 61% to 94%, with an average of 80.73%. The correlations
coefficients between dependent and independent variables are presented
in Table 2. The results show that there is a moderately high correlation
(0.686) between audit firm size (AFS) and disclosure index (DI).
However, it has been suggested (Farrar and Glauber, 1967; Judge et al.,
1985) that correlation coefficients should not be considered harmful
until they exceed 0.80. Table 2 reveal that the highest correlation is
(0.686) between audit firm size and disclosure index. Therefore,
collinearity did not appear to be a serious problem in interpreting the
regression results. The R Square and Adjusted R Square and F-value for
the model are presented in tables 3 and 4. The explanatory power of the
model expressed by Adjusted R Square (coefficient of determination)
indicates that 46.8% of the variation in the dependent variable is
explained by variations in the independent variables. Results of the
regression in Table 4 show that the F-ratio is 8.025 significant at 1%
level, which statistically supports the significance of the model.
Table 5 presents the results of the ordinary least square
regression model. Standardized beta coefficients, t-statistics, and
probability levels are given for each independent variable. The
empirical evidence derived from the regression model indicates that
there is a significant positive association at 9% level between
disclosure index and firm size. This finding support Hypothesis 1, and
suggests that large Bahraini companies comply with mandatory IFRSs
disclosure requirements and disclose more information than small
companies. This finding is consistent with that found in other previous
empirical studies (e.g., Gassen and Sellhorn, 2006; Hodgdon et al. 2009;
and Al-Shammari, 2011). This result confirm that only large companies
can truly benefit from the application of IFRSs, and confirm the
assumption that, large companies have more resources and eager to comply
better, thus use information disclosure to reduce agency cost.
Also, the results show that there is a strong significant positive
association at 1% level between disclosure index and size of audit firm.
This finding support Hypothesis 5, and suggests that, Bahraini companies
which audited by large auditing firms comply with mandatory IFRSs
disclosure requirements and disclose more information than Bahraini
companies which audited by small auditing firms. This result confirm the
assumption that, large audit firms are expected to deal with
multinational companies conducting their business activities over the
world. Therefore, their work is more likely to be influenced by the
IFASs and it is expected that their clients will provide more level of
information in their annual reports.
The other three independent variables (i. e. leverage,
profitability, and company age) do not appear to be significant in
explaining the level of compliance with mandatory IFRSs disclosure
requirements for the study sample firms. This result is consistent with
that found in other previous empirical studies. Most of previous
disclosure studies found no significant association between leverage and
the level of information disclosure (e. g. Chow and Wong-Boren, 1987;
Ahmad and Nicholls, 1994; Raffournier, 1995; Inchausti, 1997; Depoers,
2000; Hossain et al., 1994; Malone et al., 1993; McKinnon and
Dalimunthe, 1993; Tower et al. 1999; and Barako, 2007). Glaum and Street
(2003), and Henry (2004) reported no relationship between profitability
and the extent of mandatory compliance with IASs disclosure
requirements. Hossain and Reaz (2007) and Bukh et al. (2005) have
reported no association between company age and the level of information
The aim of this paper is to measure the extent of compliance with
mandatory IFRSs disclosure requirements in annual reports of Bahraini
listed firms, and to examine the factors that influence the level of
disclosure. This study included 27 IFRSs were the most applicable to
Bahraini listed companies. The extent of disclosure is measured
cross-sectionally using a general disclosure index comprising 224 items
was prepared and applied to 41 corporate annual reports for year ending
2010. The association between the level of disclosure and firm
characteristics was examined using multiple linear regression analysis.
The study reveals that Bahraini companies on general have responded
adequately to the IFRSs mandatory disclosure requirements of the
regulatory bodies. The results show that the levels of compliance with
mandatory IFRSs disclosure range from 61% to 94%, with an average of
80.7%. The empirical evidence of regression model indicates that the
level of disclosure compliance with IFRSs is associated positively with
company size and audit firm size. This finding suggests that large
Bahraini companies comply with mandatory IFRSs disclosure requirements
more than small companies, and suggests that, Bahraini companies which
audited by large auditing firms comply with mandatory IFRSs disclosure
requirements more than Bahraini companies which audited by small
auditing firms. The findings of this study is undoubtedly of great
concern to all users of annual reports and of particular interest to
accounting regulators to improve the level of supervision, and to
improve standard of reporting in Bahrain in order to improve
acceptability of annual reports, and to assist in evaluating the extent
of mandatory disclosure by Bahraini companies and explaining the
variation of disclosure in light of corporate characteristics.
This research is funded by the Deanship of Scientific Research at
University of Bahrain.
Ahmaed, K. and Nicholls, D., "The Impact of non-financial
Company Characteristics on Mandatory Disclosure in Developing Countries:
the Case of Bangladesh", International Journal of Accounting
Education and Research, 29(1), 62-77, 1994.
Akhtaruddin, M., "Corporate mandatory disclosure practices in
Bangladesh", The International Journal of Accounting, 40,
Akman, N. H., "The Effect of IFRS Adoption on Financial
Disclosure: Does Culture Still Play A Role?", American
International Journal of Contemporary Research 1(1), 6-17, 2011.
Al-Basteki, H., "The voluntary adoption of international
accounting standards by Bahraini corporations", Advances in
International Accounting, 8, 47-64, 1995.
Ali, M., Ahmed, K., & Henry, D., "Disclosure compliance
with national accounting standards by listed companies in South
Asia", Accounting and Business Research, 34(3), 183-199, 2004.
Alsaeed, K., "The association between firm-specific
characteristics and disclosure: The case of Saudi Arabia",
Managerial Auditing Journal, 21, 476-496, 2006.
Al-Shammari, B., Brown, P., & Tarca, A., "An investigation
of compliance with international accounting standards by listed
companies in the Gulf Co-Operation Council member states",
International Journal of Accounting, 43(4), 425-447,2008.
Al-Shammari, B., "Factors influencing the extent of mandatory
compliance with international financial reporting standards: the case of
Kuwaiti listed companies", Journal of International Business and
Economic s, 11(4), 2011.
Ballas A. A. and C. Tzovas., "An empirical investigation of
Greek firms' compliance to IFRS disclosure requirements",
International Journal of Managerial and Financial Accounting, 2(1),
Barako D. G., "Determinants of voluntary disclosures in Kenyan
companies annual reports", African Journal of Business Management,
1(5), 113-128, 2007.
Beaty, R. P., "Auditor Reputation and Pricing of the Initial
Public Offerings", The Accounting Review, Vol. 64, No. 4, pp.
Belkaoui-Riahi A, "Level of multinationality, growth
opportunities and size as determinants of analysts ratings of corporate
disclosures", American Business Review, 19(2): 115-220, 2001.
Bradbury, M.E., "Voluntary disclosure in financial segment
data: New Zealand evidence", Accounting and Finance, 32(1), 15-26,
Bukh, P.N., Nielsen, C., Gormsen, P., Mouritsen, J.,
"Disclosure of information on intellectual capital in Danish IPO
prospectuses", Accounting, Auditing & Accountability Journal,
18(6), 713-32, 2005.
Chow, C.W., Wong-Boren, A., "Voluntary financial disclosures
by Mexican corporations", The Accounting Review, 62(3), 533-541,
Christensen, H. B., Lee, E., & Walker, M., "Incentives or
standards: What determines accounting quality changes around IFRS
adoption?", AAA 2008 Financial Accounting and Reporting Section
(FARS) Paper. Available at SSRN: http://ssrn.com/abstract = 1013054,
Craswell, A. T. and Taylor, S. L., "Discretionary Disclosure
of Reserves by Oil and Gas Companies: an Economic Analysis",
Journal of business Finance and Accounting, 19, 295-09, 1992.
Cuijpers, and W. Buijink, "IAS determinants and
consequences", European Accounting Review, 14(3), 487-524, 2005
Dahawy, K., Merino, B., & Conover, T., "The conflict
between IAS disclosure requirements and the secretive culture in
Egypt", Advances in international Accounting, 15, 203-228, 2002.
Dahawy K., "Company Characteristics and Disclosure Level: The
Case of Egypt", International Research Journal of Finance and
Economics, 34, 194-208, 2009.
Daske, H., Hail, L., Leuz, C., & Verdi, R., "Mandatory
IFRS reporting around the world: Early evidence on the economic
consequences", Journal of Accounting Research, 46(5), 1085-1142,
DeAngelo, L. E., "Auditors Size and Audit Quality",
Journal Accounting and Economics, 3(4), 183-99, 1981.
Deloitte Touche Tohmatsu., IFRS in Your Pocket 2011, 10th ed.
(June), available at: http://www.iasplus.com/dttpubs/pocket2011.pdf,
Depoers, F., "A cost-benefit study of voluntary disclosure:
some empirical evidence from French listed companies", European
Accounting Review, 9(2), 245-263, 2000.
Dumontier, P. and Raffournier, B., "Why firms comply
voluntarily with IAS: an empirical analysis with Swiss data",
Journal of International Financial Management and Accounting, 9 (3),
El-Gazzar, S. M., P. M. Finn, and Jacob, R., "An empirical
investigation of multinational firms' compliance with international
accounting standards", International Journal of Accounting, 34(2),
Farrar, D. and Glauber, R., "Multicollinearity in Regression
Analysis: A Problem Revisited", Review of Economics and Statistics,
49, February, 92-107, 1967.
Firth, M., "The Impact of Size, Stock Market Listing, and
Auditors on Voluntary Disclosure in Corporate Annual Reports",
Accounting and Business Research, 9(36), 273-280, 1979.
Gassen, J. and Sellhorn, T., "Applying IFRS in Germany:
Determinants and Consequences", (July). Available at SSRN:
http://ssrn.com/abstract = 906802 or
Glaum M. and D. L. Street, "Compliance with the Disclosure
Requirements of Germany's New Market: IAS Versus US GAAP",
Journal of International Financial Management & Accounting 14(1),
Hodgdon, C., Tondkar, R. H., Adhikari, A., & Harless, D. W.,
"Compliance with IFRS disclosure requirements and individual
analysts' forecast errors", Journal ofInternational
Accounting, Auditing and Taxation, 17(1), 1-13, 2008.
Hodgdon, C., Tondkar, R. H., Adhikari, A., & Harless, D. W.,
"Compliance with International Financial Reporting Standards and
auditor choice: New evidence on the importance of the statutory
audit", The International Journal of Accounting, 44(1), 33-55,
Hope, O.-K., Jin, J. Es Kang, T., "Empirical Evidence on
Jurisdictions that Adopt IFRS", Journal ofInternational Accounting
Research, 5(2), 1-20, 2006.
Hossain, M., L. M. Tan, & M. Adams, "Voluntary Disclosure
in an Emerging Capital Market: Some Empirical Evidence from Companies
Listed on the Kuala Lumpur Stock Exchange", The International
Journal of Accounting, 29, 334-351,1994.
Hossain, M., & Reaz, M., "Determinants and characteristics
of voluntary disclosure by Indian banking companies", Corporate
Social Responsibility and Environment Management, 14(5), 274-288, 2007.
Inchausti, B. G., "The influence of Company Characteristics
and Accounting Regulation on Information Disclosed by Spanish
Firms", The European Accounting Review, 6, 45-68, 1997.
International Accounting Standards Committee (IASC), International
Accounting Standards Explained, New York, John Wiley & Sons, 2000.
Jensen, M. C., & Meckling, W. H., "Theory of the firm:
managerial behavior, agency costs and ownership structure", Journal
of Financial Economics, 3(4), 305-360, 1976.
Jermakowicz, E. K. and Gornik-Tomaszewski, S., "Implementing
IFRS from the perspective of EU publicly traded companies." Journal
of International Accounting, Auditing & Taxation, 15(2), 170-196,
Joshi P., AlAjmi J. and Ashutosh, "A study of compliance with
International Auditing Standards (ISAs) by auditors in Bahrain",
International Journal ofApplied Decision Sciences (IJADS), 3(3), 2010
Joshi, P.L. and Al-Mudhahki, J., "Empirical Study of
Compliance with International Accounting Standards (IAS-1) by Stock
Exchange Listed Companies in Bahrain", Journal of Financial
Management and Analysis, 14(2), pp. 43-54, 2001.
Joshi P. and Sayel R., "The adoption of International
Accounting Standards by small and closely-held companies: evidence from
Bahrain", The International Journal of Accounting, 37(4), 2003.
Judge, G. G., Griffiths, W. E., Hill, R. C. Lutkepohl, H. and Lee,
T. (1985), The Theory and Practice of Econometrics, 2nd ed., New York:
John Wiley & Sons.
Juhmani O., "Voluntary Information Disclosure: The Case of
Bahrain", International Journal of Business Research, 2, 79-90,
Karamanou, I. and G. Nishiotis, "The Valuation Effects of Firm
Voluntary Adoption of International Accounting Standards", July,
Lang, M., & Lundholm, R., "Cross-sectional determinants of
analyst ratings of corporate disclosures", Journal of Accounting
Research, 31, 246-271, 1993.
Malone, D., C. Fries and T. Jones, "An Empirical Investigation
of the Extent of Corporate Financial Disclosure in the Oil and Gas
Industry", Journal ofAccounting, Auditing & Finance, 8,
Mangena, M., & Tauringana, V., "Corporate compliance with
non-mandatory statements of best practice: The case of the ASB statement
on interim reports", European Accounting Review, 16, 339-427, 2007.
Mckinnon, J. L. and Dalimunthe, L., "Voluntary disclosure of
segment information by Australian diversified companies",
Accounting and Finance, 33(1), 33-50, 1993.
Meek, G. K., Roberts, C. B., and Gray, S. J., "Factors
influencing voluntary annual report disclosures by US, UK and
Continental European multi-national corporations", Journal of
International Business Studies, 26 (Third Quarter, 3), 555-72, 1995.
Mora, A. and Rees, W., "The early adoption of consolidated
accounting in Spain", The European Accounting Review, 7(4),
Moya, S. and Oliveras, E., "Voluntary Adoption of IFRS in
Germany: A Regulatory Impact Study", Corporate Ownership &
Control, Spring, 3(3), 138-147, 2006.
Naser K, "Comprehensiveness of disclosure of non-financial
companies listed on Amman Financial Market", International Journal
of Commerce & Management, 2(8), 88-119, 1998.
Nobes, C., "Accounting classification in the IFRS era",
Australian Accounting Review, 18(3), 191-198, 2008.
Owusu-Ansah, S., "The impact of corporate attributes on the
extent of mandatory disclosure and reporting by listed companies in
Zimbabwe", The International Journal of Accounting, 33, 605-631,
Raffournier, B., 'The determinants of voluntary financial
disclosure by Swiss listed companies', European Accounting Review,
4(2), 261-280, 1995.
Renders, Annelies; Gaeremynck, Ann., "The Impact of Legal and
Voluntary Investor Protection on the Early Adoption of International
Financial Reporting Standards (IFRS), De Economist, 155(1), 49-72, 2007.
Skinner, D., "Why Firms Voluntary Disclose Bad News",
Journal of Accounting Research, 32(1), 38-60, 1994.
Street, D. L., S. J. Gray, and Bryant, S. M., "Acceptance and
observance of international accounting standards: an empirical study of
companies claiming to comply with IASs", International Journal of
Accounting, 34(1),11-48, 1999.
Street, D.L. and Bryant, S. M., "Disclosure level and
compliance with IASs: a comparison of compliance with and without U.S.
listings and filings", International Journal of Accounting, 35(3),
Street, D.L. and Gray, S.J., "Factors influencing the extent
of corporate compliance with International Accounting Standards: summary
of a research monograph", Journal of International Accounting,
Auditing and Taxation, 11, 51-76, 2002.
Taplin, R., Tower, G. and Hancock, Ph., "Disclosure
(discernibility) and compliance of accounting policies: Asia-Pacific
evidence", Accounting Forum, 26(2), 172-90, 2002.
Tower, G., Hancock, P., and Taplin, R. H., "A regional study
of listed companies' compliance with international accounting
standards", Accounting Forum, 23(3), 293-305, 1999.
Wallace, R. S. O. & Naser, K., "Firm-specific determinants
of the comprehensiveness of mandatory disclosure in the corporate annual
reports of firms listed on the stock exchange of Hong Kong",
Journal of Accounting and Public Policy, 14(2), 311-368, 1995.
Watts, R. L. and Zimmerman, J. L., Positive Accounting Theory,
Englewood Cliffs, Prentice Hall, 1986.
Omar I. H. Juhmani, University of Bahrain, Bahrain
Dr. Omar I Juhmani earned his Ph.D. at the University of
Wales-Bangor, UK in 1996. Currently he is a professor of accounting at
University of Bahrain, Kingdom of Bahrain, and Editor-in-Chief: the Arab
Journal of Accounting.
Table 1: DESCRIPTIVE STATISTICS
N Minimum Maximum Mean Std.
DI 41 .61 .94 .8073 .08164
TA 41 5033.00 9974463.00 748812.5854 1.83685E6
LEV 41 .04 28.19 4.2327 7.03575
ROE 41 -300.03 25.64 -1.6480 50.58804
CA 41 6.00 55.00 27.6341 12.89914
AFS 41 .00 1.00 .6829 .47112
Table 2: CORRELATIONS
DI TA LEV ROE CA AFS
TA .383 * 1
LEV .377 * .308 1
ROE -.071 .035 -.151 1
CA -.006 -.179 -.261 .208 1
AFS .686 ** .224 .351 * -.132 .087 1
*. Correlation is significant at the 0.05 level (2-tailed).
**. Correlation is significant at the 0.01 level (2-tailed).
Table 3: MODEL SUMMARY
Model R R Square Adjusted R Std. Error of
Square the Estimate
1 .731 (a) .534 .468 .05957
(a). Predictors: (Constant), AFS, CA, ROE, TA, LEV
Table 4: ANOVA (b)
Model Sum of df Mean F Sig.
1 Regression .142 5 .028 8.025 .000 (a)
Residual .124 35 .004
Total .267 40
(a). Predictors: (Constant), AFS, CA, ROE, TA, LEV
(b). Dependent Variable: DI
Table 5: COEFFICIENTS (a)
Model Unstandardized Standardized t Sig.
B Std. Beta
(Constant) .723 .027 27.161 .000
TA 9.647E-9 .000 .217 1.743 .090
LEV .001 .002 .101 .763 .450
ROE 2.441E-5 .000 .015 .125 .901
CA 1.839E-5 .001 .003 .023 .982
AFS .105 .022 .603 4.691 .000
(a). Dependent Variable: DI