Corporate Governance and Timeliness

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Working Paper May 2008

CORPORATE GOVERNANCE AND THE TIMELINESS OF FINANCIAL REPORTING: AN EMPIRICAL STUDY OF THE PEOPLE’S REPUBLIC OF CHINA Robert W. McGee, Florida International University Xiaoli Yuan, California State University, East Bay ABSTRACT Timeliness of financial reporting is one of the attributes of good corporate governance identified by the OECD and World Bank. Shareholders and other stakeholders need information while it is still fresh and the more time that passes between year-end and disclosure, the more stale the information becomes and the less value it has. This paper examines the timeliness of financial reporting in the People’s Republic of China. The timeliness of financial reporting was measured by counting the number of days that elapsed between year-end and the date of the independent auditor’s report for a number of Chinese companies. Those results were then compared to data of non-Chinese companies in developed market economies to determine whether there was a significant difference. This study also examines which independent audit firms issued the audit opinion and which sets of accounting standards were used (IFRS, US GAAP or Chinese accounting standards) to determine which audit firms and accounting standards dominate.

INTRODUCTION Transparency is a very important component of financial reporting. Companies must disclose anything that might influence the investment decision of an informed investor. Nothing of consequence may be hidden. This rule is widespread and pervasive. Stock exchanges require it. Government agencies require it. Various accounting rulemaking bodies require it, including the Financial Accounting Standards Board in the United States and the International Accounting Standards Board. One aspect of transparency is timeliness. Generally speaking it is better to disclose information sooner rather than later, although there are some tradeoffs. For example, companies that issue their annual reports on January 1 are extremely timely but there is a certain probability that some of the information in that report is not as complete or accurate as would be the case if the company had spent more time preparing the statements and had issued them a few weeks or months later. There is an inverse relationship between the quality of financial information and the timeliness with which it is reported (Kenley & Staubus, 1974). Accounting information becomes less relevant with the passage of time (Atiase, Bamber & Tse, 1989; Hendriksen & van Breeda, 1992; Lawrence & Glover, 1998).

Electronic copy available at: http://ssrn.com/abstract=1131338

At the other extreme are financial statements that are issued a year or two after the end of the fiscal year. Although the statements may fairly reflect the financial position of the company, the information is stale by the time it reaches the public. Somewhere between one day and a year or two is the optimum delay between year-end and the issuance of the annual financial statements. Companies must have sufficient time to prepare the statements and the independent auditor must have sufficient time to audit the statements after they are prepared, but the public must have the information available before it becomes stale. Some stock exchanges and securities regulatory commissions have rules regarding how long financial statements may be delayed before issuance but not all countries and stock exchanges have such rules and even where such rules exist they may not always be followed. There is some evidence that companies in transition economies issue their financial statements far later than do companies in the more developed market economies (McGee, 2006; 2007a&b). That has been the case in some former Soviet Union countries, at least. China might fit the definition of a transition economy, in the sense that it is moving away from central planning and toward a market model. But the Chinese transition has been different than the transition from central...
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