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Factors influencing the extent of corporate compliance with IFRS: evidence from companies listed in Bahrain Stock Exchange.
Abstract:
This research examine empirically the level of compliance with mandatory IFRSs disclosure requirements for companies listed on Bahrain Stock Exchange, and the association between the level of disclosure and five corporate characteristics, namely; corporate size, leverage, profitability, company age, and size of audit firm. A disclosure checklist developed to assess the level of disclosure in the 2010 annual reports of 41 Bahraini companies. The results show that the compliance levels range from 61% to 94%, with an average of 80.7%. Multiple regression analysis demonstrated that company size and audit firm size had a significant positive relationship with the level of compliance with mandatory IFRSs disclosure requirements. The remaining variables (i. e. leverage, profitability, and company age) were found to be insignificant in explaining the level of compliance with IFRSs disclosure.

Keywords: IFRS, compliance, disclosure, annual report, corporate characteristics, Bahrain

Article Type:
Report
Subject:
Business enterprises (Laws, regulations and rules)
Financial disclosure (Analysis)
Disclosure laws
Author:
Juhmani, Omar I.H.
Pub Date:
05/01/2012
Publication:
Name: Journal of International Business and Economics Publisher: International Academy of Business and Economics Audience: Academic Format: Magazine/Journal Subject: Business, international; Computers Copyright: COPYRIGHT 2012 International Academy of Business and Economics ISSN: 1544-8037
Issue:
Date: May, 2012 Source Volume: 12 Source Issue: 2
Topic:
Event Code: 930 Government regulation; 940 Government regulation (cont); 980 Legal issues & crime Advertising Code: 94 Legal/Government Regulation Computer Subject: Government regulation
Product:
Product Code: 9912200 Venture Analysis; 9108628 Financial Regulation & Reporting; 9915410 Reporting & Disclosure NAICS Code: 92615 Regulation, Licensing, and Inspection of Miscellaneous Commercial Sectors
Geographic:
Geographic Scope: Bahrain Geographic Code: 7BAHR Bahrain
Accession Number:
293950230
Full Text:
1. INTRODUCTION

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' disclosure practices.

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.

3. HYPOTHESES

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.

Company Size:

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.

Leverage:

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 developed.

H2: The extent of disclosure compliance with IFRSs is positively associated with Bahraini firm's leverage.

Profitability:

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 hypothesis.

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 firms.

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. METHODOLOGY

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 & Tourism.

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 variables).

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 listed companies.

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 'dichotomous' approach.

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' shareholders' equity.

4. Age of the company was measured as number of years since establishment date.

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

where:

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 disclosure.

6. CONCLUSIONS

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.

ACKNOWLEDGEMENT:

This research is funded by the Deanship of Scientific Research at University of Bahrain.

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Omar I. H. Juhmani, University of Bahrain, Bahrain

AUTHOR PROFILE:

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.
                                                Deviation

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

DI       1
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.
               Squares        Square

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.
             Coefficients        Coefficients

             B           Std.        Beta
                         Error

(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
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