The role of enterprise risk management on disclosure transparency in the international financial reporting standards period

Bisan Almasri

doi:10.5267/j.ac.2021.4.016

Abstract

This research empirically investigates the role of the enterprise risk management system implementation level in capturing firm managerial incentives. The system plays an important role in understanding the association between international financial reporting standards and the capital market. Listed firms in the Australian market were used for the period 2000-2010 for this purpose. The study results imply that implementing higher levels of ERM by Australian firms during the mandatory IFRS adoption period does not capture firm incentives in IFRS period. Consequently, these results suggest that the implementation of ERM by Australian firms does not reduce the contractual costs between investors and management, whilst adopting IFRS does. Future research may use other techniques and/or strategies other than ERM, to capture the firm incentives, and as a result, may have economic consequences.

Highlights

International Financial Reporting Standards (IFRS) as a high-quality standard may not achieve its stated objective of producing high-quality financial reports that serve the needs of stockholders, due to several factors
The study results imply that implementing higher levels of enterprise risk management (ERM) by Australian firms during the mandatory IFRS adoption period does not capture firm incentives in IFRS period. These results suggest that the implementation of ERM by Australian firms does not reduce the contractual costs between investors and management, whilst adopting IFRS does
The need for firm incentives to be transparent is an important factor used to control the capital market effects of adopting IFRS, and there is a clear consensus in the international community that greater transparency is required by organizations, so efforts to strengthen the international financial system must go beyond improving transparency (Australia Treasurer, 1998)

Summary

Introduction

International Financial Reporting Standards (IFRS) as a high-quality standard may not achieve its stated objective of producing high-quality financial reports that serve the needs of stockholders, due to several factors. The need for firm incentives to be transparent is an important factor used to control the capital market effects of adopting IFRS, and there is a clear consensus in the international community that greater transparency is required by organizations, so efforts to strengthen the international financial system must go beyond improving transparency (Australia Treasurer, 1998). Incentives appear to dominate highquality standards as a determinant of the quality of financial reporting (Verrecchia, 2001; Lambert et al, 2007; Leuz & Verrecchia, 2000; Daske et al, 2013; Lin et al, 2012; Li, 2010; Jeanjean & Stolowy, 2008). Some researchers have argued that incentives appear to be a determinant of the quality of financial reporting (Lin et al, 2012; Li, 2010; Jeanjean & Stolowy, 2008). Management without high-quality incentives will find adopting IFRS attractive as a means of false signalling of high-quality reporting

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Conclusion