Income statements transparency and firms' characteristics of companies listed on the Bursa Malaysia

Income statements transparency and firms' characteristics of companies listed on the Bursa Malaysia

INTRODUCTION
Financial statements should always provide reliable information to assist users in decision making. The statement should disclose relevant, reliable, comparable and understandable information. To be understood clearly, the presentation should not be misleading. Readers should be able to understand the information presented without undue effort according to International Accounting Standards (IAS) 1. To achieve this, the annual reports should contain full disclosure and higher level of transparency. As Thompson and Yeung (23) stressed that for a company to be transparent, disclosure means providing a full and frank account of a company's activities. In addition, as far as corporate transparency is concerned, it should be defined as the widespread availability of relevant, reliable information about the periodic performance, financial position, investments opportunities, governance, value and risk of publicly traded firm (3).
Comprehensive disclosure of financial statement has been a world wide issue for a long decade. Malaysian market is currently promoting good corporate governance practices as a result of debacle of many big conglomerates in US as well as in Malaysia. As users of financial statement specifically income statement demanding for better disclosure of quality information and found that there are big amount of expenses portion goes to other operating expenses. The income statement is important because it reports on the operating performance of the company. The greater the transparency of income statement the more useful it will be for current and potential investor to make investment decision. In other words, the more the companies disclose, concerning the figures founding the financial statement, the greater the level of transparency. The current reform of the accounting and financial reporting in Malaysia which aims to promote transparency and to deliver high quality annual report is enhance through comprehensive disclosure. This change has contributed to the accounting standards setting and laws regarding financial reporting produced by local organizations.
The Section 167 and Ninth Schedule of the Companies Act 1965 govern the disclosure in the financial statements of companies in Malaysia. Under Section 167, states that each company must keep a proper set of books and accounts and the financial statements must contain at a minimum Profit and Loss Account, a Balance Sheet, a Cash Flow Statement and accompanying notes to the account. Schedule 9, details the item that the companies must include in the financial statements. Until the introduction of Financial Reporting Act 1997, the items in Schedule 9 represent the minimum statutory disclosure requirement for companies. It must be noted that the accounting standards issued by the Malaysian Institute of Accountants (MIA) and other professional bodies remains 'voluntary' disclosure requirement. In the case of listed companies, the regulatory agency that responsible is the Securities Commission (SC), the registrar of companies and the Central Bank of Malaysia. Their functions are to administering in public listed companies, administering companies incorporated in Malaysia and administering financial institutions respectively. This is to ensure enterprise financial reporting meeting the minimum requirements, if necessary go beyond that to achieve a fair presentation. The companies listed on the Bursa Malaysia must also meet the accounting and reporting guidelines as per issued by SC (22). Each company that going to public market should administer good corporate governance by discloses full information necessary to make informed users investment decisions.
The Malaysian Code of Corporate Governance (MCCG 2002) had been introduced to promote greater transparency and adopt professional business ethics as well as convey this via their annual reports. The National Annual Corporate Report Awards (NACRA) held by the collaboration of Bursa Malaysia, MIA and the MICPA to help Malaysian companies aim for the greatest standards in annual reporting. Study of disclosures begins with research done by Cerf (5). He constructed disclosure index by specifying and weighting some related items which might appear in annual reports. The index scores were positively correlated with firm characteristics namely asset size, number of shareholders and profitability (21). Buzby (4) was consistent with other researcher but add listing status as one of the variable to explain disclosure level.
Disclosures indexes tend to based upon lists of selected items if accounting information which may be disclosed in corporate annual reports and seek to measure the extent of disclosure by using numerical weights on items of accounting information. Extensive accounting literature relating to the use of disclosure indexes by way of measure the quality of information and it is vary among different studies. Inchausti (13) reported that in some studies, only voluntary information were considered (7), (9), (19) whilst in other studies rating for both compulsory and voluntary items was being included in an index (5), (6), (8). Studies also differ in the aspects of items included in index from 17, Barret (1), 39 Buzby (4) and 224, Cooke (8). In some studies, they compared the transparency or disclosure of accounting information in cross-countries (2), (3).