hong kong should regulate towards more transparency? presentators: mable tang 50192529 mandy cheng...
TRANSCRIPT
![Page 1: Hong Kong should regulate towards more transparency? Presentators: Mable Tang 50192529 Mandy Cheng 50126041 Fion Lau 50194105](https://reader034.vdocument.in/reader034/viewer/2022050722/5514d4a255034640138b626b/html5/thumbnails/1.jpg)
Hong Kong should regulate towards more transparency?
Presentators:Mable Tang 50192529Mandy Cheng 50126041Fion Lau 50194105
![Page 2: Hong Kong should regulate towards more transparency? Presentators: Mable Tang 50192529 Mandy Cheng 50126041 Fion Lau 50194105](https://reader034.vdocument.in/reader034/viewer/2022050722/5514d4a255034640138b626b/html5/thumbnails/2.jpg)
Agenda
• Part I: Introduction • Part II: Market Wide Problems• Part III: Specific Problems in Annual Repor
t• Part IV: Recommendations
![Page 3: Hong Kong should regulate towards more transparency? Presentators: Mable Tang 50192529 Mandy Cheng 50126041 Fion Lau 50194105](https://reader034.vdocument.in/reader034/viewer/2022050722/5514d4a255034640138b626b/html5/thumbnails/3.jpg)
Part I: Introduction
![Page 4: Hong Kong should regulate towards more transparency? Presentators: Mable Tang 50192529 Mandy Cheng 50126041 Fion Lau 50194105](https://reader034.vdocument.in/reader034/viewer/2022050722/5514d4a255034640138b626b/html5/thumbnails/4.jpg)
Introduction
• Who demand for regulating towards more transparency?– Primary user: shareholders;– Other users: employees, creditors
• Why they demand that? Information asymmetry
![Page 5: Hong Kong should regulate towards more transparency? Presentators: Mable Tang 50192529 Mandy Cheng 50126041 Fion Lau 50194105](https://reader034.vdocument.in/reader034/viewer/2022050722/5514d4a255034640138b626b/html5/thumbnails/5.jpg)
Introduction
– AICPA, 1994 report, Improving Business Reporting: A Customer Focus suggested that,
effective information sharing effective functioning of capital
markets
management credibility analysts’ understanding of the firm investors’ patience and confidence share value (Eccles and Mavrinac, 1995)
Leading to
Increasing
![Page 6: Hong Kong should regulate towards more transparency? Presentators: Mable Tang 50192529 Mandy Cheng 50126041 Fion Lau 50194105](https://reader034.vdocument.in/reader034/viewer/2022050722/5514d4a255034640138b626b/html5/thumbnails/6.jpg)
– In Hong Kong, after financial crisis of 1997, unexpected company failures and financial scandals,
negative publicity about excessive directors benefits, investor confidence many investors and auditors have called for improving company disclosure
practices (A Study of Corporate Disclosure Practice and Effectiveness in
Hong Kong, Simon S.M. Ho and Kar Shun Wong)
Introduction
Decreasing
Leading to
– Re-develop the confidence of financial users after collapse of Enron is a must
![Page 7: Hong Kong should regulate towards more transparency? Presentators: Mable Tang 50192529 Mandy Cheng 50126041 Fion Lau 50194105](https://reader034.vdocument.in/reader034/viewer/2022050722/5514d4a255034640138b626b/html5/thumbnails/7.jpg)
Part II: Market Wide Problems
•Information Asymmetry •Lack of Credibility •Lack of Comparability•Dynamic of Environment•Globalization (International Trade)
![Page 8: Hong Kong should regulate towards more transparency? Presentators: Mable Tang 50192529 Mandy Cheng 50126041 Fion Lau 50194105](https://reader034.vdocument.in/reader034/viewer/2022050722/5514d4a255034640138b626b/html5/thumbnails/8.jpg)
1.Information Asymmetry
• Whether there is market failure for disclosure?• Window dressing is the main problem• Management level know more information
than investors, tends to hide bad news and show good position of company
• Some information not available to investors• If no full and true information provided,
investors will be misled
![Page 9: Hong Kong should regulate towards more transparency? Presentators: Mable Tang 50192529 Mandy Cheng 50126041 Fion Lau 50194105](https://reader034.vdocument.in/reader034/viewer/2022050722/5514d4a255034640138b626b/html5/thumbnails/9.jpg)
Benefits towards more disclosure
• More qualified and quantified information will be released, users can make better investment decisions
• More disclosure make investor more confident and enhance share value-also greatly related to survival and maximizing share value of a company
![Page 10: Hong Kong should regulate towards more transparency? Presentators: Mable Tang 50192529 Mandy Cheng 50126041 Fion Lau 50194105](https://reader034.vdocument.in/reader034/viewer/2022050722/5514d4a255034640138b626b/html5/thumbnails/10.jpg)
2.Lack of Credibility
• Less transparency, creditors not know whether the company is worth lending money or not
• Refer to “Enron Case”• Problem: no standardized rule for
recognition of earnings for energy
resource industry
![Page 11: Hong Kong should regulate towards more transparency? Presentators: Mable Tang 50192529 Mandy Cheng 50126041 Fion Lau 50194105](https://reader034.vdocument.in/reader034/viewer/2022050722/5514d4a255034640138b626b/html5/thumbnails/11.jpg)
• Energy trading earnings based on mark-
to- market accounting
• Companies can inflate profits by using unrealistic price forecast
• However, Enron smoothed earnings rather than inflate them- gave appearance that Enron’s earnings stream highly reliable, to pump up stock price
![Page 12: Hong Kong should regulate towards more transparency? Presentators: Mable Tang 50192529 Mandy Cheng 50126041 Fion Lau 50194105](https://reader034.vdocument.in/reader034/viewer/2022050722/5514d4a255034640138b626b/html5/thumbnails/12.jpg)
- creditors wrongly believed Enron has the ability to repay the debts and finally suffered great losses in the bankruptcy of Enron
![Page 13: Hong Kong should regulate towards more transparency? Presentators: Mable Tang 50192529 Mandy Cheng 50126041 Fion Lau 50194105](https://reader034.vdocument.in/reader034/viewer/2022050722/5514d4a255034640138b626b/html5/thumbnails/13.jpg)
3.Lack of Comparability
• Annual report is presented for general purpose to the public
• It does not fulfil the needs of any specific users
• E.g., a investor may need more detailed information on a company’s profit generating ability but not any general figures
![Page 14: Hong Kong should regulate towards more transparency? Presentators: Mable Tang 50192529 Mandy Cheng 50126041 Fion Lau 50194105](https://reader034.vdocument.in/reader034/viewer/2022050722/5514d4a255034640138b626b/html5/thumbnails/14.jpg)
• Although in the same industry, different companies may use different accounting policies and practices in preparing annual reports
• Thus, difficult for users (not professionals) to compare the information between different companies
![Page 15: Hong Kong should regulate towards more transparency? Presentators: Mable Tang 50192529 Mandy Cheng 50126041 Fion Lau 50194105](https://reader034.vdocument.in/reader034/viewer/2022050722/5514d4a255034640138b626b/html5/thumbnails/15.jpg)
4. Dynamic of Environment
• Arising of more complicated Business mode (New Economy)- e.g. E-commerce: no regulation, mostly depends on self-monitoring
![Page 16: Hong Kong should regulate towards more transparency? Presentators: Mable Tang 50192529 Mandy Cheng 50126041 Fion Lau 50194105](https://reader034.vdocument.in/reader034/viewer/2022050722/5514d4a255034640138b626b/html5/thumbnails/16.jpg)
• Rapid technological innovation
• E.g. use of information system (EDP department, internet)
• Chang (1998) and Lev Zarowin (1999) find the decline in value relevance of financial statement items is partially explained by an increase in technological innovation
![Page 17: Hong Kong should regulate towards more transparency? Presentators: Mable Tang 50192529 Mandy Cheng 50126041 Fion Lau 50194105](https://reader034.vdocument.in/reader034/viewer/2022050722/5514d4a255034640138b626b/html5/thumbnails/17.jpg)
Globalization (International trade)
• Nowadays, institutional investors, corporations and internet-based
trading invest around the globe• Globalization of capital markets has
been accompanied by calls for globalization of financial reporting
![Page 18: Hong Kong should regulate towards more transparency? Presentators: Mable Tang 50192529 Mandy Cheng 50126041 Fion Lau 50194105](https://reader034.vdocument.in/reader034/viewer/2022050722/5514d4a255034640138b626b/html5/thumbnails/18.jpg)
• Some problems arise:- Is it possible to have a global accounting standard?- Which convergence of financial reporting institutions will take place?- What are political and economic consequences?
• Traditional financial reporting model fails to capture economic implications of changes in a timely way
![Page 19: Hong Kong should regulate towards more transparency? Presentators: Mable Tang 50192529 Mandy Cheng 50126041 Fion Lau 50194105](https://reader034.vdocument.in/reader034/viewer/2022050722/5514d4a255034640138b626b/html5/thumbnails/19.jpg)
Part III: Specific problems in Annual Report
• Non-inclusive Management Report• Involuntary Disclosure • Misuse of Graphical Representation• Incapable for Disclosure of Complex Structure
![Page 20: Hong Kong should regulate towards more transparency? Presentators: Mable Tang 50192529 Mandy Cheng 50126041 Fion Lau 50194105](https://reader034.vdocument.in/reader034/viewer/2022050722/5514d4a255034640138b626b/html5/thumbnails/20.jpg)
1.Non-inclusive Management Report
• It includes….. - Management Discussion and Analysis
-Comment from management on operation and future development - Directors’ Report
-Guidance on the annual report - Five-Year Summary
-Tubular analysis on past five years’operation
![Page 21: Hong Kong should regulate towards more transparency? Presentators: Mable Tang 50192529 Mandy Cheng 50126041 Fion Lau 50194105](https://reader034.vdocument.in/reader034/viewer/2022050722/5514d4a255034640138b626b/html5/thumbnails/21.jpg)
What’s the Problem?• Merely “promise” by using exaggerated
wordings - no guideline on how should they evaluate
the company• ALL about future is Optimistic! - hinder bad news, pessimistic viewpoint• Un-audited - even audited, it that credible?• Gradual improvement in profit figure - reliable? Even under current economic
situation? - certain degree of manipulation!
![Page 22: Hong Kong should regulate towards more transparency? Presentators: Mable Tang 50192529 Mandy Cheng 50126041 Fion Lau 50194105](https://reader034.vdocument.in/reader034/viewer/2022050722/5514d4a255034640138b626b/html5/thumbnails/22.jpg)
2. Involuntary Disclosure
• Do you know the unique features of Hong Kong Business structure ?
• Professor Tsui, “the major weakness of such companies was a lack of accountability in terms of disclosure and the quality of disclosure” (SCMP, 10/2/02)
![Page 23: Hong Kong should regulate towards more transparency? Presentators: Mable Tang 50192529 Mandy Cheng 50126041 Fion Lau 50194105](https://reader034.vdocument.in/reader034/viewer/2022050722/5514d4a255034640138b626b/html5/thumbnails/23.jpg)
Studies in Hong Kong
• Of Heng Seng 100 companies - about 39% have more than 2 family members on BOD - about 38% have a chief executive being the chairman as well (15% coming from the same family)
Lower level of voluntary disclosure!!
![Page 24: Hong Kong should regulate towards more transparency? Presentators: Mable Tang 50192529 Mandy Cheng 50126041 Fion Lau 50194105](https://reader034.vdocument.in/reader034/viewer/2022050722/5514d4a255034640138b626b/html5/thumbnails/24.jpg)
Why’s that?
• Control over company policy inevitably involve biased by majority interest (Big Family)
• “what should be included” Vs “what is requested” by SSAP - e.g. Connected party transactions• Disclose it in superficial way ?
![Page 25: Hong Kong should regulate towards more transparency? Presentators: Mable Tang 50192529 Mandy Cheng 50126041 Fion Lau 50194105](https://reader034.vdocument.in/reader034/viewer/2022050722/5514d4a255034640138b626b/html5/thumbnails/25.jpg)
3.Misuse of Graphical Representation
• Techniques for misleading: - missing baseline - over-extended & multiple scales - optical illusions - omission or obtrusive
gridlines…..etc….• Is that a need to regulate ?
![Page 26: Hong Kong should regulate towards more transparency? Presentators: Mable Tang 50192529 Mandy Cheng 50126041 Fion Lau 50194105](https://reader034.vdocument.in/reader034/viewer/2022050722/5514d4a255034640138b626b/html5/thumbnails/26.jpg)
Example: VTech Holding Limited
• Electronic Sector….• According to the research by Dr. Courtis, Electronic & Component Industry had around 33% graphical
misrepresentation for turnover in 1994-95• Annual Report used: 2000/01
![Page 27: Hong Kong should regulate towards more transparency? Presentators: Mable Tang 50192529 Mandy Cheng 50126041 Fion Lau 50194105](https://reader034.vdocument.in/reader034/viewer/2022050722/5514d4a255034640138b626b/html5/thumbnails/27.jpg)
Comments:
1/ Not clear Zero-baseline
10.212.5 12.5
7.8
-11.7
7.49.4 9.1
4.4
-15
-20
-15
-10
-5
0
5
10
15
1997 1998 1999 2000 2001
%
EBITDA/SalesEBIT/Sal e s
![Page 28: Hong Kong should regulate towards more transparency? Presentators: Mable Tang 50192529 Mandy Cheng 50126041 Fion Lau 50194105](https://reader034.vdocument.in/reader034/viewer/2022050722/5514d4a255034640138b626b/html5/thumbnails/28.jpg)
Comment:1/ No zero baseline2/ Scale - misleading?
731842
9611046
1335
0
200
400
600
800
1000
1200
1400US$'M
1997 1998 1999 2000 2001
Turnover
![Page 29: Hong Kong should regulate towards more transparency? Presentators: Mable Tang 50192529 Mandy Cheng 50126041 Fion Lau 50194105](https://reader034.vdocument.in/reader034/viewer/2022050722/5514d4a255034640138b626b/html5/thumbnails/29.jpg)
So, up till now…
• Again, Do you think it is a need to have
more regulations on transparency?
![Page 30: Hong Kong should regulate towards more transparency? Presentators: Mable Tang 50192529 Mandy Cheng 50126041 Fion Lau 50194105](https://reader034.vdocument.in/reader034/viewer/2022050722/5514d4a255034640138b626b/html5/thumbnails/30.jpg)
4. Incapable for showing Complex Structure
• Growth of Multinational Business Entity• Rise of E-commerce “Business Entity” - Without Physical office or even selling
pure services (online movie)• Active Merger and Acquisition activities - SSAP not have the best measure for
this• Is traditional accounting adequate?
![Page 31: Hong Kong should regulate towards more transparency? Presentators: Mable Tang 50192529 Mandy Cheng 50126041 Fion Lau 50194105](https://reader034.vdocument.in/reader034/viewer/2022050722/5514d4a255034640138b626b/html5/thumbnails/31.jpg)
Part IV: Recommendations
![Page 32: Hong Kong should regulate towards more transparency? Presentators: Mable Tang 50192529 Mandy Cheng 50126041 Fion Lau 50194105](https://reader034.vdocument.in/reader034/viewer/2022050722/5514d4a255034640138b626b/html5/thumbnails/32.jpg)
Recommendations
• Enable the management level and outsider receive the same level of information as to avoid information asymmetry
• Standardized rule for recognition of earnings as to ensure borrowing credibility
![Page 33: Hong Kong should regulate towards more transparency? Presentators: Mable Tang 50192529 Mandy Cheng 50126041 Fion Lau 50194105](https://reader034.vdocument.in/reader034/viewer/2022050722/5514d4a255034640138b626b/html5/thumbnails/33.jpg)
Recommendations
• Specific reports should be generated for specific users in future financial statement
(Accounting Theory, Ahmed Riahi Belkaoui)
– Public reporting of corporate financial forecasts• Provide information useful for the
predictive process when it will enhance the reliability of users’ prediction
(Trueblood report)
![Page 34: Hong Kong should regulate towards more transparency? Presentators: Mable Tang 50192529 Mandy Cheng 50126041 Fion Lau 50194105](https://reader034.vdocument.in/reader034/viewer/2022050722/5514d4a255034640138b626b/html5/thumbnails/34.jpg)
• Rules should be generated to identify and measure earnings in e-commerce transactions
• Calling for regulations on globalization of financial reporting
• Credibility of management disclosures should be enhanced by regulators, standard setters, auditors and other capital market intermediaries
(A review of the empirical disclosure literature, Paul M. Healy and Krishna G. Palepu)
Recommendations
![Page 35: Hong Kong should regulate towards more transparency? Presentators: Mable Tang 50192529 Mandy Cheng 50126041 Fion Lau 50194105](https://reader034.vdocument.in/reader034/viewer/2022050722/5514d4a255034640138b626b/html5/thumbnails/35.jpg)
Recommendations
• Concern on providing “Quality ” information rather than just “Quantity”. FASB says, it should be– Relevant– Timely– Understandable– Reliable– Neutral– Representationally faithful (Accounting Theory, Eldon S. Hendriksen and
Michael F.van Breda)
![Page 36: Hong Kong should regulate towards more transparency? Presentators: Mable Tang 50192529 Mandy Cheng 50126041 Fion Lau 50194105](https://reader034.vdocument.in/reader034/viewer/2022050722/5514d4a255034640138b626b/html5/thumbnails/36.jpg)
Incentives for Regulating towards More Transparency
Leading toLevel of Disclosure
StockLiquidity
Proved by Healy et al. (1999a)
![Page 37: Hong Kong should regulate towards more transparency? Presentators: Mable Tang 50192529 Mandy Cheng 50126041 Fion Lau 50194105](https://reader034.vdocument.in/reader034/viewer/2022050722/5514d4a255034640138b626b/html5/thumbnails/37.jpg)
Incentives for Regulating towards More Transparency
Leading toLevel of Disclosure
Cost of Capital
Proved by Botosan (1997)
![Page 38: Hong Kong should regulate towards more transparency? Presentators: Mable Tang 50192529 Mandy Cheng 50126041 Fion Lau 50194105](https://reader034.vdocument.in/reader034/viewer/2022050722/5514d4a255034640138b626b/html5/thumbnails/38.jpg)
Incentives for Regulating towards More Transparency
Leading toLevel of Disclosure
Information Intermediation
Proved by Lang and Lundholm (1993)
![Page 39: Hong Kong should regulate towards more transparency? Presentators: Mable Tang 50192529 Mandy Cheng 50126041 Fion Lau 50194105](https://reader034.vdocument.in/reader034/viewer/2022050722/5514d4a255034640138b626b/html5/thumbnails/39.jpg)
Conclusion
• Regulating towards more transparency enables to disclose all relevant and material information to the user. Credibility of the financial report will then be increased. So, the users to have more confident on relying the financial report in making informed decision.
![Page 40: Hong Kong should regulate towards more transparency? Presentators: Mable Tang 50192529 Mandy Cheng 50126041 Fion Lau 50194105](https://reader034.vdocument.in/reader034/viewer/2022050722/5514d4a255034640138b626b/html5/thumbnails/40.jpg)
Reference List• Annette Chiu, Attitudes must change before clear corporate picture seen
South China Morning Post; Hong Kong; Feb 10, 2002.• Ben Kwok, Governance makes gains
South China Morning Post; Hong Kong; May 31, 2000. • Hendriksen, Eldon S. Accounting theory 5th ed. Homewood, Ill. : Irwin, c1992.• John E. Core, A review of the empirical disclosure literature: Discussion, Journal of Accounting and Economics, Volume 31, Issues 1-3, pp441-456, September 2001. • Paul M. Healy & Krishna G. Palepu, Information asymmetry, Corporate disclosure, and the capital markets: A review of the empirical disclosure literature, Journal of Accounting and Economics, Volume 31, Issue 1-3, pp.405-440, September 2001.• Riahi-Belkaoui, Ahmed, Accounting theory . 3rd ed. Fort Worth : Dryden Press : Harcourt Brace Jovanovich, c1993.• Simon S.M. Ho & K.S. Wong, A Study of Corporate Disclosure Practice and Effectiveness in Hong Kong, Journal of International Financial Management and Accounting, 2001.
![Page 41: Hong Kong should regulate towards more transparency? Presentators: Mable Tang 50192529 Mandy Cheng 50126041 Fion Lau 50194105](https://reader034.vdocument.in/reader034/viewer/2022050722/5514d4a255034640138b626b/html5/thumbnails/41.jpg)