Trust and Disclosure Transparency in Financial Reporting of Government Agencies

Abstract

This study examines the impact of trust on disclosure transparency in financial reporting of government agencies. Using unique data from Korean central government agencies for the period of 2011-2015, we provide evidence that trust enhances government agencies’ financial disclosure transparency. Specifically, we document that high-trust agencies are more likely to classify their accounting errors as material and recognize these errors (as a separate line item) in financial statements. This contrasts with the practice of low-trust agencies that classify similar-magnitude accounting errors as immaterial, obfuscating the information from potential scrutiny. We further find that high-trust (low-trust) agencies tend to provide more disaggregated (aggregated) service cost information. In cross-sectional analyses, we find that the impact of trust on both disclosure of accounting errors and disaggregation of service cost information is amplified when agencies have an outsider head, are more decentralized, and face higher parliamentary inspection pressures, the situations in which more information coordination is required. Taken together, our findings suggest that trust contributes to higher disclosure transparency of government financial reporting by facilitating active information production and dissemination within an organization.