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Corporate Board: Role, Duties & Composition / Volume 8, Issue 2, Continued 1, 2012

CORPORATE BOARD: ROLE, DUTIES & COMPOSITION

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Corporate Board: Role, Duties & Composition / Volume 8, Issue 2, Continued 1, 2012

EDITORIAL
Dear readers! This issue of the journal is devoted to several issues of corporate board practices. Zied Bouaziz and Mohamed Triki to test the validity of their hypothesis, which states the existence of a certain deterministic between the board's characteristics and financial performance measured by three different ratios, namely ROA, ROE and Tobin's Q, have developed three linear regression models. Authors empirical validation was conducted on a sample of 26 companies listed on the Tunisian stock exchange Tunis (Tunis Stock Exchange) over a period that spans four years (2007-2010). The estimated models shows satisfactory results pointing out the importance of the impact of board characteristics on financial performance of Tunisian companies. Jayalakshmy Ramachandran and Ramaiyer Subramaniam study financial reporting by companies that usually is strengthened with auditors report. An auditors report is a statement which communicates his views on the financial statements prepared by the company. When the auditors are satisfied with all the evidences they have verified, they state that the financial statements give a true and fair view. True and fair view is in existence since a very long time as compared to various other terms. Since its int roduction, true and fair view had faced a number of criticisms. Past researchers had tried to explore this concept. None of them managed to give any additional information than was traditionally available in the books. This study concludes by stating that it is time to reconsider the concept of true and fair view. Zuaini Ishak and Abood Mohammad Al-Ebel examine the intellectual capital (IC) disclosures of 137 Gulf Co-operation Council (GCC) listed banks using a content analysis approach. Instead of examining the effect of board characteristics in isolation from each other, this study extends previous research on the determinants of IC disclosure by considering board effectiveness score in relation to IC disclosure. Moreover, this study extends previous studies in board-IC disclosure relationship by investigating the hypothesised impact of information asymmetry in moderating this relationship. Authors findings show that IC disclosure is positively associated with the effectiveness of board of directors. In addition, this study provides evidence that the level of information asymmetry in GCC bank moderates the relationship between board effectiveness and IC disclosure. Findings of this study therefore provide strong support of the hegemony theory. These findings are important for policy makers as they confirm that the effectiveness of board of directors in protecting the investors depends on the level of information asymmetry. Bethuel Sibongiseni Ngcamu aims to determine employees expectations for the pro posed PMS and their perceptions of the systems impact on effectiveness within the university concerned. The study adopted a quantitative research design and a survey method was used, whereby, a structured questionnaire was administered by the researcher to a selected population size of 150 of which 108 completed questionnaires, generating a response rate of 72%. The study reflects a disproportionately high percentage of 34% of the respondents who disagreed and 21.3% who were undecided as to whether PMS is needed at the university concerned where the majority of these respondents being academics and those with matriculation. Ummi Junaidda Binti Hashim and Rashidah Binti Abdul Rahman investigate the link between corporate governance mechanisms and audit report lag for companies listed on Bursa Malaysia from 2007 to 2009. The 288 companies listed on Bursa Malaysia have been randomly selected. The corporate governance mechanisms examined include the board of directors and audit committee.

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CORPORATE BOARD: ROLE, DUTIES AND COMPOSITION


Volume 8, Issue 2, Continued 1, 2012, CONTENT

Editorial

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THE IMPACT OF THE BOARD OF DIRECTORS ON THE FINANCIAL PERFORMANCE OF TUNISIAN COMPANIES

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Zied Bouaziz, Mohamed Triki


A QUALITATIVE STUDY ON THE AUDITORS TRUE AND FAIR VIEW REPORTING 108

Jayalakshmy Ramachandran, Ramaiyer Subramaniam


BOARD OF DIRECTORS, INFORMATION ASYMMETRY, AND INTELLECTUAL CAPITAL DISCLOSURE AMONG BANKS IN GULF CO-OPERATION COUNCIL 125

Zuaini Ishak, Abood Mohammad Al-Ebel


PERCEPTIONS OF ORGANISATIONAL READINESS FOR THE PERFORMANCE MANAGEMENT SYSTEM: A CASE STUDY OF A UNIVERSITY OF TECHNOLOGY 138

Bethuel Sibongiseni Ngcamu


INTERNAL CORPORATE GOVERNANCE MECHANISMS AND AUDIT REPORT LAG: A STUDY OF MALAYSIAN LISTED COMPANIES 147

Ummi Junaidda Binti Hashim, Rashidah Binti Abdul Rahman

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THE IMPACT OF THE BOARD OF DIRECTORS ON THE FINANCIAL PERFORMANCE OF TUNISIAN COMPANIES
Zied Bouaziz*, Mohamed Triki** Abstract The Board of Directors plays a key role as a internal mechanism of corporate governance. Indeed, its effectiveness is dependent on the presence of several factors, the most important are related to characteristics that relate primarily to the independence of its members, board size, the cumulative functions of decision and control, the degree of independence of the audit committee and the gender diversity of the board. To test the validity of our hypothesis, which states the existence of a certain deterministic between the board's characteristics and financial performance measured by three different ratios, namely ROA, ROE and Tobin's Q, we have developed three linear regression models. Our empirical validation was conducted on a sample of 26 companies listed on the Tunisian stock exchange Tunis (Tunis Stock Exchange) over a period that spans four years (2007-2010). The estimated models show satisfactory results showing the importance of the impact of board characteristics on financial performance of Tunisian companies. Keywords: Board Of Directors, Financial Performance, Board Size, The Accumulation Of Functions, Diversity Of The Board * Faculty of Economics and Management of Sfax, Accounting Department, Tunisia E-mail: ziedbouazi@yahoo.fr ** Faculty of Economics and Management of Sfax, Accounting Department, Tunisia E-mail: mohamed.triki@mes.rnu.tn

Introduction In recent years, various authors have predicted that the protection of minority shareholders' interests in a context of asymmetric information is a prerequisite for the proper functioning of the financial market (Labelle & al 2000). Indeed, there are different control mechanisms that are capable of protecting the public interest against abuse and managerial discretion in firms that are characterized by either a concentrate capital or diluted capital. In the same furrow, Fama & Jensen (1983) and Charreaux (1993) provide that the board of directors plays an important role to limit conflicts of interest between different stakeholders. The board of directors, as internal mechanism of governance, has a major function on the limitation of managerial discretion and thereafter to manage the agency relationship between shareholders and managers and stakeholders of company. An analysis of the main studies on the subject of the board allowed us to identify several indices associated with the effectiveness of control by this mechanism. This is mainly the presence of independent directors on the board, the existence of various board committees, the multiple roles of CEO and chairman and size of the Board in accordance with the study of Zeghal et al (2006). In order to clarify and deepen the board's role in the governance system, the sections of this study will be devoted to the study of the main features of the board and their impact on financial performance of Tunisian companies. Indeed, the first section deals with the main previous studies that relate to the impact of board characteristics on financial performance. The presentation of the sample and definition of

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variables is the subject of the second section. Finally the analysis results will be displayed in the third section. 1. Previous studies and research hypotheses Many mechanisms exist to protect the interests of shareholders, it is commonly accepted that the Board of Directors plays a major role in promoting the interests of investors (Labelle & al 2000). Indeed, the Board of Directors plays an important role in the proxy resources, determining strategic choices and especially in the resolution of conflicts of interest between managers and stakeholders. Also a scan of the main studies on the topic of the board allowed us to identify the characteristics of the board has an impact on financial performance. 1.1 Independence of board members and financial performance This is the most important feature of the board to reflect the quality of governance of a company. This notion has always held the interest of several researches. Indeed, previous studies have focused on the distinction between outside directors and inside directors Literature has emphasized the effectiveness of board independence as a mechanism reducing the manager's discretion and opportunism. They corroborate the hypothesis that the independent members tend to mitigate agency conflicts between leaders and managers (Alexander &al 2000). To this extent, much research has shown that a high proportion of independent directors on the board improve the quality of financial disclosure and subsequent financial performance of companies (Chen& al 2000). The Empirical research on the relationship between board composition and financial performance of the firm are far from unanimous. Several previous studies have shown that the presence of outside directors has a positive effect on performance like the studies of Byrd & al (1992) and Lee & al (1992) that assume the presence of outside directors protect shareholders' interests when there is an agency conflict. Black & al (2006) and Lefort & Urzua (2008) corroborate this idea further and predict that increasing the number of independent directors on the board promotes a positive financial performance of the firm. In the same furrow, Kor & al (2008) approve that outside directors' have good skills and they can positively influence the financial performance of the company. Other authors such as Hermalin & al (1991), Bhagat & Black (2000) and Klein (2002) result in an insignificant relationship between the fraction of outside directors' on the board and the financial performance. Finally, Coles & al (2005) argue that inside directors can also improve the value of the company because they have access to relevant information and have specific knowledge of the company. Similarly, Sarkar & Sarkar (2009) and Kaymak & al (2008) support this conclusion and provide that inside directors leads to higher returns on assets (ROA) and not the outside independent directors. In the context of our study and in accordance with the provision of the Code of Commercial Companies of Tunisia, a shareholder is not required for membership of the board of a public company in addition to the code itself has foreseen the possibility of appointing an employee as a director.We anticipate a positive effect of the independence of directors on financial performance. Hence our first hypothesis: 1.2 Size of the board of directors and financial performance The literature is largely interested in the study of the influence of size of the board of directors on the financial performance of the company.

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H1: The presence of a significant percentage of independent directors on the board of directors positively influences the financial performance of Tunisian companies. A scan of the economic and financial literature we concluded that the link between the size of the board of directors and financial performance leads to contradictory conclusions. Therefore, unanimity has not been proven about this relationship. Indeed, several researchers suggest that the number of directors may influence the functioning of the board and therefore the financial performance of the company. Some authors seem to favor a large council. Indeed, in an uncertain environment, the larger the board, the greater knowledge of the various administrators can improve performance and to exercise effective control (Kiel & al 2003, Coles & al 2005 and Linck, & al 2006). Similarly Godard & Schatt (2004), provide more the number of directors is important more the company achieves high performance. In this line, Pearce & Zahra (1989) and Provan (1980) provide for the existence of a positive relationship between board size and firm's financial performance. In the same groove and in their Meta analysis Dalton & al (1999), confirm this positive relationship and find it is more intense for businesses to large sizes. In the same direction, Pearce & Zahra (1989) and Adams & Mehran (2003) find that firms with a large board of directors ensure a better performance. However, another strand of literature shows that, the large boards of directors are less effective and have a negative impact on company performance. Indeed, when the board is large, this may present a barrier to the management control of the company because of poor coordination, flexibility and communication. Wu (2000), Bhagat &Black (2002), Odegaard & al (2004), Mak & al (2005) and Andres & al (2005) state that small boards create more value than large boards. This divergence of results shows that there are no consensuses on the impact of the size of the board on its monitoring capacity. Some argue for a larger size. Other research shows that the reduced number of directors strengthens the control of the board and subsequently improves the financial performance of companies. In the context of our study the Code of Commercial Companies of Tunisia provides that public companies are managed by a board composed of three to twelve members at most. Hence our second hypothesis: H2: The size of the board negatively affects the financial performance of Tunisian companies. 1.3 The dual functions of management and control and financial performance Another feature is supposed to influence the effectiveness of control exercised by the directors on the board of directors, it is the cumulative functions of decision and control. According to Brickley & al (1997), the duality is the allocation of the same person as CEO and Chairman of the Board for the same period. As well Rachdi & al (2009) study the relationship between duality and performance has produced a combination of theories of agency and stewardship. The first defends the idea that advocates the separation of functions while the second emphasizes the superiority of the dual functions of decision and control to heighten business performance. The agency theory states that combine the functions of CEO and Chairman of the Board is considered an obstacle to the effectiveness of the control exercised by the Board and therefore recommends the separation of two functions. Indeed, the proponents of agency theory, including Jensen & Meckling (1976) and Jensen (1993) noted that the separation of management and control decisions reduces agency costs and improves the performance.

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Similarly Carapeto & al (2005) recommend the separation between the management function and that of the general chairman. They show that the function of chairman is to chair the meetings and monitor the hiring process, referral, assessment and executive compensation. It is therefore clear that the Chief can not be efficient since it will favor its own interests. Therefore, for the board to be effective it is necessary to separate the two positions. In the same furrow, Sarkar & al (2009) consider duality as an obstacle to the board's role since it allows weakening the control making by the directors and therefore a control system able to encourage the opportunism of the manager. Contrary to the agency theory which suggests that duality diminished the independence of the Board, the proponents of the theory of stewardship like Cannella &al (1993) and Sridharan & al (1997) provide that plurality of functions increases the financial performance of the firm that the CEO has all the information for disclosure to members of the board. The Defenders of duality require the presence of a single responsible with a mission to chart the strategies and policies of the company because the separation of functions creates a divergence within the council and promotes conflicts of interest. In this vein, Tuggle & al (2008) reach this conclusion and argue that the sharing of power between the CEO and Chairman of the Board is a factor that may determine the ability of the manager in carrying out its functions. Weir & al (2002) argued that a combined role can project a clear sense of direction and can have a positive effect on financial performance. Indeed, these studies have referred to the theory of organization who said that the company can achieve better financial performance when the leader has complete authority and that its role is played clearly and without opposition. In France, Godard& Schatt (2004) found that firms that opted to combine the positions are more profitable in the long term, confirming the essential role played by the leadership to create value. Hence our third hypothesis: H3: The combination of leadership and chairmanship of the board negatively affect the financial performance of Tunisian companies. 1.4 The size of the audit committee and financial performance Pincus & al (1989) show that firms with larger audit committees are expected to devote more resources to monitor the process of accounting and financial reporting. In the same furrow, Anderson & al (2004) found that large audit committees have a better protection and better control the process of accounting and finance committees with respect to small by introducing greater transparency with respect shareholders and creditors which has a positive effect on corporate financial performance. Hence our fourth hypothesis: H4: The presence of a significant number of directors on the audit committee positively affects the financial performance of Tunisian companies 1.5 The independence of audit committee members and financial performance The audit committee's role is to oversee the audit process and also to resolve any disagreement that may arise between auditors and management. Indeed, Abbott and al (2000) suggest that firms whose audit committees consist of independent members were less sanctioned by the SEC. The composition of the audit committee to the subject of several recommendations which state that the audit committee should consist of a majority of outside independent directors to ensure their independence ( Beasley &Salterio 2001).

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In the same furrow, Klein (1998) shows that the effectiveness of the board depends on its own structure and the structure of its committees. Indeed, he argues that the allocation of independent outside directors to the audit committee is likely to improve business performance. Hence our fifth hypothesis: H5: The presence of a significant percentage of independent members of the audit committee positively affects the financial performance of Tunisian companies. 1.6 The Board diversity and financial performance The presence of women in the board was the subject of several theoretical and empirical reflections especially in developed countries such as the study of Singh (2008) which deals with British companies as well as that of Adams and Ferreira (2007, 2009) in the American context and also the study of Rose (2007) for the case of Danish companies. The question now is whether the presence of women in the board has an impact on the latter. The answer to this question is mixed between the defendants and opponents of gender diversity on boards. According to proponents of this diversity, they present some arguments that women bring new ideas, have an ability to communicate very important to men as they deal with strategic issues at council meetings has a positive effect on the business (Carter &al 2003, Adams & Ferreira 2003 and Ehrhadto & al 2002). In the same furrow, Omri& al (2011), provide that the joint councils improve the company image through the disclosure of their openness, tolerance and fairness. This result was corroborated by the study of Kang & al (2009) which provide that the announcement of the addition of a woman on the board to an effect on improving yields recorded. Contrary to previous results, Shrader & al (1997) analyze 200 American companies with market capitalization of the highest between 1992 and 1993. They find no significant positive relationship between the percentage of women on the board and financial performance. Similarly, Kochan & al (2003) find no positive relationship between diversity men / women in positions of power and financial performance of the company. Indeed, the study of Zahra &al (1988) on the presence of minorities on the board of directors (women and racial minorities) and financial performance, has led to a non significant association between two variables. Hence our sixth hypothesis: H6: The presence of women on the board of directors negatively affects the financial performance of Tunisian companies. 1.7 The frequency of meetings and financial performance The frequency of board meetings may be viewed as a key element in board effectiveness. Indeed, there are explanations both for and against a positive relationship between the frequency of meetings and corporate financial performance. A scan of the economic and financial literature we concluded that the link between the frequency of meetings of the board of directors and financial performance leads to contradictory conclusions. Indeed, some authors like Godard& al (2004) predicted that the increase in the number of board meetings in a positive impact on the financial performance of French companies. In the same furrow, Davidson and al (1998) found a positive relationship between corporate financial performance and number of meetings of the Board. However, more research like the study of Vafeas (1999) which states that increasing the number of board meetings is not synonymous with the existence of a strong financial performance. Hence our seventh hypothesis: H7: the frequency of meetings of the board positively affects the financial performance of Tunisian companies.

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2. Presentation of the sample and definition and measurement of variables Prior to the analysis of study results, we present at the next paragraph the methodological choices made in order to test the hypotheses of the research. First, we present the characteristics of our sample. Subsequently, we define the measures of variables used in this study. 2.1 Presentation of the sample The sample for this study consists of 26 companies listed on the Tunisian stock exchange (TSE) over a period of four years (2007-2010). Financial data are collected of the financial statements from official bulletins available in the Financial Market Council (CMF) on its website www.cmf.org.tn and scholarship. The Market data are collected through the Exchange and on the site www.bvmt.com.tn and also with a few brokers. The Data on the board of directors are collected from the prospectuses of companies available in the CMF and guide from stocks provided by the TSE. Are excluded from the sample, the banks, the insurance companies and the financial institutions due to their specific accounting rules and a few companies newly listed on TSE. Indeed, we have not considered all the companies listed in our study period (2007-2010). The choice of listed companies is based on the fact that more information is available on these companies. 2.2 Definition and measurement of variables At this point, we tried to list the different variables that can be divided into dependent variables (performance measurement), independent variables that relate principally on the properties of the board of directors and control variables. Table 1. Definition and measurement of variables
Variables Return On Assets (ROA) Return On Equity (ROE) Q de Tobin authors Barro (1990) and Angbazo &Narayanan (1997) Holderness &Sheehan (1988) and Ang&Lauterbach (2002). Beiner & al (2006) and Bhagat & al (2008) Measurement of variables Net income / total assets Net income / equity

dependent variables Control variables independent variables

((Book value of assets + market value of equity)- book value of equity) / book value of assets independence of board Pearce & Zahra (1989), Bhagat the number of independent directors &Black (1999) and Godard & Schatt divided by the total number of directors members (IND_CA) (2004) on the Board Adams & Mehran (2003), Klein, the number of directors on the Board Board size (TAI_CA) (2002), Vafeas (2003) and Godard & Schatt (2004) overlapping functions Kang &al(2009), Brickley & al (1997) Takes the value 1 when the positions of and Godard & Schatt (2004). CEO and chairman of the board are (CUM_FON) occupied by one person. 0 otherwise. Klein (2002) and Godard and Schatt the number of directors who serve Size of the audit committee (TAI_AUD) (2004) Independence of audit Anderson and al (2003), Godard and the proportion of independent directors committee (IND_AUD) Schatt (2004) and Brown & Caylor who sit on the audit committee (2004) Frequency of meetings Vafeas & al (1998), Godard & Schatt the number of board meetings per year (2004) and Andrs & al (2005) (FREQ_REU) The percentage of women in consulting Gender diversity of the Singh (2008) and Kang & al (2009) Board (DIV_CA) Pearce &Zahra (1989) and Godard the natural logarithm of book value of size of the firm (2002) total assets (TAI_FIRM) level of debt (DEBT_FIRM) Mc Daniel (1989) and Turner & Debt / total assets Sennetti (2001)

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3. Analyzes the results To capture the effect of board characteristics on financial performance of Tunisian companies measured by ROA, ROE and Tobin's Q, we test the regression models (1), (2) and (3) incorporating the control variables (firm size and debt ratio) to control their effect on the dependent variables. ROAi,t = 0 +1 IND_CA i,t + 2 TAI_CA i,t+ 3 CUM_FONi,t + 4 TAI_AUDi,t + 5 IND_AUDi,t+ 6 FREQ_REUi,t +7 DIV_CAi,t + 8 TAI_FIRMi,t + 9 DEBT_FIRMi,t + i,t ROE i,t = 0+ 1 IND_CA i,t + 2 TAI_CA i,t+ 3 CUM_FONi,t + 4 TAI_AUDi,t + 5 IND_AUDi,t+ 6 FREQ_REUi,t + 7 DIV_CAi,t + 8 TAI_FIRMi,t + 9 DEBT_FIRMi,t + i,t Q Tobini,t+1 = 0+1 IND_CA i,t + 2 TAI_CA i,t + 3 CUM_FONi,t + 4 TAI_AUDi,t + 5 IND_AUDi,t+ 6 FREQ_REUi,t +7 DIV_CAi,t + 8 TAI_FIRMi,t + 9 DEBT_FIRMi,t + i,t 3.1 Descriptive Analysis The results presented in Part A of Table 1 (Appendix) indicate that Tunisian firms listed on the TSE other than financial institutions have a low return on assets and sometimes even a negative return (-0.164). This yield is between (16%) and (19%) with an average that does not exceed 5% (4.98%). Moreover, these descriptive statistics show that the average Tobin's Q is (1.80) and this ratio to a maximum value of 4.27. However, some firms have a Tobin's Q is less than unity (0.97) this means theoretically they have trouble raising money to invest and increase the dividends they pay to shareholders. The results presented in Table 1 indicate that the independence of members of the board is more or less respected by Tunisian firms listed on the TSE. Indeed, it is an average of 49% (0.489) with minimum (0%) mainly for family businesses whose board members have a family connection between them and indeed this is the characteristic of the majority of Tunisian companies and a maximum not exceeding 82% (81.8%). We find that firms that are the subject of our study are mainly companies that make use of cumulation of the president of the board and director general (60.6%) and justified the fact that the majority of companies selected are family. This result is confirmed by the study of Godard and Schatt (2004) who found that family businesses are opting for French listed the plurality of functions which make them more profitable in the long term, confirming the essential role played by the leadership create value. The companies in our study have audit committees with an average size of 3 directors and the size of this committee varies between 2 and 4 administrators but with the percentage of independence that does not exceed 75%. Similarly the average of independent audit committee members does not exceed 20% (19.47%) with minimum (0) and this is justified because of the existence of family firms in our sample. 3.2 Verification of the applicability of the linear regression and multivariate analyzes Because all dependent variables are continuous, we use the model of multiple linear regressions to estimate our three equations. 3.2.1 Checking the conditions of application of the linear regression The application of linear regression is subject to certain conditions. Indeed, this method requires that no problems of autocorrelation and heteroscedasticity of errors and the lack of multicollinearity among independent variables.

(1)

(2)

(3)

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3.2.1.1 Verification of the absence of autocorrelation problems To affirm that the OLS estimators converge asymptotically to the true values we need to verify the absence of self correlation of errors. The results show that the Durbin-Watson statistics are all close to two. This allows us to affirm the absence of self - correlation of errors. Hence the OLS estimators converge asymptotically to the true values of the parameters with minimum variance. 3.2.1.2 Verification of the absence of multi colinearity The linear regression requires the absence of a problem of multi collinearity between the independent variables introduced in the same model. Indeed, Kennedy (1985) provides an r = 0.8 to decide on a serious problem of collinearity between the independent variables included in a regression model. We present the coefficients of Pearson correlations between the independent variables in our study (see Appendix). This matrix shows the correlation between the different independent variables is moderate. This implies the absence of the problem of multi collinearity among variables. 3.2.1.3 Verification of absence of heteroscedasticity To test the existence of a potential problem of heteroscedasticity of errors, we used White's test in 1978. Indeed, White (1978) regresses the squared residuals of OLS on all independent variables of the model on the square of each explanatory variable and the variables obtained from the cross-initial theoretical model. However, when the number of explanatory variables is important, the number of regressions of the equation of White will be significantly larger than the number of observations, which causes the lack of robustness of the test. Thus, White has shown that under the assumption of homoscedasticity, the quantity W = N.R2 asymptotically chi-square has an N-k degrees of freedom. The results of this test show that there is no problem of heteroscedasticity in all regression models used in our study (see Appendix Table 3). 3.2.2 Multivariate analyzes and hypothesis testing Analysis of our results will be divided into three parts. In the first part, we examine the effect of board characteristics on financial performance of Tunisian companies measured by the ROA by analyzing the estimation results of the first regression model (equation 1). The second part will analyze the results regarding the effect of board characteristics on financial performance measured by ROE (Equation 2). Finally, we discuss in Part III, the results regarding the effect of board characteristics on financial performance measured by Tobin's Q (equation 3).However prior to the determination of the various regressions equations it is necessary to ascertain whether or not individual effects in our models and it is crucial to choose between a fixed effects model or the effects model random by applying the Hausman specification test. 3.2.2.1 Analysis of the effect of board characteristics on financial performance measured by ROA Table 2. Type of effect Tets model (ROA) 1 Values of the Fisher statistic 3.5928 Sig 0.0000 Conclusion Reject the null hypothesis of equality of the constants Type of effect specific effect

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We find that the probability of acceptance of the null hypothesis of the Fisher test is 0.0000 <threshold of 5%. We reject the null hypothesis H0 and we confirm the existence of an individual effect. Following the rejection of H0 we turn to the determination of the random effect (BETWIN) for the judgment of our model. Table 3. Hausman test S.D. 0.021787 0.034496 Rho 0.2851 0.7149

Cross-section random Idiosyncratic random

At this stage the use of the Hausman specification test (1978) is crucial to identify the nature of the specification (fixed or random). Test Summary Cross-section random Chi-Sq. Statistic 29.117425 Chi-Sq. d.f. 9 Prob. 0.0006

According to the Hausman test (1978), we find that the probability is (0.0006) less than the critical value at 5%. This implies that the model is studied in individual fixed effects. From an econometric perspective, this result means that the individual effects are added to the constant model and not the random term. Table 4. Results of linear regression on Equation 1 Dependent variable ROA t-statistic Coefficient -0.062934 -0.563680 + 3.495056 0.112294*** 0.000389 0.120650 -0.017956 -1.091590 + -0.023063 -1.090314 + 3.023016 0.105687*** + 4.981887 0.123768*** -2.708355 -0.447243*** 0.001196 0.126088 -4.373467 -0.098508*** R2 adjusted = 0.770149 F=11.15049 p= 0.000 expected sign

VARIABLES constant IND_CA TAI_CA CUM_FON TAI_AUD IND_AUD FREQ_REU DIV_CA TAI_FIRM DEBT_FIRM R2= 0.846022

Prob 0.5748 0.0008 0.9043 0.2788 0.2794 0.0035 0.0000 0.0085 0.9000 0.0000 N= 104

*** Significant at 1% ** significant at 5% * significant at 10%

Inspection of the table reveals a positive and statistically significant at 1% between the financial performance measured by ROA and the independence of members of the Board IND_CA ( = 0.1122, P = 0.008). This result supports the hypothesis H1, which states that the presence of a significant percentage of independent directors on the board of directors positively influences the financial performance of companies. Indeed, this result corroborates the studies of Black & al (2006) and Lefort & Urzua (2008) which provide that the increased number of independent directors on the board promotes a positive performance of the firm. This result also confirms the studies of Lau & al. (2009), Schiehll & al (2009) and Sarkar & Sarkar (2009) who also agree that independent directors promote better value creation within the company that managers provide good governance independent from those internal. Moreover, the results in Table support the hypothesis H 5 which states that the presence of a high percentage of independent members of the audit committee positively affects financial performance. Indeed, from Table, the coefficient on the variable independence of audit committee members IND_AUD is positive ( = 0.1056) and statistically significant at 1% (P = 0.0035) which supports the study Klein (1998) shows that the allocation of the outside (independent) audit committee is likely to improve the financial performance of the company. Similarly Beasley & Salterio (2001) state that the audit committee should consist of a majority of independent directors to improve the quality of information and hence the performance of the company.

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We also find that the coefficient associated with the frequency of meetings of the board FREQ_REU is positive and statistically significant at 1% and in accordance with the hypothesis H 7 which provides that the frequency meeting of the board positively affects financial performance. This result is confirmed by several studies the most important are that of Godard & Schatt (2004) who stressed that a significant increase in the number of meeting of the Board allows a detailed control of managers and increasing shareholder wealth that has a positive effect on corporate financial performance. Furthermore the results indicate that the coefficient on the variable range board DIV_CA is negative and statistically significant at 1%. We find that the negative sign of the coefficient on the variable DIV_CA is consistent with expected sign. Indeed this result corroborates the study of Farrell &al (2005) which provide a negative impact of gender diversity on boards and performance because it reduces the number of women in these councils, which may bias the scope of their presence. Finally, we also find that the sign of the estimated coefficient obtained on the control variable (firm size) is not consistent with the expected sign (= 0.0011, P = 0.9). Indeed the table shows that the size of the firm in a positive and not significant ( This result is not confirmed in studies of Black & al (2006) and Arcot & Bruno (2005) which state that small firms are more successful than businesses to large sizes. On the other hand the results for this regression shows that the debt (debt ratio) to a negative coefficient and statistically significant at 1 %( = -0.0985, P = 0.000). Indeed, this result is consistent with the work of Myers (1977) which states that indebtedness leads to high agency costs because of the divergent interests of shareholders and creditors. 3.2.2.2 Analysis of the effect of board characteristics on financial performance measured by ROE: We find that the probability of acceptance of the null hypothesis of the Fisher test is 0.0000 less than the 5% level. We reject the null hypothesis H0 and we confirm the existence of an individual effect. Table 5. Type of effect
Tets model (ROE) 2 Values of the Fisher statistic 3.3265 Sig 0.0000 Conclusion Reject the null hypothesis of equality of the constants Type of effect specific effect

Following the rejection of H0 we turn to the determination of the random effect (BETWIN) for the judgment of our model. Effects Specification Cross-section random Idiosyncratic random S.D. 0.080274 0.118879 Rho 0.3132 0.6868

At this stage the use of the Hausman specification test (1978) is crucial to identify the nature of the specification (fixed or random). Test Summary Cross-section random Chi-Sq. Statistic 19.998038 Chi-Sq. d.f. 9 Prob. 0.0179

According to the Hausman test, we find that the probability is (0.0179) less than the critical value of chiTwo at the 5%. This implies that the model is studied in individual fixed effects. The results in Table 6 indicate that except for the signs of coefficients for variables IND_CA TAI_AUD and signs of the coefficients obtained are consistent with the expected signs. First note that, contrary to hypothesis H1, the independence of members of the board does not seem to have a significant effect on financial performance measured by ROE. Indeed, the coefficient on the variable IND_CA is negative and not significant ( = -0.0425, P = 0.7017). This result is not consistent with the results of studies of Black & al (2006) and Lefort & Urzua (2008) which showed that the presence of a significant percentage of independent directors on the board of directors influences positive financial performance.

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Tavle 6. Results of linear regression on Equation 2


Dependent variable ROE VARIABLES constant IND_CA TAI_CA CUM_FON TAI_AUD IND_AUD FREQ_REU DIV_CA TAI_FIRM DEBT_FIRM R2= 0.749528 expected sign + + + + R2 adjusted = 0.626107 Coefficient 0.78897** -0.042590 -0.001008 -0.085096 -0.304492*** 0.349636*** 0.280347*** -0.735567 -0.009244 -0.055882 F=6.072948 p= 0.000 t-statistic 2.050561 -0.384654 -0.090703 -1.501170 -4.177139 2.901997 3.274481 -1.292542 -0.282764 -0.719927 N= 104 Prob 0.0441 0.7017 0.9280 0.1379 0.0001 0.0050 0.0017 0.2005 0.7782 0.4740

*** Significant at 1% ** significant at 5% * significant at %

Moreover, the results show that the coefficient on the variable IND_AUD is positive and statistically significant at 1% ( = 0.3496, P = 0.005). Implying that the independence of audit committee members to positively impact financial performance. This result supports the hypothesis H 5, which states that the presence of a significant percentage of independent members of the audit committee positively affects financial performance. This result corroborates the results of several studies including that of Klein (1998) shows that the allocation of the outside (independent) audit committee is likely to improve the financial performance of the company. We also find that the coefficient on the variable frequency FREQ_REU meeting is positive ( = 0.2803) and statistically significant at 1% (P = 0.0017). This result confirms the hypothesis H 7 which provides that the frequency of meeting of the board positively affects financial performance. This result is justified by the study of Davidson & al (1998) who found a positive relationship between corporate financial performance and number of meetings of the Board. Indeed, in their frequency of meeting of the board is positively related to the quality of control exercised by him on the head of the firm and the information disclosed to all stakeholders. However, the results for the variables TAI_AUD indicate a negative coefficient and significant at 1% ( = -0.3044, P = 0.0001). This result is not consistent with the study by Anderson & al (2004) who found that large audit committees promote greater transparency for shareholders and creditors has a positive effect on performance corporate financial. Similarly, the results indicate that the coefficient associated with the variable size of the board TAI_CA is negative ( = -0.001) and insignificant (P = 0.9280) according to the prediction of the hypothesis H 2 that includes the board size negatively affects corporate financial performance. Regarding the control variables, the sign found on the firm size variable is consistent with the expected sign. Indeed, we found that the coefficient on firm size is negative but not statistically significant (= 0.0092, P= 0.778). Similarly, the table shows that the coefficient on debt (debt ratio) is negative but not statistically significant ( = -0.0558, P = 0470). Indeed, the negative sign of the coefficient on the variable DEBT_FIRM is consistent with the expected sign because any debt or the use of debt hinders performance but in a more or less significant. However, previous studies such as that of Myers (1977) who found that the coefficient associated with the variable DEBT_FIRM is negative and statistically significant. Indeed, the work of Myers (1977) state that the indebtedness leads to high agency costs because of the divergent interests of shareholders and creditors.

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3.2.2.3 Analysis of the effect of board characteristics on financial performance measured by Tobin's Q Table 7. Type of effect Tets Model 3 (Tobin's Q) Values of the Fisher statistic 1.9393 Sig 0.0163 Conclusion Reject the null hypothesis of equality of the constants Type of effect specific effect

We find that the probability of acceptance of the null hypothesis of the Fisher test is 0.0163 <less than the 5% level. We reject the null hypothesis H0 and we confirm the existence of an individual effect. Following the rejection of H0 we turn to the determination of the random effect (BETWIN) for the judgment of our model. Table 8. Hausman test Effects Specification Cross-section random Idiosyncratic random S.D. 0.074723 0.480130 Rho 0.0236 0.9764

At this stage the use of the Hausman specification test (1978) is crucial to identify the nature of the specification (fixed or random). Test Summary Cross-section random Chi-Sq. Statistic 29.523846 Chi-Sq. d.f. 9 Prob. 0.0005

According to the Hausman test, we find that the probability is 0.0005 <less than the 5% level. This implies that the model is studied in individual fixed effects. Table 9. Results of linear regression on Equation 3
Dependent variable Tobin's Q VARIABLES expected sign t-statistic Coefficient constant -2.375336 -1.528555 IND_CA + 5.186386 2.319313*** TAI_CA -0.041420 -0.923172 CUM_FON 2.132053 0.488123** TAI_AUD + 0.474271 1.610933 IND_AUD + -0.622720 -1.279741 FREQ_REU + 5.482612 1.895802*** DIV_CA -0.812927 -0.353689 TAI_FIRM -. -0.016666 -0.126227 DEBT_FIRM -3.623341 -1.135921*** R2= 0.780103 R2 adjusted = 0.671748 F=7.199509 p= 0.000 N= 104 *** Significant at 1% ** significant at 5% * significant at 10 % Prob 0.1309 0.0000 0.3591 0.0366 0.1118 0.2049 0.0000 0.7247 0.8999 0.0006

First note that, contrary to hypothesis H3 combine the functions of management and chair of the board seems to have a positive effect on financial performance measured by Tobin's Q. Indeed, we find that the coefficient associated with the accumulation of functions CUM_FON is positive and statistically significant at 5% ( = 0.0488, P = 0.036). This result is consistent with studies of Cannella & al (1993) and Sridharan & al (1997) which provide that the combination of tasks increases the performance of the firm that the CEO has all the information for disclose the later members of the board. Moreover, the results in Table show that the coefficient on the variable independence of members of the Board IND_CA is positive and statistically significant at 1% according to the prediction of hypothesis H 1, which states that the presence of a significant percentage of independent directors on the board of directors influences positively the financial performance. This result is not consistent with studies of Burton (2000) and Bhagat & al (2002) who find that firms with independent boards are not necessarily perform better than others. Also this result does not corroborate the studies of Core & al (2002) indicates

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that even a high percentage of independents on the board can have a negative impact on firm performance. Similarly the variable frequency of meeting FREQ_REU is associated with financial performance measured by Tobin's Q and that this association is positive ( = 1,895, P = 0.0000) and statistically significant at 1% Confirming the hypothesis H7, which states that the frequency of meeting positively affects the financial performance of companies. This result is consistent with the study of Godard & Schatt (2004) who stressed that a significant increase in the number of meeting of the Board allows a detailed control of managers and increasing shareholder wealth which has a positive effect on financial performance of companies. Regarding the control variables, the sign found on the firm size variable is consistent with the expected sign. We find that firm size has a negative impact on Tobin's Q. this result joins the study of Beiner & al (2006) who showed that large size firms are likely to have significant agency problem because of the difficulty of controlling them and the problem of free cash flow. Similarly the table shows that the coefficient on debt (debt ratio) is negative and statistically significant at 1% (= -1.1359, P = 0.0006). Indeed, the negative sign of the coefficient on the variable DEBT_FIRM is consistent with the expected sign. Indeed this result corroborates the study by Myers (1977) which provides that the debt enjoyed by the ratio "total debts on total assets" is also significant and negative. Conclusion The study of the impact of board characteristics on financial performance of companies was based on an investigation of 26 Tunisian companies with publicly traded securities of Tunis (Tunis Stock Exchange). Order to study this impact we used essentially the bivariate analysis by studying the association between endogenous variables and the explanatory variables and multivariate analysis using multiple linear regression. Similarly, the use of descriptive statistics in our study presents a more or less important. Indeed, the results of descriptive statistics are summarized in a set of mean, median, and frequency. The interest of these results is to have some information on certain characteristics and practices of Tunisian companies regarding corporate governance and in particular the main features of the board. Indeed, the results of all tests show the bivariate and multivariate significant effect of certain characteristics of the board on financial performance is measured by ROA, ROE and Tobin's Q. On the one hand regarding the impact of board characteristics on financial performance measured by ROA, we find that only board independence, the independence of the audit committee, the kind of diversity Board meeting frequency and have a significant effect on financial performance. On the other hand, results from these multivariate analyzes have shown that the independence of the audit committee and the frequency of meeting a significant and positive impact on financial performance measured by ROE. Finally, we note the existence of a significant effect on the one hand between the independence of the board, combining the functions of management and board leadership and the frequency of meetings and other financial performance measured by Tobin's Q. We offer some recommendations to Tunisian companies listed on the stock exchange on the development board, such as limiting the relationship between directors to provide additional insurance against the risk of collision leaders. so we propose to limit the percentage of capital held by shareholders to obtain capital companies and not diffuse type of family businesses.

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In conclusion, the results of this empirical study showed that the characteristics of the board which relate to the independence of board members, board size, independence of audit committee members, frequency of meetings Council have a greater or lesser impact on financial performance measured by the different ratio of performance used in this study namely ROE, ROE and Tobin's Q. References 1. 2. 3. 4. 5. 6. 7. 8. 9. Abbott, L & Parker S. Auditor selection and audit committee characteristics Auditing: A Journal of Practice and Theory 19 (2): pp 47-66, 2000. Adams, R.B & Ferreria, D, Women in the boardroom and their impact on governance and performance, Journal of Financial Economics, Vol.94 (2), pp.291-309, 2009. Adams, R.B & Ferreria, D: A theory of friendly boards, Journal of Finance, Vol.62 (1) pp.217250, 2007. Adams, R.B & Ferreria,D: Diversity and incentives: evidence from corporate boards, Working Paper, University of Stockholm. 2003. Adams, R &Mehran, H., Is corporate governance different for bank holding companies? Fede ral Reserve Bank of New York Economic Policy Review (April) vol 53 (2), pp 123 - 142, 2003. Alexandre H & M. Paquerot : Efficacit des structures de contrle et enracinement des dirigeants, Finance Contrle Stratgie, vol 3, N2,pp 5-29, 2000. Anderson, R.C., Mansi S.A., & Reeb D.M: Founding family ownership and the agency cost of debt, Journal of Financial Economics vol 68 (1), pp263-285, 2003. Anderson, R.C., Mansi S.A., & Reeb D.M.: Board characteristics, accounting report integrity and the cost of debt journal of accounting and economics, vol 37, pp 315-342, 2004. Andrs, P., Azofra, V. & Lpez, F.J: "Corporate Boards in some OECD countries: size composition, functioning and effectiveness." Corporate Governance: An International Review. Vol. 13(2), pp 197-210 2005. Ang, J., Lauterbach, B., & Schreiber, B.Z: Pay at the executive suite: How do US banks compensate their top management teams? Journal of Banking & Finance vol 26 (3), pp 1143-1169, 2002. Angbazo, L. & Narayanan, R: Top management compensation and the structure of the board of directors in commercial banks, Europen. Finance Review. vol 1, pp 237257, 1997. Barro, R: Government spending in a simple model of endogenous growth . Journal of Political Economy vol 98, pp 103-125, 1990. Beasley, M.S& Salterio.S: The relationship between board characteristics and voluntary improvement in audit committee composition and experience, contemporary accounting research, vol 18 pp 539-570, 2001. Beiner S, Drobetz W, Schmid M M, & Zimmermann H: An Integrated Framework of Corporate Governance and Firm Valuation European Financial Management 12 (2), pp 249283, 2006. Bhagat, S. & Black, B: Board independence and long -term firm performance working paper, University of Colorado 2000. Bhagat, S.& Black B: The non-correlation between board independence and long-term firm performance. Journal of Corporation Law pp 231-274, 2002. Bhagat, S. & Black, B: The uncertain relationship between board composition and firm value , Business Lawyer N54, pp 921-963, 1999. Bhagat, S. & Bolton, B: Corporate governance and firm performance, Journal of Corporate Finance, vol 14, N3, pp 257-273, 2008. Black, B S., Love, I & Rachinsky, A: "Corporate Governance and Firms' Market Values: Time Series Evidence from Russia". Emerging Markets Review, Vol. 7, pp. 361-379, 2006. Brown, L D. &. Caylor L M: Corporate governance and firm Performance Georgia State University working paper 2004. Brickley, J.A., Coles, J.L. & Jarrell, G: Leadership structure: Separating the CEO and chairman of the board, Journal of Corporate Finance, vol 3, pp 189-220, 1997. Burton P: Antecedents and Consequences of Corporate Governance Structures Corporate Governance An International Review 8 (3), pp194203, 2000. Byrd, J.W& Hickman, K.A: Do outside directors monitor managers? Evidence from tender offer bids.Journal of Financial Economics 32, pp 195 221, 1992. Cannella, A. & Lubtakin, M: Succession as a sociopolitical process: Internal impediments to outsider succession, Academy of Management Journal, vol 36, pp 763-793, 1993.

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25. Carapeto, M, Lasfer, M & Machera, K: "Does Duality Destroy Value?" Cass BusinessSchool Research Paper, 2005. 26. Carter, D.A, Simkins, B.J. & Simpson, W.G: Corporate governance, board diversity, and firm value, The Financial Review, Vol.38, pp.33-53, 2003. 27. Charreaux G, : Conseil dadministration et pouvoir dans lentreprise. Working Paper universit de Bourgogne, 1993. 28. Chen, J.P., Charles, & Jaggi, B. L: The Association between independent nonexecutive directors, family control and financial disclosures in Hong Kong . Journal of Accounting and Public Policy, 19(4-5), pp.285-310,2000. 29. Coles, J.L, Daniel N. D & Naveen, L : Boards: Does one size fit all? Arizona State University Finance Department, Purdue University and Purdue University, 2005. 30. Core, J.E. & D.F. Larcker: Performance consequences of mandatory increases in executive stock ownership, Journal of Financial Economics 64(3), pp 317-340, 2002. 31. Dalton D.R., C.M. Daily, J.L. Johnson & A.E. Ellstrand, : Number of directors and financial performance: a meta-analysis, Academy of Management Journal, vol.42, n6,p.674- 686,1999. 32. Davidson, W.N, Pilger.T & Szakmary. A :golden parachutes, board and committee composition and shareholder wealth The financial review pp 17-32, 1998. 33. Ehrhadto. O. & Nowake. E: Private benefits and Minority Shareholder Expropriation. Empirical Evidence from IPOs of German Family-owned firms , Working Paper, Humboldt University and Goethe University, 2002. 34. Fama, E. F. & Jensen, M. C. 1983,Agency problems and residual claims. Journal of Law and Economics, 26(2): pp 327-49. 35. Farell, K.A. & Hersch, P: Additions to corporate boards: the effect of gender, Journal of Corporate Finance, Vol.11, pp.85- 106, 2005. 36. Godard L & A. Shatt : Caractristiques et fonctionnement des dadministration franais : Un tat des lieux, Cahier du FARGO, n 104020, fvrier, 2004. 37. Godard L : La taille du conseil dadministration : dterminants et impact sur la performance, Revue Sciences de Gestion, 33, pp.125-148, 2002. 38. Hermalin B & Weisbach M: The effects of board composition and direct incentives on firm performance Financial Management 20 pp 101-112, 1991. 39. Holderness, C. G., & Dennis P :The Role of Majority Shareholders in Publicly Held Corporations. Journal of Financial Economics 20: pp 317-46 1988. 40. Jensen, M.C.& Meckling,W.H: "Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure", Journal of Financial Economics pp.305-360, 1976 41. Jensen, M.C: The modern industrial revolution, exit the failure of internal control systems. Journal of Finance, vol 48(3), pp 831-880, 1993. 42. Kang. E, Ding D.K & Charoenwong. C: Investor reaction to women directors, Journal of Business Research, 2009. 43. Kaymak, T. & Bektas, E: East meets west? Board characteristics in an emerging market: Evidence from Turkish Banks, Corporate Governance, vol 16, N6, pp 550-561, 2008. 44. Kennedy. P 1985, A guide to econometrics, Basil Blackwell, Southampton. 45. Kiel, G.C & Nicholson, G.J: Board Composition and Corporate Performance: how the Australian experience informs contrasting theories of corporate governance Corporate Governance An International Review 11, pp 189205, 2003. 46. Klein, A. 1998 firm performance and board committee structure journal of law and economics Vol 41 pp 275-303. 47. Klein, A : Audit committee, board of director characteristics, and earnings management. Journal of Accounting and Economics 33 pp 375-400, 2002. 48. Kochan, T., Bezrukova, T.K, Ely R., Jackson S., Joshi A., Jehn K., Leonard J., Levine D. & Thomas D: The effects of diversity on business performance: Report of the Diversity Network, Human Resource Management, Vol.42, N1, pp3-21, 2003. 49. Kor, Y.Y. & Misangyi, V.F: Outside directors industry-specific experience and firms liability of newness, Strategic Management Journal, vol 29, N12, pp 1345-1355, 2008. 50. Labelle R. et B. Raffournier, : Conseil dadministration et gouvernement d'entreprise : une comparaison internationale, La Revue du Financier, n127, pp.18-28, 2000. 51. Lau, J., Sinnadurai, P. & Wright, S : Corporate governance and chief executive officer dismissal following poor performance: Australian evidence, journal of Accounting and Finance, vol 49, pp 161-182, 2009.

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A QUALITATIVE STUDY ON THE AUDITORS TRUE AND FAIR VIEW REPORTING


Jayalakshmy Ramachandran*, Ramaiyer Subramaniam** Abstract Financial reporting by companies is strengthened with auditors report. An auditors report is a statement which communicates his views on the financial statements prepared by the company. When the auditors are satisfied with all the evidences they have verified, they state that the financial statements give a true and fair view. True and fair view is in existence since a very long time as compared to various other terms. Since its introduction, true and fair view had faced a number of criticisms. Past researchers had tried to explore this concept. None of them managed to give any additional information than was traditionally available in the books. This study concludes by stating that it is time to reconsider the concept of true and fair view. Keywords: Auditor, Audit, Opinion, True, Fair, View, Report, Stakeholders, Organization, Override * Asst. Professor, Nottingham University Business School, Jalan brogan, 43,500 Seminyih, Malaysia E-mail : jayalakshmy.rama@nottingham.edu.my ** Lecturer, Faculty of Business and Law, Multimedia University, Bukit Beruang, 75450 Melaka, Malaysia E-mail : ramaiyer.subramaniam@mmu.edu.my

1 Introduction The word audit is derived from the Latin word meaning to hear. It is about upholding the integrity of financial reporting and business conduct and is about seeking truth (Percy, 1997). True and fair view is used by auditors to convince the user group or the stakeholders that the financial statements are free from error and are factual. Stakeholder is a party who affects, or can be affected by, the company's actions. The stakeholder concept was first used in a 1963 internal memorandum at the Stanford Research institute (Wikepedia). It defined stakeholders as "those groups without whose support the organization would cease to exist. The examples of stakeholders include owners/investors of companies, Government bodies, senior management staff, Non managerial staff, creditors, bankers, customers, trade union, and local community. The most important stakeholders can be seen as those with most to lose from the organisation's actions, but this does not always reflect their relative power (Worthington, 2004). The Approved Standards on Auditing (AI), on auditors report on financial statements talks about how an auditor is supposed to express his opinion on financial statements. As per AI 700, the basic reports can be of two types, a qualified or an unqualified report. An unqualified report is given when an auditor is satisfied that the financial statements are drawn up without any material misstatements and that they adhere to the respective accounting and auditing standards. This is when the auditors states that the financial statements give a true and fair view of its income and statement of affairs. True and Fair view is in existence since a very long time as compared to various other terms that were used prior to True and Fair view. However researchers, lawmakers and the stakeholders have found it difficult to construe the real meaning of the term and what it intends to communicate to the stakeholders. This paper is thus an endeavor to determine if true and fair view requires an overhaul. The study uses past literatures to deliberate the idea. 1.1 Research Problem Researchers have explored and tried to identify the function of true and fair view in auditing. While it is known from various legal regulations and accounting standards, that true and fair view is a concept used

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to give an opinion on the financial statements, many still find it a very confusing and a vague term (Cowan, 1965; Walton 1993). Some believe that it is a legal term (Elliot and Elliot, 1997; Hulle, 1993), while some believe that the interpretation of true and fair could differ with differing interests of the stakeholders in the company (Gill, 1983). It is clear that the law has not provided clear guidance on interpretation of true and fair view which has led to lack of clarity for the auditors themselves who solely use the terms (Higson, 1991; Porter 1992; Rutherford, 1985) and at the same time it gives a wrong interpretation by different stakeholders as to the role of auditors and directors (Parker and Nobes, 1991). True and fair is used in number of countries where the language of communication is not English and it was observed that these countries are fraught with difficulty while trying to literally translate the words true and fair into their local language. The authors thus claim that true and fair view cannot be used in a meaningful manner and can only be viewed as adjectives (Burlaud, 1993; Nobes, 1993; Walton, 1993; Hulle, 1993 Ordelheide, 1993; Stacy 1997; Haider, 2001). This research is, thus, an attempt to address the concerns which stakeholders could face when auditors provide true and fair financial statements knowing that financial statements are bundled with major drawbacks. 1.2 Objectives of the research 1. To identify whether the Company Law and the Codes of Ethics have an influence on true and fair view opinion given by the auditors. 2. To identify whether stakeholders are able to interpret the concept of true and fair view. 3. To identify whether stakeholders are satisfied with the concept of true and fair view communication by the auditors. 4. To conclude if true and fair view can be retained in its original form as countries embrace International Financial Reporting Standards as a common platform for reporting. 1.3 Scope of the study The practice of certifying the financial statements as true and fair by auditors of public listed companies and other large organizations was common and rampant. However, after the financial scandals where large multi-national organizations were exposed globally, several steps were taken to address the issues involved with the concepts of true and fair as well as its impact on th e expectations of the parties involved with the organizations. This study focuses on the issues with the current practice of certification that was developed through legislation and guidelines. The study also extends to the issues faced in the current financial world as a whole, to the accountants in particular, due to poor accounting and reporting practices. The choices that are open to an auditor, in the current environment is the main focus of this study. To be able reconsider the true and fair reporting by auditors could be one such alternative. 1.4 Significance of the study True and fair view today has become a term of art (Edey, 1971), in the sense that it seems to be dominant in terms of reporting by auditors on company financial statements (Walton, 1993). A layman interprets the concept of true and fair as accurate financial reporting, while financial reporting should never be taken as completely accurate due to the number of assumptions that has to be made during compilation of financial statements (Higson and Blake, 1993). Legal standards also allow departures from particular standards, if such departure means to give a true and fair view. However, the extent of such departures should be disclosed along with the reason for the departure. Where the companies feel that compliance with certain standards could give misleading information and at the same time departures are forbidden, maximum efforts should be taken to reduce the extent of perceived misleading aspects. This can be achieved by adequate disclosure in the financial statements. It has to be clearly understood that, while auditors verify the financial statements, they do not intend to guarantee on the accuracy of the said financial statement. They only intend to give an opinion on the financial statements prepared by the client. The auditors specifically state in their audit certificate that an audit includes examining on test check basis, evidence supporting the amounts and disclosures in the financial statements (2003 Annual report and financial statements of the Malaysian Institute of Accountants). While this might be the correct approach as far as the auditor is concerned, it has, in fact, given rise to an expectation gap. The expectation gap has been growing over a period of time d ue to the ambiguity in the phrase true and fair view. It could be perceived that when financial reporting framework develops, the significance of true and fair might change. Other issues pertaining to the lack of auditor independence, lack of regulator y

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guidance and call for the regulators to act on the current explosion of the public on loss of funds, are some of the incentives to further the scope of study in this area. 2 Literature review The growing democracy of most countries, globalisation, freedom of practice for the professionals, lack of control by owners of their own money and the amount of hot money floating in the economy are some of the reasons which had probably prompted the issuance of audit certificates as a convincing tool to third parties on the performance of companies. However, issuance of such certificates did not deter companies or their top management from committing fraud or deceit. Suseela Devi et. al. (2004) argued that the Royal Mail case, in 1931, was the first to have illustrated how it was possible to produce audited accounts, which met legal requirements and yet omitted mentioning sufficient data so as to completely mislead investors and shareholders. True and fair view was not the first legal standard (Rutherford 1985). In the eighteenth century in United Kingdom, there existed an Act for the relief of the creditors and proprietors which required the senior officers to make a true state or representation of the affairs and condition of the company and to state, make up and balance the accounts of the company. In case of default, they had to give up their right to transfer shares or receive profits with respect to their interests. This was done in order to ensure that the creditors and proprietors had a full sat isfaction of the state and condition, debts and effects of the company (Chambers and Wolnizer, 1991). Similar to this Act, they had various other acts drawn up which required similar disclosures to be made all of which included the words, true, exact, distinct, just, correct, properly drawn up, full and fair, full and true, and true and correct to represent their conduct (Rutherford, 1985). The change of true and fair from true and correct was advocated by the United Kingdoms largest professional accountancy body, the Institute of Chartered Accountants of England and Wales (Amat, Blake and Oliveras, 1996). They also stated that the word correct had always been too strong because it implied that there was one view which was correct as against all others which were incorrect. Between the years 1790 to 1842, various private Acts establishing canal, railway and gas companies were introduced. Some of these Acts stressed on the quality of accounts that needed to be maintained (Chambers and Wolnizer, 1991). It was here that the concepts of true and exact and full and true were introduced. Prior to the adoption of the phrases true and fair, various other phrases were used in the British legislation. Full and fair view was used unti l 1844 (Chambers and Wolnizer, 1991; David Flint, 1982). True and correct view was used from 1900 (Rutherford, 1985). Thus, until about the 1920s, the auditors were primarily concerned with detecting fraud and error, and ensuring that the solvency position of the companies (or other reporting entities) was properly portrayed in the balance sheet. In accordance with this, auditors carefully checked the detailed entries in, and arithmetical accuracy of, the companys books and made sure that the amounts shown in the balance sheet corresponded to the account balances in the ledger. This was possible as the transactions were straight-forward on the back of a simple business environment. However, as the businesses and its complexities grew, it became imperative to maintain more records than was considered necessary in the past. Subsequently, this led to the reality that it was not practically possible for the auditor to verify every transaction and check for the correctness, truth or the accuracy. The phrase true and fair was thus recommended to the Cohen Committee by Companies Act in England and Wales (Rutherford, 1985), in the year 1944. It was finally adopted in the United Kingdom in the year 1947 (Brenda Porter 1992; Gill 1983) and subsequently many companies, including those in Malaysia, followed suit. Today true and fair view is the fundamental principle for financial reporting not only in the United Kingdom but also in Europe and in most Asian countries. For the last sixty years the published financial statements of companies incorporated in United Kingdom have been required by law to show a true and fair view of the state of affairs of the company and its results. The true and fair view doctrine thus provides the ultimate foundation for financial reporting and has probably become the single most important criterion in reporting performance of companies (Flint, 1982; Leach, 1981; Gill, 1983; Cowan, 1965). With the introduction of the Fourth Council Directive of the European Economic Community, true and fair view was introduced as an accounting concept within the whole European Union (Ekholm and Troberg, 1998). Further developments took place when the override principle of true and fair view was introduced by the European Economic Community as a means of accounting harmonisation. The European Community started off with initially six countries - France, Germany, Italy, Belgium, Netherlands and

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Luxembourg, as their members (Christopher Nobes, 1993). It was established in 1965 and first headed by Dr. Elmendroff. The Elmendroff Committee submitted their first draft to the European Economic commission in 1968, which was subsequently published in 1971. At this stage the accounts were required to have clarity and were supposed to be not misleading. When United Kingdom, Ireland and Denmark joined the Community in 1973, negotiations between the countries led them to submit a second draft in 1974 with the requirement of true and fair incorporated within (Alexander, 1993;, Amat, Blake and Oliveras, 1996). Subsequently there was a third draft submitted in 1978, which gave true and fair view an overriding importance. Article 2 of EEC states that where a particular provision is incompatible with true and fair view, that provision must be departed from in order to give a true and fair view within the meaning of paragraph 3. Any such departures must be disclosed in the notes. The major drawback identified was that the extent of maximum departure had not been stated in the Act. Apart from this it was found difficult to adapt true and fair view due to language barriers. Translating true and fair view overriding principles to different languages and yet maintaining its legal validity was one of the other criticisms that cropped up in accounting harmonization. Since its (true and fair view) acceptance by the other Member States and its inclusion in a Community legal instrument, the interpretation of this principle could no longer come exclusively from United Kingdom law and principles (Hulle, 1993). Ordelheide (1993) concurs with this contention and further states that though true and fair view is what the British accountants declare it to be, in case of European conflict, it is the European true and fair that will take effect for legal decisions. However it was argued by Alexander (1993) that it was not possible to have a European true and fair view that was different form the British true and fair. Another argument given by Burlaud (1993) stated that the versions of true and fair could keep changing depending upon the language one wishes to choose. Varied interpretations of the concept of true and fair view, when translated into different languages, were seen. It was interpreted as real in Greece, Faithful in France, Netherlan d and Belgium, true and correct in Italy, true and appropriate in Portugal and true and fair in United Kingdom (Nobes, 1993). When translated into the Czech accounting system, it actually meant that the financial statements would provide a true and dependable picture of the matters (Sucher et. al., 1996). This indicates that the concept of true and fair view is now deviating from its original values. The argument still remains as to whether true and fair view is a professional concept or a legal c oncept. By and large it was also seen that people equate true and fair view to the United States term present fairly in conformity with generally accepted accounting principles. In the United States the governing criterion is conformity with Generally Accepted Accounting Principles (GAAP). Present fairly is defined by reference to conformity with GAAP, and there is no authoritative literature in the United States in which present fairly is explained or defined (Zeff, 1993). Conformity with GAAP thu s implies fair presentation, claims the author. Present fairly in accordance with GAAP, became a part of the standard United States audit report since 1939, (McEnroe and Martens, 1998). The meaning of Present Fairly In Conformity with Generally Accepted Accounting Principles, addresses the use of GAAP and fair presentation. It states that an auditor should not express an unqualified audit opinion if the financial statements contain a material departure from GAAP unless, due to unusual circumstances, adherence to GAAP would make them misleading (McEnroe, 2005). Now, with the introduction of the Sarbanes-Oxley Act of 2002, fair presentation meant that the financial statements complied with the regulations provided by that Act as well (Cunningham, 2003). The United States accounting and United Kingdom accounting methodologies adopted similar versions of the ultimate goal of financial reporting (Cunningham, 2003). While in United States financial reports need to show a fair presentation in accordance with GAAP, in United Kingdom the financial statements need to present a true and fair view of the business conditions and the results, claims the author. Ironically, in both these cases the law has not defined the term. Thus the achievement of fairness or t rue and fair view still depends upon professional judgment and application of general rules in specific situations. Though many have understood the two concepts to be the same, there has been a significant amount of discussion over usage of present fairly as compared to true and fair view. At the first glance the two notions might look similar, but conceptually, true and fair view goes beyond conformity with GAAP, since it provides the reporting entity an option to depart from the promulgated accounting standards in special circumstances (Livne, 2004). The Financial Reporting Council (FRC) of United Kingdom in its paper published in August 2005 made it clear that the concept of true and fair shall

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remain a cornerstone of financial reporting and auditing in United Kingdom despite the adoption of international financial reporting standards. The Association of British Insurers (ABI) response to FRC published in November 2005 stated that while FRC considered present fairly and true and fair to be similar, the consideration of similarity was not sufficient. The major concern was that the two phrases were not identical. The reason given by FRC for not changing the concept to fairly present was that, the change could bring about changes in the format and content of the company accounts as well as audit report. The major criticism faced by true and fair as against present fairly was that with respect to present fairly there was one authoritative document, namely Statement of Auditing Standards (SAS) 69 to use in constructing a rough definition of present fairly in accordance with GAAP while with respect to true and fair view no such documents existed and there was no common definition as to what true and fair view meant (McEnroe and Martens, 19 98). A great deal was written about the meaning of true and fair, much of which was intellectually stimulating for those wishing to research the topic, but few practicing auditors studied this material in any depth, if at all (Stacy, 1997). In English the true and fair view of the.... assets, liabilities, financial position and profit or loss could be interpreted literally as an exact and trustworthy picture of the assets, liabilities, financial situation and profit or loss (Burlaud, 1993). The word, true could mean authentic, actual, genuine, real and undistorted. All of these could be understood in the manner in which it was quoted, without ambiguity. This view was also supported by Cowan (1965). He further claimed that truth which does not come within the category of fundamental or scientific truth can be judged only in the light of some clearly defined purpose. However, when we look at the word fair, it could mean impartial, average and promising. The Chambers English dictionary has given the meaning of true to be faithful, constant, trusty and genuine. The word fair has variety of meaning (Cowan, 1965), the relevant one includes clear, clean, pure, reasonable and favorable. All these are very subjective and there is no conclusive meaning. The word fair could have different meanings to different individuals even within the same context. It all depended upon the expectation of the end users, i.e. who expects and what they expect. The form of wording true and fair has led to separate discussions as to what is meant by truth and fairness, which could have been avoided if true and fair had been treated as hendiadys i.e. an expression of a complex idea by two words coupled with and (Amat, Blake and Oliveras, 1996). In case of companies, the end users are the investors and their expectation is always to have a guarantee on the financial statements. Thus the inclusion of the word fair in the phrase true and fair makes the audit certificate a subjective opinion, not conveying what it needs to truly convey. It is well understood by the professional group, that this phrase does not have a clear definition in any statute and hence is subject to various interpretations. So what constitutes a true and fair view mainly depend s upon whether the financial statements are drawn in accordance with the Standard Accounting Practices (SAP) of United Kingdom. The auditors report should clearly set forth the auditors opinion as to whether or not they give a true and fair view. Financial Statements that were certified true and fair indicated that the performance and changes in the financial position of an enterprise, on which the users of financial statements rely, were projected without distortion or exaggeration. Thus the true and fair figure should possess the characteristics of reliability, relevance, understandability and comparability (Lembre et al. 1998). The general standard of performance required of auditors in the United Kingdom was laid down by Lord Justice in the case of In re Kingston Cotton Mill Co. (No. 2) (1896) when he said: It is the duty of the auditors to bring to bear on the work he has to perform that skill, care and caution which a reasonably competent, careful and cautious auditor would use. What is reasonable skill, care and caution must depend on the particular circumstance of each case The phrase true and fair therefore does not commit anything about the financial position of the company. It would just mean that there had been no irregularities or material misstatements in the financial statements. The true and fair attestation is generally understood to require compliance with applicable accounting standards (Kershaw, 2006). Over the years, various parties who have suffered loss after relying on audited financial statements have taken auditors to court on claims of negligence, that is, on grounds that the auditors did not perform their duties properly and, as a result, failed to detect errors in the financial statements. The collapse of Enron in 2001 and the subsequent discovery that its auditor, Arthur Andersen, had shredded audit documents after notification of a Securities and Exchange Commission (SEC) investigation of Enron sent shock waves through the financial markets (Tackett et al. 2004).

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3 Discussion 3.1 Meaning and interpretation for the concept of true and fair view The phrase true and fair originated in United Kingdom and has been in the Companies Law since 1947. However, the UK companies Act has not provided a proper definition to the phrase true and fair. It is understood that the phrase true and fair lacks a proper definition and the interpretation that is drawn from the phrase is enormous and at times ambiguous. A definition to true and fair view was offered by Lee (1981), who quoted: Today, true and fair view has become a term of art. It is generally understood to mean a presentation of accounts, drawn up according to accepted accounting principles, using accurate figures as far as possible, and reasonable estimates otherwise; and arranging them so as to show, within the limits of current accounting practice, as objective a picture as possible, free from willful bias, distortion, manipulation, or concealment of material facts. In other words the spirit as well as the letter of the law must be observed. Higson and Blake, (1993) examined the Oxford dictionary to identify various meanings to the words true as well as fair and concluded that three distinct meanings appear, each of which may put a different emphasis on the 'true and fair concept: 1. clear, distinct, plainly to be seen; 2. free from bias, fraud or injustice; and 3. tolerable; passable; average. Lee, (1982) offered the meaning for true and fair view by stating that: True means that the accounting information contained in the financial statements has been quantified and communicated in such a way as to correspond to the economic events, activities and transactions it is intended to describe, while Fair means that the accounting information has been measured and disclosed in a manner which is objective and without prejudice to any particular sectional interests in the company. Edey (1971) explained that true and fair view had a technical concept and said that it was a term of art. He wrote: To the man in the street.the words true and fair are likely to signify that the accountants give a true statement of facts. He will be likely to associate facts with actual profit and actual values. He does not realise that profit and value are abstractions. Before they can be conceived at all in any precise way they must be defined in such a manner that the definition contains in itself, or implies clearly, a method of calculation that could be followed in practice. Prescod, (1996) identified four separate, distinct and not totally complementary meanings for the phrase a true and fair view that could be rendered. True and fair can be considered 1. as a relaxation of previous accounting rules, acknowledging that various areas of judgement and estimation arise in the preparation of financial statements, 2. as a strengthening of previous accounting rules, effectively moving towards a substance over form approach, 3. as an assertion that the financial statements should be free from bias, and 4. as a basis for the assertion of the authority of the technical pronouncements emerging from the accounting profession. McEnroe and Martens (1998) have identified that the phrase true and fair means lack of bias in the financial statements. This view is also supported by several other authors who pointed out that true and fair view means making an effort to provide unbiased information of various components affecting a companys intrinsic value (Ekholm & Troberg, 1998). Kirk, (2001) was of the opinion that since true and fair is not defined by law, it allows professional judgement and establishment of meaning through usage. A study conducted by Laswad (1998), on the perceptions of true and fair view concluded that it is only

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possible to interpret the phrase rather than define it. The study identified that the phrase has more of a technical meaning rather than a qualitative meaning. Thus, the interpretation for this phrase would depend upon the user group. Dunn and Stewart, (2001) explained that since the phrase true and fair lacks proper definition, it should be understood in terms of its normal everyday usage according to the English language. The conclusion made by the authors suggested that the phrase could be perceived differently by different individuals and can be fully understood only by those who have invested the necessary time to become immersed in the process of financial reporting. Thus it can be seen that the concept of true and fair view lacks an authoritative meaning. Yet, true and fair view has a special meaning that could extend to both qualitative description and a definition of content, claimed Stacy (1997). Parker and Nobes, (1993) noted that the word fair was more important than true. While truth could be construed as factual, fair could mean not misleading. A number of authors have researched this aspect and have only managed to conclude that the concept of true and fair mean different things in different countries (Aisbitt & Nobes, 1998; Higson & Blake 1997; Nobes 1993; Prescod, 1996). Its existence for a very long time in the legal system of most countries, demands that a definition for this concept should have emerged by now, yet it can be seen that an acceptable definition has not been developed by the law till date. 3.2 An Accountants version of true and fair view Porter (1992), was of the opinion that the phrase true and fair could mean different things to different individuals, like for a lawyer it could mean unambiguous and bias free, while for an accountant it could have a technical meaning. Thus, to an accountant, if the financial statement has to present a true and fair view, the financial statements must be presented in such a way so as to create the correct impression of the reporting entitys financial affairs. For this to be achieved the rules should be strictly adhered to. Dunn and Stewart, (2001) were of the opinion that since accountants have different cultural backgrounds, achieving truth and fairness in financial reporting is a process of communication and negotiation. They also stated that the meaning attached to truth and fairness is elusive and appears to be situated in the world in which accountants perceive, act and communicate. In Czech economy it is seen that the concept of true and fair is used by accountants to obtain specific advantage within the Czech economy and its advantage is restricted only to a particular group of accountants rather than the whole accountancy profession (Sucher et. al. 1996). In trying to derive a proper meaning of the concept, from an accountants point of view, the authors could identify that the accounts were supposed to be complete, in a manner verifiable and correct so that one can derive a fair view of the matters that are the objects of accounting. The resulting auditors report in the form of words and numbers characterized by clarity, logic and integrity, should convey a description of economic reality as closely as current communications, economics and accountancy allow (Briloff, 2002). By and large, from the accountants point of view the phrase true and fair means compliance with accepted accounting principles and absence of material errors (Rutherford, 1985; Cowan, 1965; Evans, 1990; Walton 1991; Higson, 1992; Parker & Nobes, 1993; Laswad, 1993; Haider, 2001; Karan, 2003). This view point is not totally shared by Low and Koh, (1993) and Karan, (2003) who were of the opinion that true and fair could mean absence of material errors or free from bias, but it need not necessarily guarantee compliance with Generally Accepted Accounting Principles(GAAP) or legal requirements. It was also seen that many auditors thought that an audit report was merely an indication that the auditors have undertaken their statutory duties (Higson, 1992). Yet, in general the author could identify major reservations among the auditors in using the phrase true and fair. In Poland it was seen that the auditors took a legalistic approach rather than a commercial approach to audit since the adoption of true and fair and the corresponding changes in law left the auditors a challenge of de jure adaptability (MacLullich, 2001). Thus it can be seen that some sort of a consensus within the profession or the auditors, with respect to true and fair, is not established to date. 3.3 Users understanding of true and fair view The fundamental principle of reporting in company accounts is that the primary responsibility rests on the directors to make a full disclosure to enable the company and the directors to be judged as to whether what they have done is acceptable to shareholders and other relevant stakeholders (Flint, 1982). It is often presumed by the users, including the sophisticated investors, that the financial statements have been determined by the certifying independent auditor, while in fact the statements are generally those of management and the auditors only opines if the financial statements are consistent with GAAP (Briloff,

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2002). It is always an unanswered question when one wants to know how the stakeholders perceive the concept of true and fair view. Differing interpretations among the stakeholders makes one feel that the concept of true and fair view is not communicating the actual information that the auditor is trying to send claimed Higson, 1992. Any concept that is used to report to the users should have two effects, one that the concept shall not aim to manipulate users towards a particular conclusion and second that all segments of the community should be equally well served (Cowan 1965; Higson and Blake, 1993). It has been argued that financial statements should be complete with respect to qualitative and quantitative information so that the financially sound shareholders could obtain a detailed understanding of the financial affairs of a business (Stacy, 1997). However, here again the author, in contrast to the opinion of Cowan (1965) or Higson and Blake, (1993) is not addressing the shareholders group at large. The focus has been restricted to only the financially sound shareholders. Interviews with the user group in the Czech economy revealed that true and fair view was not an abstract concept to meet higher objectives (Sucher et. al. 1996). It was used only to judge if the financial statements satisfied the requirements of the Generally Accepted Accounting Principles and at the same time for some preparers and users, the concept did not have any particular individual significance either, noted the authors. While it is felt that the concept of true and fair should satisfy the user n eeds, it is yet to be clarified as to whether the auditors report does so, due to the remoteness of user needs from the ordinary meanings of the words used (Rutherford, 1985). In any case by trying to cater to all the user groups, the objective of financial statements becomes unclear and confusing (Ryan, 1985). Thus, true and fair can be seen as most important to accountants as an ultimate target in accounts rather than to be used as an accounting principle (Burlaud, 1993; Soderblom, 2001). 3.4 Legal aspects of true and fair view Despite the passing of nearly sixty years since it reached the statute book, however, the term remains judicially undefined in practice. In Singapore the true and fair view requirement is a legal concept. However, no efforts are made by the legislators or the courts to define the phrase (Lee and Koh, 1997). Rutherford, 1983 believed that the phrase true and fair should have a more technical meaning than a legal interpretation since in case of any complications the law would get back to the accountants to understand whether true and fair was achieved. It is the duty of the auditors to ensure truth and fairness in financial statements, some authors felt that it would be beneficial if true and fair was enshrined in the law properly through clear definition (Kirk, 2001; Lee, 1994; Prescod 1996). It was researched and identified by Higson and Blake (1993) that true and fair view, was a slippery concept and was not capable of contemplating a prosecution, neither was any legal action based on the concept by any country. 3.5 True and Fair View Override It is understood that the true and fair view override was an origination in the Fourth Directive by the European Commission (EC) and meant to be followed by countries registered under EC. In accordance with Article 2(3) of the Fourth Directive the annual accounts shall give a true and fair view of the companys assets, liabilities, financial position and profit or loss . Where, application of a specific provision of the Directive would not be sufficient to give a true and fair view, additional information must be given (Article 2 (4)). Where, in exceptional cases, additional information would not be enough in order to give a true and fair view, the specific provision in the Directive must be departed from (Article 2(5)). Under such circumstances, the departure must be disclosed in the notes, together with an explanation of the reasons for it and an assessment of its effect on the companys assets, liabilities, financial position an d profit or loss. A similar provision is also given in the Seventh directive (Article 16 (3) for the consolidated accounts. However, under the Seventh Directive the true and fair requirement does not apply to the scope of the consolidation (Hulle, 1993). Thus the overall impression is that there was no strong objection to the inclusion of the true and fair view as such in the Fourth Directive since all the key institutional players formed their policies around the true and fair view principle (Walton, 1997). Interestingly, the arguments placed by Alan Cook (1997) extend this thought by stating that both true and fair as well as true and fair override must always be viewed together, as they compliment and reinforce each other.

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The major issues raised in application of true and fair view override principles is basically the translation of English language into various other languages like German and French, as these countries are a part of EC. It was pointed out by Burlaud, (1998) that in English the true and fair view of the ..assets, liabilities, financial position and profit or loss could be interpreted literally as an exact and trustworthy picture of the assets, liabilities, financial situation an profit or loss . As for the French version, that states that the accounts should give a faithful image of the owners capital, the financial situation and the results. He also pointed out that there is not a single official EC language, and in certain limited cases one could imagine that the expressions real situation, exact and trust worthy picture and faithful image are not equivalent to each other and that there are therefore several versions of the Fourth Directive. A notable finding by Livne and McNicholas (2003) stated that the reporting practices that result from one country are a consequence of their standards, legal environment and the manner in which standards are enforced. Given that UK is at the high end of the range of enforcement of accounting standards, override behavior in other countries might differ significantly from the behavior documented in the UK. This view is supported by Zeff (1993) who said that there had been cases in Dutch companies, who had close ties with the US capital market and have used present fairly in place of true and fair view. It was found in such cases that give a true and fair view as used in the legislation of EC countries is not the equivalent of present fairly as used in the United States. Various authors have different solutions to solve the problems arising from the interpretation of the phrase true and fair view and to narrow down the differences arising from the adoption of the override principles. But still the basic problem remains unsolved, which points at the phrase itself. This argument could be supported by the comment made by Burlaud (1993, 98) who said that very few companies would take the risk of departing from the accounting rules and justifying this by the extremely vague notion of the true and fair view . It was pointed out by Linve and McNicholas (2003) that Security Exchange Commission (SEC) had historically objected to the possibility of an override if international accounting standards were to be allowed for companies listed in the U.S. Amat, Blake and Oliveras (1996) support Burlauds view by stating that Germany does not require, or even permit departure from the detailed requirements of the law to give a true and fair view. Walton (1997) looked down upon the override by claiming that the UK accountants used this concept as a means of escaping from the austere rules of the Fourth Directive. 3.6 True and fair view as compared to Present fairly Familiar terminology such as a true and fair view in the UK, and present fairly in the USA, constitute the means by which users are informed by the auditor about integrity of the management. In both these cases it can be observed that the concept lacks a proper or acceptable definition (Lee 1994). Neither true and fair view nor present fairly helps to reach the objective of financial statements, that is to give unbiased information about the financial performance of companies (Cowan, 1965). McEnroe and Martens, (1998) identified that many users considered true and fair to be superior to present fairly in accordance with Generally Accepted Accounting Principles (GAAP). These results were consistent with that of Kirk, (2001) who identified that in New Zealand users preferred to use true and fair concept. Some felt that the two concepts could not be interchanged and they had to be retained as the essential parts of the UK audit report and US audit report respectively (Kirk, 2001; McEnroe & Marttens, 1998;). However in order to make financial reporting easier, it is better to come up with one internationally accepted accounting standard, particularly with the onset of International Financial Reporting standards with about 110 countries embracing the same. 3.7 Criticisms of true and fair The major limitation identified by most authors is that true and fair lacks a prope r definition and the interpretation depends upon the people for whom the financial statements are intended to be. This means that different people could interpret true and fair differently. The multiplicity of commonly used Polish translations and grammatical constructions for true and fair view as well as a lack of consensus as to its classification imply the lack of substantial rationalization in understanding the true and fair concept in Poland (MacLullich, 2001). The research by Higson (1993) affirmed that, in the United Kingdom, the phrase true and fair aroused little enthusiasm amongst those who are concerned with the application of this phrase.

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Karan, (2003) opined that true and fair view has led to discordant interpretations. Dunn and Stewart, (2001) said that the requirement that financial statements should give a true and fair view creates a great deal of difficulty for preparers, auditors and users of financial statements. Cultural differences of each country could influence the practice and application of true and fair view. Rather than being over economical with truth, it should be unambiguously clarified that both true and fair adjectives have been used not in the generally understood sense but in a narrow or restricted or limited sense. Cowan, (1965) pointed out that insufficient thought has been given to the concept of true and fair view while Ekholm and Troberg, 1998 were of the opinion that true and fair view reporting may many times lead to a dramatic decline in the market value of an enterprise and consequently, such information may be regarded as causing significant harm. 3.8 Current significance of true and fair view and the override principles Karan (2003) suggested that one could use not misleading in the place of true and fair for the reason that, unlike cultural connotations of the true and fair view that have lead to discordant interpretations. In the authors words the concept of not misleading has the potential to transcend national idiosyncrasies and assist in the development of consistent accounting standards in both national and international application. The Czech legislation chose to avoid the use of the word true, which was perceived to have been misused in the Central Europe over the last sixty years (Sucher et. al., 1996). It was correctly pointed out by Clarke, (2006) that if a judge were to expect that true and fair, being ordinary words, be given ordinary meaning, one will not be able to defend any other usage. It is expected and observed that all the other professions, which entails greater complexities than financial affairs, have regular, common, profession wide, tried and proven methods of reporting (Dean and Clarke, 2004). However this acumen is lacking in accounting, thereby leading to lack of professional expertise. 3.9 Case Study and judgements given on Auditors liabilities due to False Certification History has seen a number of cases where the auditors were charged in the courts for not disseminating the correct information to the stakeholders. The auditors have taken shield under concept of true and fair view which does not communicate what is meant to be communicated to the stakeholders (Higson and Blake, 1993). The Royal Mail Case in 1931 was the first to have illustrated how it was possible to produce audited accounts, which met the legal requirements and yet omitted sufficient data so as to completely mislead the investors and the shareholders. The trend is still continuing, which could be seen in Parmalat, the largest Italian food company, which eventually collapsed in 2003 with 14 billion euro hole in its accounts. Melis (2007), analyzed that in spite of following all the legal requirements including rotation of auditors, the company was the biggest European bankruptcy case. As against the earlier corporate collapses like that of Enron and WorldCom, where, Arthur Andersen, the auditors of these companies were implicated with giving wrong information to the stakeholders, the latest in the series of financial mismanagement is Satyam computer services, which was incorporated in 1987. This companys chairman openly declared having indulged in financial statement fraud and had managed to escalate the figures beyond recognition. While the name Satyam meant truth, no truth abo ut the company was observed. The company claimed to have employed 53,000 employees and later it was discovered that the company had in fact employed only 40,000 employees, there by creating 13,000 dummy employees, the salary of who were pocketed by the chairman. PricewaterhouseCoopers, the auditors of the said company, had failed to discover this fact and had been issuing unqualified reports. When queried, they claimed that the information provided and verified, had justified an unqualified report. Numerous other leading cases are analyzed in this research in establishing the principles of law relating to breach of trust like: The London and General Bank Ltd. The main emphasis in the judgement given by the judge says: His (Auditors) first duty is to examine the books not merely for the purpose of ascertaining what they do show but also for the purpose of satisfying himself that they show the true financial position of company. The judge, in his judgement, also stressed that the auditor must be honest that is he must not certify what he does not believe to be true and he must take reasonable care and skill before he believes that what he certifies as true. This was a very good case in projecting the duty of the auditors and their responsibilities. Republic of Bolivia Exploration Syndicate Ltd. The judge held that auditors of a limited company are bound to know or make themselves acquainted with their duties under articles of the company whose

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accounts they are appointed to audit and the Companies Act for the time being in force. When it is shown that the audited balance sheet did not project the true condition of the company and that damage had resulted, the onus would be on the auditors to show that it was not the result of any breach of duty on their part. Rex corporation The auditor and the chairman of the company were criminally prosecuted for publishing annual reports knowing them to be false in a material particular intent to deceive the shareholders. While the company was making a trading loss, deliberate false representation was made to the shareholders that the company was making a trading profit. Scott group : It was held that the auditors were liable since the auditors should have foreseen that the companys low profits and rich assets would make the company a good target for takeover. The auditors report would thus be relied for any such takeover bid. Jeb Fasteners Limited. It was held that the auditors should have foreseen at the time of audit that some person might rely on those accounts for the purpose of deciding whether or not to take over the company and therefore could suffer loss if the accounts were inaccurate. The case of Scott group was upheld. Twomax Ltd & Goode The financial statements were negligently audited and the auditors reports were relied on for a takeover bid. The auditors were awarded damages of 65,000 plus costs. United States v. Andersen: The auditors were charged with actively involving themselves in all the misdeeds of Enron and finally also with the charge of s hredding documents related to the firms audit of Enron. This resulted in the companys restatement of income showing finally a loss of $618 million for the first quarter of 2001. The auditors were held grossly negligent thereby leading the firm to be barred from auditing publicly traded US companies. This case is attributed to lack of independence of the auditors, since they were bribed heavy amounts for consultation services than for statutory audit. 3.10 Factors influencing the acceptance of the concept of true and fair view Various factors can be seen influencing the acceptability or the understanding of true and fair view. These have been identified from the literatures reviewed. The first and foremost being the restrictions set by the professional codes of ethics and the legal requirements. Ethical codes help in defining appropriate behavior for an individual practitioner and also in sending out a message to the wider community about the type of behavior that can be expected by a member of the professional body concerned (Page & Spira, 2005). In the absence of any guidance, people look to the professional codes of conduct and the legal rulings to decide on the right or the wrong. Secondly it is acknowledged that auditors report is the only means of communication between the auditors and the shareholders thereby expecting the auditors to communicate in a clear and unambiguous manner. In order to be able to achieve clear and unambiguous communication the auditors must ensure that the stakeholders are able interpret the report and reap the benefit of their reports. The well-being of the society and the economy is dependent on the extant law as well as its ability to enforce the same. In this research the authors aim to ascertain if the existing law is sufficient to enforce integrity in the auditors while stating true and fair. 3.11 Restrictions set by law and ethical conduct Ethics refer to a system or code of conduct based on moral duties and obligations that indicates how one should behave (Messier & Boh, 2004) Ethical interrogations will rise every time the decision maker exercises the freedom of choice given a range of possibilities and those conclusions will have significances for the wellbeing of the society (Marshall, Smith and Armstrong, 2006). When contemplating the design and implementation of an ethics program, it is appropriate to first examine the preconditions that may be necessary in order for the individuals to behave in a morally responsible manner, insist McDonald and Nijhof, 1999. However, it can be seen that the profession of accounting and auditing are trying dreadfully to prove to the world their ethical stance (Vinten 2007). Like any other professions, ethical codes of conduct are not the latest introduction to the accounting profession. They have been upon since the inception of numbers and accounts. Sihag and Balbir (2004) noted that during the ancient accounting period, legal rules had to be written with clarity and completeness, in order to ensure effective enforcement of rules and regulations and allocation of duties to

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various office bearers. While there is, still, misperception on what constitute proper codes of ethics, it is suggested that the legal system must have precise guidelines, proper documentation and appropriate disciplinary action that can be instituted against breach of law, enshrined in it (Farrell et. al. 2001). Professionalism on the other hand, means that the individual possesses certain characteristics, attitude and aptitude that mark a profession or a professional person (Messier, Jr & Boh, Auditing and Assurance services in Malaysia, second edition). Professions establish such codes to demonstrate to the users, the standards of behavior they intend to follow while providing services to their client. Thus in order to protect the privileges and the coffers of the stakeholders apart from legitimacy, morality of transactions are indispensable, which means that the auditors have a moral duty not only to check the transaction but also ensure that the amounts spent are within the regulatory framework (Percy, 2000, Amat et.al.). This explains the need to have truth in the reporting element which must be unbiased, consistent with rules and neutral to adopt. The codes of ethics set by the profession consistent with that of the law remain the guiding forces for the auditors to act ethically, bearing in mind the high level of social obligation they carry. Ordelheide (1996) believed that legal norms are formulated in abstract terms and in practice every particular accounting case can be solved with reference to legal norms only. It is therefore, necessary to define legal norms, which could bring consistency in interpretations. Consequently, if we could define the professional codes of conduct in a legal context, it could probably help to bring about reliance or achievement of the true and fair certification. The recent high profile collapses and also the downfall of Andersen has raised a question as to the adequacy of the rules for the auditors to act ethically (Flugrath et. al. 2007). This became more questionable when more firms (KPMG and Ernst & Young) were instilled with civil fraud charges, specially because these firms gave an unqualified audit opinion to nearly half of the 228 public listed companies that later filed for bankruptcy within the year (Brown, 2005). The question of ethics cannot be addressed in a vacuum if one has lost his humanity claimed Doost, 2004. Arthur Andersen with their impeccable reputation for quality audits aggressively pursued the schemes of wealth generation and accumulation through any means (Toffler & Reingold, 2003). The existing retro can be seen as a very ambiguous period in human history with lots of openings and opportunities for a better future, which cannot be achieved by mere revision of accounting and auditing rules of conduct (Doost, 2004). However it can be seen that number of firmer protocols are being incorporated to monitor the work performed by auditors, the audit committees and the directors of organization with the introduction of the Sarbanes-Oxley act (Razaee et. al. 2003). In spite of all these efforts taken by the regulatory authorities, one could witness the commission of financial statement fraud, for companies such as WorldCom, Parmalat and Satyam Computers, which acknowledge good corporate governance as prevailing framework but had failed to implement it, resulting in loss of wealth by the stakeholders (Mardjono, 2005). This shows that merely having good ethics, rules and principles, by itself is not sufficient; in fact more focus has to be put on the way in which it is implemented. UK has taken steps to ensure that the auditor independence is implemented following the collapse of Enron, noted Fearnley and Beattie (2004). Among the various steps implemented were, increased transparency and disclosures by audit firms apart from calling for voluntary disclosures wherever possible in preference to costly and interventionist strategies, claimed the authors. The authors also posit that further changes to the rules were possible if the existing rules and mechanisms proved unsatisfactory. One can assume that as long as the auditors are able to abide by the regulations set by the Law and as long as the auditors code of conduct is within the restrictions set by the standard setters, true and fair view of financial statement could have been achieved. It is difficult to imagine true and fair view results that are not obtained and communicated by adherence to a set of rules claimed Low and Koh, 1993. Higson and Blake (1993) quoted the view of Institute of Chartered Accountants of England and Wales (ICAEW), on the true and fair view, which suggested that the auditor must be, satisfied that a. All relevant Statements of Standard Accounting Practices have been complied with, except in situations in which for justifiable reasons they are not strictly applicable because they are impractical or, exceptionally, having regard to the circumstances, would be inappropriate or give a misleading picture. b. any significant accounting policies which are not the subject of Statement of Standard Accounting Practice are appropriate to the circumstances of the business.

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In this regard, a question posed by Porter (1992) is considered very relevant. To what extent must financial statements comply with the Accounting Practices before they could give a true and fair view? Is full compliance with all Accounting Practices necessary, as accountants have traditionally maintained? Or is there a core of Accounting Practices, which if adhered to, would ensure that the financial statements portray the correct impression of the reporting entitys financial affairs? Although one would not expect ethical considerations to be applied across every waking moment of an organization, the only really guaranteed way to ensure this is by adoption of total quality procedures suggested Vinten 2007. A higher audit quality increases the chances of informative audit evidence and helps the auditor make more informed attestations, even though a higher audit quality comes with higher audit cost (Lu, 2005). The revised statement of auditing standards (SAS 240) issued by the Auditing Practices Board (UK) on Quality Control for Audit Work, includes a strong emphasis on independence of auditors and objectivity as crucial factors in audit quality (Stevenson, 2002). The financial scandal of the 1980s focused attention on apparent weaknesses within the financial reporting system, which failed to protect investors and other stakeholders from significant losses (Spira, 2001). These weaknesses continue to lead to major financial scandals in the 21 st century (Brown 2005), which in turn has led to current confidence crisis of investors over the credibility of financial reporting (Makkawi & Schick, 2003; Sridharan et. al. 2002). Furthermore, the rules of ethics are not considered to provide sufficient guidelines to practitioners in specific situations, especially when it comes to independence of auditors (Gorman and Ansong, 1998). A collaborative venture between the American Institute of Certified Public Accountants, the American Accounting Association, the Financial Executives Institute, the Institute of Internal Auditors, and the National Association of Accountants recommended that public listed companies should develop and enforce written costs of corporate conduct, which in turn can foster a strong ethical climate as well as open channels of communication to help protect against fraudulent financial reporting (Vinten 1998). The above arguments speak volumes about how ethical codes do not add value to the current reporting practices by the company, accountants and the auditors. 3.12 Interpretation of the concept true and fair view Current audit practices may lay stress on the audit opinion paragraph, but it is not clear whether the users of the financial statements have sufficient understanding about different forms of opinion expressed by the auditor and the information content of the audit paragraphs (Soltani, 2000). It is thus a fact that true and fair view lacks a proper and an acceptable definition. This has subjected the concept of true and fair view to various interpretations depending upon the purpose of the audit, the type of audit report and the users for whom the audit report is being prepared. True and fair could be used to describe non financial information if the requirement to meet reasonable expectations could be satisfied (Stacy, 1997). This has created a great deal of ambiguity among the user group and has also brought about an expectation gap between the user groups and the auditors (Porter, 1993). The user group is by and large, of the opinion that an audit report which states that the financial statements show a true and fair view, is in fact promising the accuracy of financial statements as well as integrity of the managers of funds. The users assume that the auditors will undertake responsibilities with respect to detection of fraud, improving audit effectiveness, communicate useful information in a better and effective manner including early warnings about possible business failure (Guy and Sullivan, 1988). However, in fact, there is a great deal of difference between what the public and financial statement users believe accountants and auditors are responsible for and what the accountants and auditors themselves believe theyre responsible for, which commonly is called as the expectation gap (Guy & Sullivan, 1988; Lee, 1994 ). It implies that the auditors are not required to look specifically at the accuracy. They are only required to ensure that the financial statements do not contain any material errors, which could change the perception of the users. The users are ignorant of the fact that the word material itself is subjective. With so many vagueness in reporting and communication the concept o f true and fair view causes the users to be confused on what the auditor is trying articulate through the audit certificate. Higson, (1991), in his research deliberated that the phrase a true and fair view is not communicating the message that the auditor wants to send. Thus an alteration to the audit report may reduce the audit expectation gap. The case of Parmalat was used by Andrea Melis, (2005) in order to understand how the relationship between the corporate financial reporting and corporate governance influenced, negatively, the enforcement of the true and fair view accounting principle. It was observed that true and fair view reporting became just a chance for the auditors gateway.

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Nobody is sure of what true and fair stands for and how i t can be applied without losing its originality. Ambiguity is said to exist where a message is capable of multiple interpretations, where a single form of words encompasses multiple substances of meaning (Page & Spira, 2005). When using true and fair as a single construct, the importance of truth in relation to either universal truth or to reliability of information prevails (MacLullich, 2001). The more ambiguous adjective fair is equated with correct, true, clear, or even faithful claims the a uthor. This sort of confusion basically exists due to the failure of the law to define and showcase the correct usage. It was opined by Walton (1993), with respect to the meaning of the phrase true and fair, that it is a legal term in origin and yet the Companies Act have never defined it (nor has the Fourth Directive) and there is very little jurisprudence which bears upon it. Parker and Nobes, (1991) argued that from the UK point of view it was accepted that true and fair view requirement existed mainly for the benefit of the auditors. Whether or not the directors found the use of true and fair by auditors in their interest depended upon the circumstances. Thus they concluded that it was the auditors who used and supported true and fair requirement . Gill, (1983) was of the opinion that the true and fair view statement by the auditors depended on who they directed the report to. In most cases, since the shareholders are known to have appointed the auditors, the true and fair view would mean that it was directed to the shareholders. Diverse interests within a company make the phrase complicated with different interpretations drawn by different individuals. This view is also supported by Samuelsson et. al., (2003) who stated that the meaning of t rue and fair view is based on individual reflections and that it all depends on whom you are asking. A valid point raised by Gill was that the company legislation consistently speaks of a true and fair view and not the true and fair view. This is to be expected because of the multiplicity of choices that are available in the treatment of various items in the accounts. So, one is forced to conclude that there are as many true and fair views as there are viewers. Higson (1992) viewed that one standard unqualified report being used for very large public companies as well as very small privately controlled companies could convey different messages. This calls for a requirement to have different reports depending upon the size of the client. Comparing what the British Auditors are trying to tell to what the American Auditors are trying to tell via their audit certificate, it has been identified by Cowan (1965) that, lack of clear cut definition of objectives in the financial statements bring about a barrier in general acceptance by the investors. The inference thereby drawn is that if we could draw a clear interpretation for the phrases used in certifying financial statements, it would help the users to make better judgement and have more reliance on the audit certificate. The current true and fair has very little advantages over the disadvantages when the users are to interpret it in the way in which it is reported. 3.13 Satisfaction of stakeholders The wide meaning and a wide range of interpretations drawn by financially sound shareholders and the other stakeholders, makes the level of satisfaction on true and fair reporting questionable. Stakeholders are individuals within and outside the organisation who have a vested interest in the organisation. The public, in the form of shareholders and other stakeholders take comfort from the fact that the auditor as a watchdog is overseeing the integrity of business through the process of reporting on financial information (Percy, 1997). It is therefore, important that audit is not perceived as an overly expensive overhead, but a cost willingly spent for value rendered both to the audited organsiation and to stakeholders auditors are ultimately serving, (Percy, 2000). The main purpose of preparing financial statements and getting them audited and certified by independent auditors is to provide reliable information to the stakeholders, who believe that the auditors have a responsibility as watchdogs of the integrity of business (Percy, 1997). On taking a look at the way in which auditors are hired, reappointed, and paid, it is not wrong to state that shareholders and other users of accounts have to be concerned with the way in which the stakeholders interests will be safeguarded (Firth, 2002). The role of an audit and auditors is to reduce the information risk associated with financial statements (Makkawi & Schick, 2003). Stacy (1997) argued that the meaning of true and fair view is that it is firmly based on the reasonable expectation of the users and with changing economic and business activity accounting should also be ready to change with new financial instruments and new measurement techniques. Having a wide range of people with different objectives of looking at the same financial statement, it is always seen as a difficult task to satisfy all of them. The interests of all users have economic dimensions and should therefore be satisfied by such information about the entity which is necessary for establishing the entitys intrinsic value, noted Ekholm and

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Troberg, (1998). However, it is understood that the financial statements are normally prepared to satisfy the shareholders of the organisation. This means that the audit certificate should be prepared with an aim of satisfying the shareholders. This is true when the auditors are certifying the annual financial statements of an organisation. There could also be situations when the auditor is required for special purpose audits like tax audit, management audit or investigative audit. In such cases again, the users are very specific and the audit certificate shall be expected to satisfy such specific users. This is to conclude that as long as the users are satisfied, we could trust the true and fair view certification. The concept of true and fair has two aspects: First, that in presenting the accounts there should be no attempt to manipulate users towards a particular conclusion; and second, that all segments of the user community should be equally well served. This is emphasised in the American Accountin g Associations first discussion of accounting conventions and in Paton and Littletons 1940 work (Higson & Blake, 1993). This could mean that all the stakeholders should be equally satisfied with the true and fair view. In Re London and General Bank (No. 2), for example, the purpose of the statutory audit was described as securing to shareholders independent and reliable information respecting the true financial position of the company at the time of the audit (Karan, 2003,p.4). Does this mean that as long as the shareholders are satisfied, one need not be bothered about the rest of the stakeholders? Rutherford (1985) stressed that meeting user needs forms a part of presenting a true and fair view. However, it is far from easy to be confident that users of contemporary financial statements do as a matter of fact feel that their needs are satisfied. Dunn and Stewart, (2001) argued that it cannot be assumed that truth and fairness has one meaning for all. Therefore achieving truth and fairness in financial reporting is a process of communication and negotiation. Given that accountants have different meanings for truth and fairness, the users will have even greater difficulty to deal with the concept. To the layperson truth and fairness implies correctness and they rely on the accountants as experts to ensure this. However, is it possible for the auditor to give one true and fair view to satisfy all the stakeholders and fulfill their responsibilities? It is acknowledged that the current widespread criticism of and litigation against, auditors is a ramification of auditors failing to meet societys expectations of them and further that such failure is serving to undermine confidence in auditors and the work they do, pointed out Porter (1993). It is very interesting to take note of a couple of comments given in a research undertaken by Higson (1992). One interviewee claimed that a satisfactory meaning of the concept is yet to be worked out while another interviewee argued that when professionals themselves were confused with the term, how could one expect the shareholders to understand and interpret it correctly? 4 Concludingremarks True and fair view The purpose of this study was to infer whether true and fair view reporting could be retained in its current form while hundreds of countries have joined hands in adoption of International Financial Reporting Standards. This is particularly relevant due to UKs stand of retaining true and fair view as the corner stone in financial reporting. To aid the study a wide range of literatures, newspaper articles and text books were used. There were three crucial elements to true and fair view reporting. The codes of ethics and law govern the etiquette of the auditors and preparers of accounts. The insinuation from the literatures is that the codes of ethics nor the law provide sufficient guidelines on the usage of the terms true and fair view. At the same time it is difficult to enforce legal action against the auditors when they provide true and fair reports despite having knowledge of wrong doings by companies unless evidence can be hoarded proving the auditors lack of integrity. The second element was the ability of the stakeholders to interpret true and fair view. There is a wide spread confusion when auditors report using true and fair view concluding that, in the long run true and fair view will become an oppressed term if retained in its original form. The last element discussed was extent of satisfaction resulting from reading true and fair view reports. With varying degrees of independence and competencies, the auditors are unable to provide the users with observable evidence on their integrity when they report using true and fair view. This has led to dissatisfaction among the stakeholde rs who insist on extending roles of auditors and also reporting in a manner that does not befuddle the users. Overall this study has provided mixture of thoughts with respect to true and fair view reporting. While it can be seen that many users favor the concept, it is also evident that there are intense displeasures among the users. It is therefore the deduction of the researchers that it is time to re-look, or more strongly

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overhaul true and fair reporting. The major limitation of this study is that the views of the researchers have not been tested empirically. References 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. Alexander, D. (1993), A European true and fair view?, European Accounting Review, Vol 1, 59-80. Amat, O., Blake, J., and Oliveras, E. (1996), Spanish auditors and the True and Fair View, Working paper, 1-21 Bird, P. (1984), What is A True and Fair View? Journal of Business Law, 480-485 Burlaud, A. (1993), Commentary on the article by David Alexander A European true and fair view, European Accounting Review, Vol 2, No 1, 95 -98 Chambers, R. J., and Wolnizer, P. W. (1991), A true and fair view of position and results: the historical background, Accounting Business and Financial History, Vol 1, No 2, 197-213 Chastney, J., G. (1975), True and Fair View: History, Meaning and the impact of the Fourth Directive, London: ICAEW. Cheng, P. W. (2008), Credibility of financial information, Accountants Today, Vol 21, No. 5, 28-31. Clarke, F. L. (2006) Forum: Analysis and Evidence on the Principles Vs Rules Debate, ABACUS, Vol 42, No 2, 129-131 Cook, A. (1997), Requirement for a true and fair a UK standard-setters perspective, The European Accounting Review, Vol 6, No 4, 693-704 Cowan, T. K. (1965), Are truth and fairness generally acceptable, The Accounting Review, Vol 40, Iss. October, 788-794. Cunningham, L. A. (2003), Semiotics, Hermeneutics and Cash: An Essay on the True and Fair View, Research paper, 1-28. Dean, G., and Clarke. F. (2004), Principles VS Rules: True and Fair View and IFRSS, Abacus, Vol 40. No. 2, 1-2 Dunn, J., and Steward, M. (2001), Truth and Fairness Reflection in language, Research paper, 110 Eliason, S., and Ragnarsson, M. (2006), True and Fair View The substitute of God Redovisningssed? What has happened to the accounting of the companies that have implemented IFRS in Sweden?, Bachelor Thesis, Spring term, 1-42 Flint, D. (1982), A true and fair view in Company Accounts, (London: Gee and Co for the Institute of Chartered Accountants of Scotland, 1982), 1-47. Forker, J., and Greenwood, M. (1995), European harmonization and the ture and fair view. The case of the long-term conracts in the UK, The European Accounting Review, Vol 4 No 1, 1-31 Gill, G. S. (1983), True and Fair View, The Australian Accountant, November issue, 701-703 Gray.G.L. Turner J.L,Coram P.J. and Mock J.(2009), Users Perceptions and Misperceptions of the Unqualified Auditors Report, Hasan. ,. Maijoor S, Mock T.J, and Roebuck P. (2005), The Different Types of Assurance Services and Levels of Assurance Provided, International Journal of Auditing, 9, 91-102. Haider, S. A. (2001), Truth about Financial Statements, Business, May, 1-8 Higson, A. (1992), Communication through the audit report: What is the auditor trying to say?, Research paper, 1-27. Houghton, K. A., and Jubb, C. A. (2003), The market for financial report audits: Regulation of and competition or auditor independence, Law and Policy, Vol 25, No 3, 300-321 International Organization of Securities Commissions (IOSCO), Technical Committee of the International Organization of Securities Commissions (2009),Audit Communication Consultation Report AuditorCommunications@iosco.org Karan, R. (2003), Irreconcilable legal and accounting views of A true and fair view: An emerging alternative from Australian reforms, Research paper, 1-26 Kirk, N. E. (2001), True and Fair View versus Present Fairly in Conformity with Generally Accepted Accounting Principles, Discussion paper, 1-27 Lee, T. H., Ali., M. A. (2008), The evolving role of auditors, Where do we go from here?, Accountant Today, Vol 21, No. 3, 20-24. Lee, T. H., Ali., M. A., Kandasamy. S (2008), Towards reducing the audit expectation gap, possible mission, Accountant Today, Vol 21, No. 2, 18-22. Lee, T.(1994) Financial Reporting Quality Labels The Social Construction of the Audit Profession and the Expectations Gap, Accounting, Auditing and Accountability Journal, Vol 7, No 2, 30-49. Lim and Bok (2008), An overview of recent corporate governance reforms in Malaysia

15. 16. 17. 18. 19. 20. 21. 22. 23.

24. 25. 26. 27. 28. 29.

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30. Livne. G., McNichols. M., (2003), An Empirical investigation of the True and Fair Override, Research paper, Stamford University, 1-48 31. Low, C. K., and Koh, H.C. (1997), Concepts Associated with the True and Fair View: Evidence from Singapore, Accounting and Business Research, Vol 27, No 3, 195-202. 32. McEnroe, J. E. and Martens, S. C. (1998), Individual Investors Perceptions Regarding the Meaning of US and UK Audit Report Terminology: Present Fairly in Conformity with GAAP and Give a True and Fair View, Journal of Business Finance and Accounting , 25 (3) and (4), 289-307. 33. Melis, A. (2005), Critical Issues on the enforcement of the True and Fair View accounting principle. Learning from Parmalat, Corporte Ownership and Control, Vol 2, Issue 2, Winter, 108118 34. Nobes, C. (1993), The True and Fair View Requirement: Impact on and of the Fourth Directive, Accounting and Business Research, Vol 24, No 93, 35-48. 35. Ordelheide, D. (1993), True and Fair View A European and a German perspective, The European Accounting Review, Vol 5, No 3, 495-506. 36. Ordelheide, D. (1996), True and Fair View A European and a German perspective II, The European Accounting Review, Vol 1, 81-90 37. Parker, R. H., and Nobes. C. W. (1991), True and Fair: UK Auditors View, Accounting and Business Research, Vol 21 No 84, 349-361 38. Percy, J. P. (1997), Auditing and Corporate Governance A Look Forward into the 21st Century, International Journal of Auditing, Vol. 1, No. 1, 3-12. 39. Porter, B. (1992), True and Fair View An Elusive Concept, Akauntan Nasional, July issue, 16-18. 40. Prescod, L. (1996), True and Fair View: A Confused N otion in West Indian Financial Reporting, The Chartered Accountants Association of Certified Accountants, Research report, 1-49. 41. Rahim. A. (2007), Mini-Enrons shaking up Malaysias corporate governance, Accountants Today, July, 21-23 42. Rutherford, B., A. (1985), The True and Fair View Doctrine: A search for Explication, Journal of Business Financing and Accounting, Winter. 43. Ryan, F. J. O. (1967), A true and fair view, ABACUS, December, 95-108. 44. Samuelsson, M., Samuelsson, M., and Svensson, J. (2003) True and Fair View A study of the implications of this concept within IAS and Swedish GAAP, Masters Dissertation, 1-63 45. Sikka, P., Puxty, A., Wilmont, H and Cooper, C. (1998), The impossibility of eliminating the expectation gap: some theory and evidence, Critical Perspectives on Accounting, Vol. 9 No. 3, 299300. 46. Sucher, P., Seal, W., and Zelenka, I. (1996), True and Fair in the Czech Republic: a note on local perceptions, The European Accounting Review, Vol 5, No 3, 545-557 47. Walton, P. (1993), Introduction: the true and fair view in British accounting, The European Accounting Review, Vol 1, 49-58 48. Zeff, S., A. (1993), International accounting principles and auditing standards, European Accounting Review, Vol 2, 403-410 www.globalcorporategovernance.com/n_ap/299_305.htm

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BOARD OF DIRECTORS, INFORMATION ASYMMETRY, AND INTELLECTUAL CAPITAL DISCLOSURE AMONG BANKS IN GULF CO-OPERATION COUNCIL
Zuaini Ishak*, Abood Mohammad Al-Ebel** Abstract The main thrust of this paper is to examine the intellectual capital (IC) disclosures of 137 Gulf Co-operation Council (GCC) listed banks using a content analysis approach. Instead of examining the effect of board characteristics in isolation from each other, this study extends previous research on the determinants of IC disclosure by considering board effectiveness score in relation to IC disclosure. Moreover, this study extends previous studies in board-IC disclosure relationship by investigating the hypothesised impact of information asymmetry in moderating this relationship. Our findings show that IC disclosure is positively associated with the effectiveness of board of directors. In addition, our study provides evidence that the level of information asymmetry in GCC bank moderates the relationship between board effectiveness and IC disclosure. Findings of this study therefore provide strong support of the hegemony theory. These findings are important for policy makers as they confirm that the effectiveness of board of directors in protecting the investors depends on the level of information asymmetry. Keywords: Board Of Directors, Information Asymmetry, Intellectual Capital (IC) Disclosure, Banks, GCC * School of Accounting, College of Business, Universiti Utara Malaysia, 06001 Sintok, Kedah, Malaysia E-mail: zuaini@uum.edu.my ** School of Accounting, College of Business, Universiti Utara Malaysia, 06001 Sintok, Kedah, Malaysia E-mail: aboodmo@yahoo.com

Introduction Voluntary disclosure and monitoring activities both are viewed by agency theorists as two effective mechanisms to reduce agency costs and to ensure improved protection to investors of the company (see Jensen & Meckling, 1976; Fama & Jensen, 1983). Voluntary disclosure is considered useful to enhance the protection to such outsiders because it provides a signal to the minority shareholders whether the firm is committed to treating its shareholders, in a fair and equitable manner (Chobpichien, Haron, & Ibrahim, 2008). Young, Peng, Ahlstrom, Bruton and Jiang (2008) argued that one of the ways to protect the minority shareholders in countries with weak legal protection towards the minority shareholders is by having higher disclosure quality and transparency. The present paper focuses on a particular type of voluntary disclosure, which is intellectual capital (IC) disclosure. The IC disclosure is expected to provide a more intensive monitoring package for a firm to reduce opportunistic behaviour and information asymmetry. This is because the intellectual capital is the key driver of the companys competitive advantage, and disclosing it allows the shareholders to better anticipate the company risk. The voluntary disclosure of intellectual capital thus primarily works as one of governance mechanism that reduce an information asymmetries (Cerbioni & Parbonetti, 2007). In addition to the voluntary disclosure, other corporate mechanisms have been suggested to protect shareholders. The board of directors is an internal control mechanism that is intended to make decisions on behalf of the shareholders and to ensure that management behaviour is consistent with owners interests. Fama and Jensen (1983) argued that the board of directors is needed to minimise agency cost, to fulfil shareholders interests, and to enhance the level of disclosure. Cerbioni and Parbonetti (2007) claimed that the effect of internal corporate governance works complementary to corporate disclosures, and applying more governance mechanisms will assist the company to maintain its internal control and

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will work as an intensive monitoring package for the company in order to reduce opportunistic behaviours and information asymmetry. Under this environment, managers should not withhold information for their own benefit; so the level of voluntary disclosure in companys annual report is expected to increase. However, previous studies that have examined the relationship between board of directors and voluntary disclosure of intellectual capital practice (e.g. Cerbioni & Parbonetti, 2007; Singh & Van der Zahn., 2008; Li, Pike & Haniffa, R 2008) found somewhat mixed results. The reasons for the mixed results in these studies could be due to the studies that examined the effect of governance mechanisms in isolation from each other (Ward, Brown & Rodriguez, 2009). Ward et al. (2009) argued that, in addressing the agency problems, previous studies considered each mechanism separately thus they ignored the idea that the effectiveness of a mechanism depends on other mechanisms. Agrawal and Knoeber (1996) argued that the results of the effectiveness of an individual mechanism might be misleading as the effectiveness of the individual mechanism could disappear if a number of mechanisms are combined. Based on the idea that the impact of internal governance mechanisms on disclosures is complementary, the effectiveness of corporate governance may be achieved via different channels (Cai, Liu, & Qian, 2008) and the effectiveness of a particular mechanism may depend on the effectiveness of others (Rediker & Seth, 1995; Davis & Useem, 2002). We suggest that the increase of the characters that enhance the board effectiveness leads to the increase of the level of voluntary disclosure, and vice versa. Thus, the first aim of this study is to examine the effect of board characteristics as a bundle of mechanisms in protecting the interest of the shareholders. In more specific words, this study examines the relationship between score of characteristics (that affects the board effectiveness) and IC disclosure. However, it should be noted that the intensity of board of directors monitoring to reduce the conflict between the majority and minority of shareholders is affected by information asymmetry (Boone, Casares Field, Karpoff, & Raheja, 2007; Linck, Netter, & Yang, 2008). This is because, according to hegemony theory, the board of directors monitoring is limited internally through information asymmetry directed by management. Further, Chen and Nowland (2010) stated that information asymmetry makes the monitoring conducted by the board of directors less effective. Therefore, transparency in the annual reports could not be achieved by the intensity of board of directors monitoring in companies where an information asymmetry is high. Therefore , the second aim of this study is to examine the moderation effect of information asymmetry on the relationship between effectiveness of board of directors on IC disclosure in the banking sectors in the GCC countries 1. Banking sector is one of the largest sectors in GCC economies and there are more bank stocks traded in GCC stock markets than stocks of any other industry. In the GCC, this sector continues to be wellcapitalised across the board with capital adequacy ratios of above minimum standards and comfortable leverage ratios by international comparisons (Al-Hassan, Oulidi, & Khamis, 2010). The GCC countries generally have a moderate to high level of financial development. They score the highest on regulation and supervision, as well as on financial openness compared to the remaining countries in the Middle East and the North African (MENA) region (Creane, Goyal, Mobarak, & Sab, 2004). Specifically, the banking sector in GCC is selected for this study based on these three reasons. First, the business nature of the banking sector is intellectually intensive; thus voluntary disclosure of intellectual capital is good proxy of good corporate governance (Grojer & Johanson, 1999). Second, by focusing on a single industry, it allows us to control the differential effects of regulation in making the analysis. This focus also allows us to assess the influence of the board of directors effectiveness on the level of IC disclosure of GCC-listed banks more directly. This is because the results of this study are likely due to the spurious correlation caused by unobserved heterogeneity that is significantly reduced (Blackwell & Weisbach, 1994). Third, the competition in the banking sector at GCC is high and the corporate governance in this sector is better than other sectors in putting the board of committees such as auditing committee and nominating committee in place, and also in appointing a majority of independent directors. However, dispute the competition is high and the corporate governance is better than other sectors, the information asymmetry is high and the level of disclosure is low in the banking sector (Chahine, 2007).
1

The GCC countries comprise the Kingdom of Bahrain, the State of Kuwait, the State of Qatar, the Sultanate of Oman, the State of United Arab Emirates and the Kingdom of Saudi Arabia, which all have a mature, efficient, stable, and profitable banking system. These countries share some common economic, cultural, and political similarities, which by far outweigh any differences they might have (Al- Muharrami et al., 2006). In 2008, the GCC countries economy accounted for around 1.8 per cent of the worlds total GDP of around $61trn (Al-Hassan et al., 2010).

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The present study contributes to the literature in a number of ways. First, it provides systematic evidence on the relationship between the effectiveness of board of directors and IC disclosure. The results show that IC disclosure is greater for banks with a high score of effectiveness of board of directors. Second, the study provides the evidence that the relationship between the score of effectiveness of board of directors and IC disclosure is moderated by the level of information asymmetry. The remainder of the paper is structured in the following sequence. The next section is the literature review on IC disclosure, board of directors effectiveness, and information asymmetry. Section 3 presents research method and the findings are reported in Section 4. The last section of this paper summarises its key findings, and after discussing some of its limitations, a number of further research topics are presented. Intellectual Capital Disclosure The researchers and analysts have not reached unanimous agreement on the definition of IC disclosure and its components. However, one of the most widely accepted definitions of intellectual capital, which is supported by a number of prominent authors (Sveiby, 1997; Brennan & Connell, 2000; Sullivan, 2000), is formed by three sub constructs: internal capital, external capital, and human capital. Internal capitals include patents, concepts, models research and development capability, technology, and administrative systems. On the other hand, external capitals include customer capital comprising relationships with customers and suppliers, brand names, trademarks, and reputation. Next human capitals refer to employees competence such as skills, education, experience, and capacity to act in a wide variety of situations. Disclosing information about IC in the corporate annual report is not costless. Williams (2001) argued that voluntary disclosure of IC could affect the competitive advantage of company since it provides signal to competitors of possible value-creating opportunities. According to Vergauwen and Alem (2005), a firm might be at the competitive disadvantage when it discloses sensitive information to outside investors. However, from the literature review, it could be said that disclosure of IC has advantages for company, investors, and markets. For example, IC disclosure can help organisations to formulate their strategies, to assist in diversification and expansion decisions, and to use the IC as basis for compensations (Marr, Mouritsen, & Bukh, 2003). Recognising these advantages of IC disclosure, several attempts have been conducted for reporting of IC. From these attempts, several models have been produced to measure and report the intellectual capital. Kaplan and Nortons Balanced Scorecard (Kaplan & Norton, 1992), Sveibys Intangible Assets Monitor (Sveiby, 1997), and Skandias Value Scheme (Edvinsson & Malone, 1997) are among the most popular models used to construct reports on intellectual capital. From the analysis of IC disclosure studies, majority of the studies used Sveibys (1997) framework with some modifications. Sveibys (1997) framework contains 24 elements within three categories namely internal structure, external structure, and employee competence. Using the classification of IC as proposed by Sveiby (1997) after modifying the names of the categories of IC to internal capital, external capital, and human capital, Guthrie and Petty (2000) examined the level of IC disclosure in Australia. The IC reporting framework suggested by Guthrie and Petty (2000) has been followed by several authors in many countries such as Brennan (2001) in Ireland; Bozzolan, Favotto and Ricceri, (2003) in Italy; Vandemaele, Vergauwen and Smits, A. J. (2005) in Netherlands, Sweden and UK; Li et al. (2008) in UK; and Yi and Davey (2010) in China. Effectiveness Of Board Of Directors The board of directors is one of the important elements in internal corporate governance mechanisms. The board is a central institution in the internal governance of a company that provides the key monitoring function in dealing with agency problems (Chobpichien et al., 2008; Lefort & Urza, 2008; Singh & Van der Zahn, 2008; Aktaruddin, Hossain, Hossain &Yao, 2009). Fama and Jensen (1983) argued that by exercising its power to monitor and control the management, the board of directors can reduce agency conflicts as managers may have their own preferences and may not always act on behalf of the shareholders. Moreover, arguably, the board of directors plays an important role in protecting the interests of various stakeholders against managements self-interests. Similarly, Hermalin and Weisbach (2003) suggested that the board of directors should provide solutions to solve the problems faced by modern companies.

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Akhtaruddin et al. (2009) and Singh and Van der Zahn (2008) have suggested that the enhancement in board of directors in terms of board size, board composition, and leadership structure could improve board effectiveness and its capacity to monitor the management and thus increasing the possibility of providing more voluntary information to outside investors. Previous studies (Chobpichien et al., 2008; Goh, 2009) suggested that independence, size, frequency of board meetings, and non-duality of the chief executive officer (CEO) are the important factors that determine the effectiveness of board that forces management to disclose more information to outside parties. Cerbioni and Parbonetti (2007) suggested that a small board chaired by an independent director and composed of a majority of independent directors playing an active role on the audit, nomination, and compensation are important in improving the overall quality of corporate voluntary disclosure. These elements, if present, would enhance the monitoring role of board of directors. However, it has been suggested that the optimal combination of these mechanisms can be considered better to reduce the agency cost and to protect the interest of all shareholders because the effectiveness of corporate governance is achieved via different channels (Cai et al., 2008) and the effectiveness of a particular mechanism depends on the effectiveness of others (Davis & Useem, 2002). According to Chobpichien et al. (2008) and Ward et al. (2009), it is important to look at corporate mechanisms as a bundle of mechanisms to protect shareholder interests and not in isolation from each other; this is because these governance mechanisms act in a complementary or substitutable fashion (Chobpichien et al., 2008). This is in addition to Hill (1999) who posited that it is desirable to have a system of overlapping checks and balances, and that none of the mechanisms of accountability is a panacea to all the problems faced by companies. This study suggests that when characters that enhance the effectiveness of board of directors increase, the level of IC disclosure also increases. Thus, based on the arguments above, this study expects a positive relationship between the level of effectiveness of board of directors and IC disclosure. Information Asymmetry According to Jensen and Meckling (1976) and Fama and Jensen (1983), outside directors are perceived as tools to protect the shareholders interest through monitoring manage rial opportunism and enhancing the level of disclosure that reduces agency risk (Bhojraj & Sengupta, 2003). Moreover, McNulty, Roberts and Stiles (2002) argued that outside directors are always less informed regarding company operations as compared to their executive colleagues due to their notable operating distance from management. Due to this reason, the outside directors are incapable of spending enough time with the executive colleagues and consequently suffer form information asymmetry by providing the outside directors with incomplete control (Mace, 1971). Hill (1995) further expounded on the issue by stating that non-executive control is hampered through information asymmetry manipulated by management. This problem could escalate if the company is manned by large shareholders who have selfish agendas that are contrary to the outside shareholders agendas, which consequently disallow the executive to provide more information to the outside directors (Fan & Wong, 2002). Thus, information asymmetry is often mentioned to be a prime indicator in management hegemony theory and is also considered to be a core determinant of double agency theory. Its presence in the company generally hinders non-executive members from gathering necessary information on management activities e.g. information needed by the non-executive members for performance evaluation. So, OCED (2009) suggested to policy makers in GCC to allow outside directors to easily obtain information that they need in order to make the board governance effective in protecting all shareholders. From the discussion above, it can be said that one of the reasons for the mixed results obtained by previous studies on the relationship between the effectiveness of board of directors and voluntary disclosure (Gul & Leung, 2004; Ho & Wong, 2001; Patelli & Prencip, 2007; Li, et al., 2008) is information asymmetry. It is an indicator of entrenchment of management; the lower information, the lower the entrenchment of management. This would allow non-executives to participate in making decision and in controlling the management. With a high degree of information asymmetry, entrenchment of management will increase and managers play a significant role in the decision making while nonexecutives would not able to control managers because they do not have sufficient knowledge about the firm or the power delegated to them by shareholders is actually exercised by the management (Demb & Neubaeuer, 1992). Based on hegemony theory, information asymmetry is one of the mechanisms for management control that influences the effectiveness of board of directors (Yang et al., 2004). This study proposes that, as the level of information asymmetry increases, the ability of board of directors to enforce the management IC

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disclosure decreases. Therefore, in line with hegemony theory, the greater the level of information asymmetry, the weaker the positive effect that effectiveness of board of directors has on IC disclosure. Research Method Sample This study used secondary data on all listed banks in GCC Stock Exchange. The listed banks were chosen for this study because of their greater commitment and exposure to investors in respect of mandatory and voluntary reporting than unlisted banks. The samples in this study must have the following criteria: 1. The banks published their annual report between 2008 and 2010 in their website. 2. The annual report was accessible and it contained complete information needed. Based on the criteria above, 137 banks listed in GCC were chosen. Measurements Of Variables Dependent variable: IC disclosure To preserve the comparability of this study with previous ones, categories of IC captured were based on the index developed in a recent study by Zaman Khan and Ali (2010) (see Appendix A). The reasons for adopting Zaman Khan and Alis framework are: First, they developed their framework based on Sveibys framework, which has later been modified by Guthrie and Petty (2000). Guthrie and Pettys framework has been adopted and employed by other studies (e.g. Bozzolan et al., 2003; Vandemaele et al., 2005) with varying degrees of similarity. Zaman Khan and Alis framework is more or less the same with Brennan (2001), April, Bosmaand Deglon. (2003), Goh and Lim (2004), Abeysekera Guthrie (2005), and Campbell and Abdul Rahman (2010). Second, Zaman Khan and Alis framework was applied on banking sectors. As a result, only those items consistently identified as relevant and were likely to be disclosed by banks were included. Zaman Khan and Ali have removed some items from Sveibys framework on the grounds that these would be better reported within the internal management reports of banks and the fact that IC disclosure is new phenomenon in the banking sector. To measure IC disclosure, this study employed content analysis, which was also used in previous studies on IC disclosure (Guthrie, Petty, & Yongvanich, 2004; Li et al., 2008). This is because content analysis allows repeatability and valid inferences from data according to the context (Krippendorf, 1980). To aid consistency of scoring, the study instrument was completed by one researcher. However, this raised questions about reliability of the scores (Gray, Kouhy, & Lavers, 1995). Therefore, to increase reliability of the scores, this study used the steps2 applied by Milne and Adler (1999) and Guthrie, Cuganesan, & Ward, (2008). Independent variables This study followed the direction of prior studies (e.g. Hanlon, Rajgopal, & Shevlin, 2003; Brown & Caylor, 2006; Farook & Lanis, 2007; Chobpichien et al., 2008; Singh & Van der Zahn 2008) and used a composite governance score to measure the effectiveness of board of directors. The score is a composite measure that sums the value of the five dichotomous characteristics of the board to create a bank-specific summary measure of the effectiveness of board of directors that takes a score bounding by 0-1, revealing that a higher score is an indicator of a higher effectiveness of the board of directors. The five binary characteristics that are included in this measurement are board independence, boards committees, board size, board meeting, and CEO duality, ranging from 0-5. Consistent with prior studies, this study viewed smaller, more independent boards that have higher frequency of meetings and are not chaired by the CEO
2

Following Milne and Adler (1999) and Guthrie et al. (2008), this study used the following steps in order to increase reliability and validity in recording and analysing the data. First, the disclosure categories were adopted from wellgrounded, relevant literature i.e., Zaman Khan and Ali (2010) who adapted their framework from well-grounded, relevant literature i.e., Sveiby (1997) and Guthrie and Petty (2000). Second, the sentence was selected as the measurement unit to increase the validity of the content analysis (Milne & Adler, 1999). Third, the coder underwent a sufficient period of training, and pilot study was conducted in order to reach an acceptable level of the reliability of the coding decisions (Guthrie et al., 2008).

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as effective boards. For each of the components (except for non-duality and number of board committees), this study calculated the sample median. The value of one for high quality indicators was assigned (i.e., companies below the sample median for board size and above the sample median for percentage of independent directors and frequency of meetings). We then summed these values, plus the score of one for non-duality and also one for board with at least three committees. Moderator variable: Information asymmetry Information asymmetry is an indicator of entrenchment of management; lower information is lower entrenchment of management, which allows non-executives to participate in making decision and controlling management (Mace, 1971). According to Shleifer and Vishny (1997), the increase in the concentration of ownership leads to the increase in the entrenchment of management. This is because owner has strong voting power to appoint someone he or she trusts to be CEO, directors and/or board chairman (Shleifer & Vishny 1988). Management entrenchment gives members, who act as the controlling shareholders, the right to extract benefits from the firm at the cost of minority shareholders (Shleifer &Vishny, 1997; Chrisman, Chua, Sharma, 2005). For example, Attig,Fong,Gadhoum and Lang (2006) hypothesised that large wedge between controlling rights and cash flow rights can increase the likelihood of selfish behaviour of those who are in control. The controlling shareholders can do so by reducing or delaying the information availability so that other shareholders cannot interfere. The withholding information can also make the monitoring conducted by the board of directors less effective (Filatotchev, Lien and Piesse 2005; Chen & Nowland, 2010) due to the outside directors are always less informed regarding company operations. Glosten & Milgrom (1985) argued that when there are chances of extracting private benefits, the problem of information asymmetry becomes severe. So, when the percentage of minority shareholder in company increases, the chances of extracting private benefits will decrease and the problem of information asymmetry will not be severe (Bruggen, Vergauwen & Dao., 2009). In this case, the entrenchment of management will therefore decrease, thus the board of directors is able to control the management. Following Bruggen et al. (2009), this study used the percentage of minority ownership as proxy of information asymmetry. That means that the increase in the minority ownership in bank leads to the decrease information asymmetry and thus the board of directors is able to control the management. Control variables The study used firm size, profitability, and leverage that were used widely as control variables in the empirical literature of corporate governance. The measurement used for firm size was natural logarithm of total asset (Al-Shammari & Al-Sultan, 2010). Profitability was measured as the ratio of net income, before extraordinary items, to the total assets (Al-Shammari & Al-Sultan, 2010). Following Chahine & Tame (2009) and Al-Shammari & Al-Sultan (2010), this study measured firm leverage by dividing the total of liabilities by the total of assets. Statistical Analysis Hierarchical regression analysis was used to test the effect of effectiveness of board of directors and moderating effects3 of information asymmetry on IC disclosure (Cohen & Cohen, 2003). We used control variables in the first hierarchical step. After using the control variables, we used effectiveness of board of directors in the second step to examine the relative direct contribution of the effectiveness of board of

According to Aiken and West(1991), to detect moderator effects, interaction terms must be created. The interaction term is the product of multiplying the predictor variable with the moderator variable. So, interaction term raises concerns about the multicollinearity problem between interaction terms with their component terms. To avoid this problem, the predictor and moderator variables were standardized (Frazier et al., 2004; Aguinis et al., 2008). Standardizing (i.e., z scoring) also makes it easier to interpret the effects of the predictor and moderator and help to provide a meaningful interpretation (Frazier et al., 2004; Aguinis et al., 2008). After interaction terms have been created, everything should be in place to structure a hierarchical multiple regression equation using SPSS to test for moderator effects. To do this, variables are entered into the regression equation through a series of specified blocks or step. The steps used were in accordance to the suggestion by Baron and Kenny (1986) and Frazier et al. (2004).

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directors. Moderator variable was then used in the third step. The two-way interaction terms were used in the final regression model. Empirical Result Descriptive Analysis In Table 1, the Panel A presents the descriptive statistics of IC disclosure, in overall and categories. With regards to overall of IC disclosure, the Panel A in Table 1 shows that the average number of IC disclosure is 86.72. The maximum value is 175 sentences and the minimum value is 17 sentences. In respect to IC disclosure categories, the Panel A in Table 1 shows that the banks provided slightly greater number of information about internal capital at average of 47.83 than both external capital and human capital disclosures, which scored 31.72 and 14.37, respectively. This result is consistent with prior studies (e.g. Bozzolan et al., 2003; Brennan, 2001; Ali, Khan, & Fatima, 2008; Striukova, Unerman & Guthrie ,2008). In Panel B of Table 1, the summary of the descriptive statistics for the independent, moderator, and control variables is presented. The panel shows that the average score of the effectiveness of board of directors is 2.53. The maximum value is 5 and the minimum value is 0. With regards to ownership structure, the percentage of information asymmetry ranges from 0 to 85% with an average value of 38%. In terms of control variables, the Panel B in Table 1 shows that the log of total asset varies with a minimum value of 7.36 and a maximum value of 10.89. The samples had an average leverage level of 72% and a ROA of 2%. The negative sign in the ROA implies that some of the banks experienced a loss during the investigation period. Table 1. Descriptive statistics for the variables of study Variable Panel A Overall IC Disclosure Internal capital External capital Human capital Panel B Effectiveness of board of directors Information asymmetry ROA Leverage Log of total asset Regression Results As shown in Table 2, when the bank size, leverage and ROA are used as control variables into regression model in the first step, the coefficient of determination adjusted (R 2) was found to be 0.23, indicating that 0.23 of the level of IC disclosure can be explained by the bank size, leverage, and ROA. Table 2 also shows that by adding independent variable in Step 2, the adjusted R 2 increases to 0.26. This R2 change (0.03) is significant. This implies that the additional of 3 percent of variation in IC disclosure can be explained by the effectiveness of board of directors. The effectiveness of board of directors was found to have significant and positive relationship with IC disclosure at 0.05 the level of significance. These results support the argument that says that there is a positive relationship between the effectiveness of board of directors and IC disclosure. The moderator variables were introduced in the Step 3. However, there is no significant F change. This result indicates that there is no major effect from the moderator variables on dependent variable. In the final step, when the interaction was used, the adjusted R 2 increases from 0.26 to 0.31. This R2 change (0.05) is significant. This indicates that information asymmetry moderates the relationship between the effectiveness of board of directors and IC disclosure. In more 0.00 0.00 -0.06 0.10 7.36 5.00 0.85 0.10 0.91 10.89 2.53 0.38 0.02 0.72 9.81 1.06 0.20 0.02 0.19 0.67 Minimum 17.00 10.00 6.00 0.00 Maximum 175.00 140.00 75.00 46.00 Mean 86.72 47.83 31.72 14.37 Std. Deviation 35.21 24.76 16.81 12.51

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specific words, the results suggest that, as information asymmetry decreases (i.e., the percentage of minority shareholder increases in the bank), the positive relationship between the effectiveness of board of directors and IC disclosure increases. Table 2. Results of hierarchical regression analysis Step 1 LEV BSIZE ROA EFFBOD IA EFFBOD x IA R2 Adjusted R2 R2 change F change Sig of F change 0.41** 0.16* 0.01 Step2 0.40** 0.16* 0.02 0.17** Step 3 0.40** 0.16* 0.02 0.05 0.05 0.26 0.24 0.00 0.04 0.94 Step 4 0.36** 0.12** 0.01 0.09 0.06 0.25** 0.31 0.28 0.05 8.70 0.00

0.23 0.21 0.23 12.0 0.00

0.26 0.24 0.03 4.80 0.03

*, **, *** = p-value < .10, .05, .01, respectively, one-tailed where: ROA = Return on assets, LEV = Leverage, BSIZE = Bank size, EFFBOD = Effectiveness of board of directors, IA = Information asymmetry.

Figure 1 illustrates the moderating effect of information asymmetry (percentage of minority shareholder) on the relationship between the effectiveness of board of directors and IC disclosure. It appears from the figure that lower information asymmetry (higher minority shareholder) is associated with higher IC disclosure. When the level of the effectiveness of board of directors is low, the level of IC disclosure is low in banks with high and low information asymmetry. However, when the level of the effectiveness of board of directors is high, the level of IC disclosure is higher in banks with low information asymmetry (higher percentage of minority shareholder) than in banks with high information asymmetry (percentage of minority shareholder). Figure 1. Moderating effect of information assymetry

Discussion And Conclusions Drawing on the argument that says that corporate governance should be looked as a bundle and not individually, this study suggests that the increase of the characters that enhance the effectiveness of board

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of directors leads to the increase in the level of voluntary disclosure, and vice versa. On the other hand, the increase of the characters that reduce the effectiveness of board of directors leads to the decrease in the level of voluntary disclosure. In addition, this is based on the hegemony theory and the arguments that the intensity of board of directors monitoring to reduce the conflict between the majority and minority of shareholders is affected by information asymmetry (Boone et al., 2007; Linck et al., 2008). This is because, according to hegemony theory, the board of directors monitoring is limited internally through information asymmetry directed by the management; this study suggests that information asymmetry moderates the relationship between the effectiveness of board of directors and IC disclosure. There are several important findings revealed in this study. First, this study finds that as the level of the effectiveness of board of directors increases (particularly the increase in the characters that enhance the boards monitoring), the level of IC disclosure in banks annual reports also increases. This result supports the agency theory and the idea that the impact of internal corporate governance mechanisms on corporate disclosure is complementary. Second, this study finds that information asymmetry moderates the relationship between the effectiveness of board of directors and IC disclosure. This means that, as the level information asymmetry increases, the relationship between the effectiveness of board of directors and IC disclosure decreases. This finding supports the hegemony theory and the idea that the information asymmetry makes the monitoring conducted by the board of directors less effective. This study has a number of limitations that might warrant future research. This study can be considered exploratory in nature, and further works are needed in specific areas to improve it. First, the dimension of the sample could be increased by analysing more companies and/or for a longer period of time. Moreover, the samples used in this paper only involve the GCC-listed banks. Empirical evidence would take advantage of the test of the hypotheses for different type of firms (i.e., in other sectors) or for the same type of firms but in different context (i.e., other Arab countries or Asia). Second, this study did not examine the effect of the variable legal enforcement on IC disclosure due to the low legal protection of investor rights and legal enforcement in all the GCC. Legal protection of investor rights has been argued to have an effect on voluntary disclosure policies on intellectual capital. Thus, future researches should retest these hypotheses in different legal protection setting. References 1. Abeysekera, I. & Guthrie, J. 2005. An empirical investigation of annual reporting trends o intellectual capital in Sri Lanka. Critical Perspectives on Accounting 16( 3):151-163. 2. Agrawal, A. & Chadha, S. 2005. Corporate governance and accounting scandals. Journal of Law and Economics 48(2): 371-406. 3. Agrawal, A. & Knoeber, C. R. 1996. Firm performance and mechanisms to control agency problems between managers and shareholders. Journal of Financial and Quantitative Analysis 31(3): 377-397. 4. Aguinis, H., Sturman, M. C. & Pierce, C. A. 2008. Comparison of three meta-analytic procedures for estimating moderator effects of categorical variables. Organizational Research Methods 11(9): 934. 5. Aiken, L. S. & West, S. G. 1991. Multiple regression: Testing and interpreting interactions. Newbury Park, CA: Sag 6. Aktaruddin, M., Hossain, M. A., Hossain, M. & Yao, L. 2009. Corporate governance and voluntary disclosure in corporate annual reports of Malaysian listed firms. The Journal of Applied Management Accounting Research 7(1):1-20. 7. Al-Hassan, A., Oulidi, N. & Khamis, M. 2010.The GCC Banking Sector: Topography a Analysis. Washington: International Monetary Fund IMF Working Paper Series . 8. Ali, M. M., Khan, M. H. & Fatima, Z. K. 2008. Intellectual capital reporting practices: A study on selected companies in Bangladesh. Journal of Business Studies 29 (1): 82-104. 9. Al-Shammari, B. & Al-Sultan, W. 2010.Corporate governance and voluntary disclosure in Kuwait. International Journal of Disclosure and Governance 7 (3): 262280. 10. April, K. A., Bosma, P. & Deglon, D. A. (2003). IC measurement and reporting: Establishing a practice in South African mining. Journal of Intellectual Capital 4(2):165-180. 11. Attig N, Fong W, Gadhoum, Y. & Lang, L. 2006. Effects of large shareholding on information asymmetry and stock liquidity. J. Bank. Finan 30: 2875-2892.

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12. Baron, R. & Kenny, D.1986.The moderator-mediator variable distinction in social psychological research: Conceptual, strategic, and statistical considerations. Journal of Personality and Social Psychology 51: 1173-1182. 13. Bhojraj, S. & Sengupta, P. 2003. Effect of corporate governance on bond ratings and yields: The role of institutional investors and outside directors. Journal of Business 76: 455-475. 14. Blackwell James, A., & Weisback, M. S. (1994). Accounting information and internal performance evaluation: Evidence from Texas banks. Journal of Accounting and Economics, 17(3), 331-358. 15. Boone, A., Casares Field, L., Karpoff, J. M. & Raheja, C. 2007. The determinants of corporate board size and composition: An empirical analysis. Journal of Financial Economics 85(1): 66-101. 16. Bozzolan, S., F., Favotto & Ricceri, F. 2003. Italian annual intellectual capital disclosure. Journal of Intellectual Capital 4(4): 543-558. 17. Brennan, N. (2001). Reporting intellectual capital in annual reports: Evidence from Ireland. Accounting, Auditing & Accountability Journal14(4): 423-436. 18. Brennan, N. & Connell, B. 2000. Intellectual capital: Current issues and policy implications. Journal of Intellectual Capital 1(3): 206-240. 19. Brown, L. D. & M. L. Caylor. 2006. Corporate Governance and Firm Valuation. Journal of Accounting and Public Policy 25 (4): 409434. 20. Bruggen, A., Vergauwen, P. & Dao, M. 2009. Determinants of intellectual capital disclosure: evidence from Australia. Management Decision 47(2): 233-245. 21. Cai, J., Liu, Y. & Qian, Y. 2008. Information asymmetry and corporate governance. Drexel College of Business Research Paper Series. 22. Campbell, D. & Abdul Rahman, M. R. 2010. A longitudinal examination of intellectual capital reporting in Marks & Spencer annual reports, 1978-2008. The British Accounting Review 42(1): 5670. 23. Cerbioni, F. & Parbonetti, A. 2007. Exploring the effects of corporate governance on intellectual capital disclosure: An analysis of European biotechnology companies. European Accounting Review 16(4): 791-826. 24. Chahine, S. 2007. Activity-base diversification, corporate governance, and the market valuation of commercial banks in the Gulf Commercial Council. Journal of Management and Governance 11(4): 353-382. 25. Chahine, S. & Tohm, N. S. 2009 . Is CEO duality always negative? An explora tion of CEO duality and ownership structure in the Arab IPO context. Corporate Governance: An International Review 17(2): 123-141. 26. Chen, E. & Nowland, J. 2010. Optimal board monitoring in family-owned companies: Evidence from Asia. Corporate Governance: An International Review18(1): 317. 27. Chobpichien, J. , Haron, H. & Ibrahim, D. 2008. The quality of board of directors, ownership structure and level of voluntary disclosure of listed companies in Thailand. Euro Asia Journal of Management, 3(17): 3-39. 28. Chrisman JJ, Chua JH, Sharma P (2005). Trends and directions in the development of a strategic management theory of the family firm. Entrep. Theory, Pract.,29 : 555 575 29. Cohen, J. & Cohen, P.1983. Applied multiple regression/correlation analysis for the behavioral sciences (2nd Ed.). Hillsdale, NJ.: Lawrence Erlbaum. 30. Creane, S., Goyal, R., Mobarak, A. & Sab, R.2004.Financial sector development in the Middle East and North Africa. Working Paper. 31. Davis, G. F. & Useem, M. 2002. Top management, company directors, and corporate control. Handbook of Strategy and Management. 32. Demb, A. & Neubauer, F. 1992. The corporate board: Confronting the paradoxes. In Tricker R.I (Ed.). History of management thought: Corporate governance. Aldershot: Ashgate Publishing Limited. 33. Edvinson, L. & Malone, M. 1997. Intellectual capital: The proven way to establish your companys real value by measuring its hidden brain power, Piatkus, London. 34. Fama, E. F. & M. C. Jensen 1983. Separation of ownership and control. Journal of Law and Economics 26(2): 301-325. 35. Fan, H.& Wong, T. 2002. Corporate ownership structure and the informativene of accounting earnings in East Asia. Journal of Accounting and Economics 33:401-25. 36. Farook, S. & Lanis, R. 2007. Banking on Islam? Determinants of Corporate Social Responsibility Disclosure. Islamic Economics And Finance, 217. 37. Filatotchev I, Lien Y.& Piesse, J. 2005. Corporate Governance and Performance in Publicly Listed, Family-controlled Firms: Evidence from Taiwan. Asia PaciDFI J. Manag 22: 257-283.

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38. Frazier, P. A., Tix, A. P. & Barron, K. E. 2004. Testing moderator and mediator effects in counseling psychology research. Journal of counseling psychology 51(1): 115. 39. Glosten L.& Milgrom, P. 1985. Bid, ask and transaction prices in a specialist market withheterog enously-informed traders. J. Financ. Econ 14: 71-100. 40. Gray, R., Kouhy, R. & Lavers, S. 1995. Methodological themes: constructing a research database of social and environmental reporting by UK companies. Accounting, Auditing & Accountability Journal 8(2): 78101. 41. Grojer, J.E. & U. Johanson, 1999. Voluntary Guidelines on the Disclosure of Intangibles: A Bridge Over Troubled Water?", Paper presented at the International Symposium Measuring and Reporting Intellectual Capital: Experiences, Issues and Prospects, June, Amsterdam. 42. Guthrie, J. & Petty, R. 2000. Intellectual capital: Australian annual reporting practices. Journal of Intellectual Capital 1(2/3). 43. Guthrie, J., Cuganesan, S. & Ward, L. 2008. Industry specific social and environmental reporting: The Australian Food and Beverage Industry. Accounting Forum 32: 115. 44. Guthrie, J., Petty, R. & Yongvanich, K. 2004. Using content analysis as a research method to inquire into intellectual capital reporting. Journal of Intellectual Capital 5 (2): 282-293. 45. Hackston, D. & Milne, M. 1996. Some determinants of social and environmental disclosures in New Zealand companies. Accounting, Auditing & Accountability Journal 9 (1) 77-108. 46. Hanlon, M., Rajgopal, S. & Shevlin, T. 2003. Are executive stock options associated with future earnings? Journal of Accounting and Economics 36(1-3): 3-43. 47. Hermalin, B.. & Weisbach M. 1991. The effects of board composition and direct incentives on firm performance. Financial Management 20: 101-112. 48. Hill, J. G. 1999. Deconstructing Sunbeam-Contemporary issues in corporate governance. University of Cincinnati Law Review 67: 099-1127. 49. Ho, S. S. M. & Wong, S. K. 2001. A study of the relationship between corporate governance structures and the extent of voluntary disclosure. Journal of International Accounting, Auditing and Taxation 10(2): 139-156. 50. Jensen, M. C. & Meckling, W. H. (1976). Theory of the firm: Managerial behavior,agency costs and ownership structure. Journal of Financial Economics 3(4) :305-360. 51. Kaplan, R. & Norton, D. 1992. The balanced scorecard-measures that drive performance. Harvard Business Review 70(1): 71-79. 52. Khodadadi, V., Khazmi, S. & Aflatooni, A. 2010. The effect of corporate governance structure on the extent of voluntary disclosure in Iran. Business Intelligence Journal 3 (2):151-164. 53. Kobeissi ,N. & Sun, X. 2010. Ownership Structure and bank performance: evidence from the Middle East and North Africa region. Comparative Economic Studies 52(3): 287-323. 54. Krippendorff, K.,(1980). Content analysis: An introduction to its methodology. Beverly Hills: Sage Publications. 55. Lakhal, F. (2005). Voluntary earnings disclosures and corporate governance: Evidence from France. Review of Accounting and Finance 4 (3): 64-85. 56. Li, J., Pike, R. & Haniffa, R. (2008). Intellectual capital disclosure and corporate governance structure in UK firms. Accounting and Business Research 38(2): 137-159. 57. Linck, J. S., Netter, J. M. & Yang, T. 2008. The determinants of board structure. Journal of Financial Economics 87(2): 308-328. 58. Mace, M. L. (1971). Directors: Myth and Reality, Boston, MA: Harvard University Graduate School of Business Administration. 59. Marr, B., Mouritsen, J. & Bukh, P.N. 2003. Perceived Wisdom. Financial Management, July/August, 32. 60. McNulty, A., Roberts, J. & Stiles, P. 2002. Creating Accountability within the Board: The Work of the Eective Non-executive Director, Leeds University Business School; Judge Institute of Management, University of Cambridge. 61. Milne, M. J. & Adler, R. W. 1999. Exploring the reliability of social and environmental disclosures content analysis. Accounting, Auditing & Accountability Journal, 12(2):237-256. 62. Mustafa, S., & Youssef , N. 2010. Audit committee financial expertise and misappropriation of assets. Managerial Auditing Journal25 (3): 208 225. 63. OCED. (2009). Policy brief on improving corporate governance of banks in the middle east and north africa region. 64. Patelli, L. & Prencipe, A. (2007). The relationship between voluntary disclosure and independent directors in the presence of a dominant shareholder. European Accounting Review 16(1): 5-33.

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65. Rediker, K. J. & Seth, A. (1995). Boards of directors and substitution effects of alternative governance mechanisms. Strategic Management Journal 16: 8599. 66. Singh, I.& Van der Zahn, J. 2008. Determinants of intellectual capital disclosure in prospectuses of initial public offerings. Accounting and Business Research 38(5): 409-431. 67. Singh, V., Terjesen, S. & Vinnicombe, S. 2008. Newly appointed directors in the boardroom: How do women and men differ?, European Management Journal 26(1): 4858. 68. Striukova, L. Unerman, J. & Guthrie, J. 2008. Corporate reporting of intellectual capital: evidence from UK companies. British Accounting Review 40(4):297313 69. Sullivan, P. H. 2000. Profiting from intellectual capital. Journal of Knowledge Management 3(2): 132-143. 70. Sveiby, K. E. 1997. The intangible assets monitor. Journal of Human Resource Costing & Accounting 2(1): 73-97. 71. Vandemaele, S. N., Vergauwen, P. & Smits, A. J. 2005. Intellectual capital disclosure in the Netherlands, Sweden and the UK: A longitudinal and comparative study. Journal of Intellectual Capital 6(3): 417-426. 72. Vergauwen, P. & Alem, F. J. C. (2005). Annual report IC disclosures in the Netherlands, France and Germany. Journal of Intellectual Capital 6(1): 89-104. 73. Wallace, R. S. O., Naser, K. & Mora, A. 1994. The relationship between the comprehensiveness of corporate annual reports and rm characteristics in Spain. Accounting and Business Research 25(97): 4153. 74. Ward, A. Brown, J. & Rodriguez, D. 2009. Governance bundles, firm performance and the substitutability and complementarily of governance mechanisms. Corporate Governance: An International Review 17(5): 646-660. 75. White, G., Lee, A. & Tower, G. 2007. Drivers of voluntary intellectual capital disclosure in listed biotechnology companies. Journal of Intellectual Capital 8(3): 517-537. 76. Williams, S.M. 2001. Are intellectual capital performance and disclosure practices related? Journal of Intellectual Capital2 (3):192-203. 77. Yi, A. & Davey, H. (2010). Intellectual capital disclosure in Chinese (mainland) companies. Journal of Intellectual Capital 11(3): 326-347. 78. Young, M. N., Peng, M. W., Ahlstrom, D., Bruton, G. D. & Jiang, Y. 2008. Corporate governance in emerging economies: A review of the principalprincipal perspective. Journal of Management Studies, 45(1): 196-220. 79. Zaman Khan, M., & Ali, M. ( 2010). An empirical investigation and users perceptions on intellectual capital reporting in banks; Evidence from Bangladesh. Journal of Human Resource Costing & Accounting 14 (1):48-69.

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Appendix A: IC framework adopted for the study Internal capital Patent Copyright Corporate culture Management philosophy Management and technological process Information system networking system Financial relations External capital Customers Banks market share Business collaboration Franchising Licensing Banks reputation for services Bank name Human capital Training Employees educational qualification Work related Knowledge Work related Competencies Know how .Entrepreneurial spirit

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PERCEPTIONS OF ORGANISATIONAL READINESS FOR THE PERFORMANCE MANAGEMENT SYSTEM: A CASE STUDY OF A UNIVERSITY OF TECHNOLOGY
Bethuel Sibongiseni Ngcamu* Abstract The absence of a single performance management system (PMS) aligned to institutional strategy and business processes often results in failure to deliver anticipated benefits as it is not cascaded down to all departments, teams or individuals. This study aims to determine employees expectations for the proposed PMS and their perceptions of the system s impact on effectiveness within the university concerned. This study adopted a quantitative research design and a survey method was used, whereby, a structured questionnaire was administered by the researcher to a selected population size of 150 of which 108 completed questionnaires, generating a response rate of 72%. The study reflects a disproportionately high percentage of 34% of the respondents who disagreed and 21.3% who were undecided as to whether PMS is needed at the university concerned where the majority of these respondents being academics and those with matriculation. The university concerned should develop a PMS which is aligned to the university strategic plan and to other university policies coupled with structured change management interventions focusing on academics and semi-skilled employees. Keywords: Performance Management System, Rewards Strategies, Effectiveness, Academics * Mangosuthu University of Technology, South Africa

Introduction At South African universities, performance management (PM) systems are more or less obsolete due to the fact that employeess job descriptions are not aligned to departmental and university objectives. The failure of the system is exacerbated by factors such as approved strategic objectives that are not cascaded down to the level of employees, unfair and unequal systems on which remuneration and reward is based (Burney, Henle & Widener, 2009; Chan, 2004), absence of continual feedback (Matunhu & Matunhu, 2008: 11), inadequate internal communication, and unrealistic expectations in terms of rewards (Brennan & Shah, 2000). However, a number of commentators, especially those within the education sector, regard this managerialistic approach to performance appraisal as unwarranted, counter productive (Scholtes, 1999) and unworkable and unacceptable in knowledge-based organisations (Simon, 2001: 91). Other authors describe it as antithetical to a self-governing community of professionals, an infringement of academic freedom, based on a top-down approach to research and teaching which severely restricts creativity and self-development, or a covert means of introducing greater governmental control of the Higher Education and Further Education sectors and increasing the remuneration of those who work in them (Barry, Chandler & Clark, 2001; Holly & Olivier, 2000; Henson, 1994; and Townley, 1990). This study intends to answer whether the respondents perceive PMS as having an impact on the effectiveness within the university concerned as well as to whether expectations will be clarified and feedback provided on the employees performance. Whilst, the chief objectives of this study were to determine the perceptions of employees on the impact of PMS on bringing the effectiveness, clarified expectations and providing feedback to employees on performance. Meanwhile, there is a paucity of published data on the perceptions of employees in universities on their expectations and impact of PMS in bringing effectiveness before the system being implemented. This study will add value to the body of knowledge in the South African universities as human resources managers will understand what factors they must take into consideration when planning and implementing PMS.

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Theoretical Approach Employees expectations and feedback on PMS Failure to link job descriptions to departmental strategic plans and those of the institution lead to weaknesses and under-performance as a job description clearly describes expectations and desired performance required of an employee. Furthermore, unclear understanding of roles and responsibilities between the line manager and the subordinate tends to cause animosity. As Fullan & Scott (2009: 37) pinpoint another angle on the misalignment problem: the failure of individual position descriptions, performance plans, accountability, and reward and staff development systems to focus on the capabilities and priorities for effective delivery, the quality of day-to-day delivery in research and teaching, and the implementation of key quality improvements. Hypothesis1: PMS is necessary as it will impact on clarified expectations and performance feedback given to employees within the university concerned. Hence, universities strategic plans are not cascaded to tactical and operational levels and are further separated from the strategic management environment, which makes it difficult for the perfomance indicators and targets to be achieved. Smith & Cronje (1992: 115) define the strategy as the formulation of an organisations vision and mission, and subsequent actions to achieve the vision and mission. Therefore, performance plans are expected to emanate from the universitys approved strategic plan. Minnaar (2010: 54) maintains that performance plans are not a list of projects, but that they are directly related to the institutional mandate and must contain activities required to maintain present levels of service rendering, as well as those that aim to expand the current scope of services, usually through project interventions. Employees have expectations based on objectives which they perceive should be set out in such a way that they are specific, measurable, achievable, relevant and time-bound (SMART), so that both line manager and employee can determine how the employee is performing. For an employee to achieve the agreed SMART and deliverable objectives, the competencies should be identified and recorded in the form of the Personal Development Plans (PDPs). Armstrong (2001: 191) asserts that both parties in the PM process will also need guidance and training in the use of competencies, the preparation of performance agreements and plans, the preparation for and conducting of perfomance reviews, ratings and the completion of review forms. Bernthal, Rogers & Smith (2003) contend that PM programs also provide a unique mechanism for ongoing feedback and development, a critical component of engagement. After setting goals together, managers and employees can track progress and ensure that performance stays in alignment with goals and changing work conditions. Continuous feedback facilitates performance by helping employees to refocus their behaviour when they get off track. During performance reviews, managers can provide more specific feedback relative to goals to help employees identify strengths and areas for development. In this way, new performance goals can be set to leverage employee strengths and provide opportunities to address developmental or career goals. Armstrong (2001: 191) believes that some of the skills and procedures, such as providing feedback, coaching, counselling and rating will be practised by managers so that subordinates are fully aware of the expected duties and responsibilities. Impact of PMS on effectiveness There is little evidence that PMS can accomplish organisational/team/individual objectives, which in turn can make a positive contribution to organisational effectiveness, as there is little clarity about what practices make a PMS effective in universities. There are objectives that need to be accomplished by organisations, which include motivating performance, helping individuals to develop their competencies (Maybodi, 2010:83), building a performance culture (Cameron & Quinn, 1999), determining who should be promoted, eliminating individuals who are poor performers and helping implement organisational strategies. Edward (2003) indicates that virtually every organisation has a PMS that is expected to accomplish a number of important objectives with respect to human capital management and further development. Hypothesis2: PMS is necessary as it will impact on effectiveness within the university concerned.

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Effective feedback based on agreed and understoond objectives and job requirements, specific to agreed objectives, accurate, relevant, balanced, alternative and timely solutions enable the implementation of the PMS to go smoothly. Edward (2003: 3) reveals considerable research which shows that PM effectiveness increases when there is ongoing feedback, behaviour-based measurements are used and trained raters are employed. However, there is one potential determinant of PMS effectiveness, that has received relatively little attention: how closely the results of the PMS are tied to significant rewards. Whilst, different empirical studies have been conducted on job satisfaction and its link to rewards (Probst & Brubaker, 2001), rewards as a tool to promote effectiveness of employees (Hinkin & Schriesheim, 2004) and enhancing participation and effective commitment (Travaglione & Marshal, 2006). Some studies have highlighted the important role played by a PMS, claiming that it converts human performance into dollar values (Bernthal, Rogers & Smith, 2003), increases productivity (Houston, 2000), and improves organisational culture (Rose, Kumar, Abdullar & Ling, 2008). Armstrong (2001: 5) maintains that PM embraces all formal and informal measures adopted by an organisation to increase corporate, team and individual effectiveness, and to continuously develop knowledge, skill and competence. The main aim of this empirical study was to gauge the perceptions of employees on the impact of the system on effectiveness, expectations clarifications and feedback on PMS outcome. Research Approach The present study is based on the quantitative research design, whereby descriptive statistics, namely measures of central tendency and measures of dispersion, were used to describe the distribution of scores on each variable and to determine whether the scores on different variables are related to each other. In this study, a survey research method was adopted which addressed the dimensions of the PMS in terms of its impact on effectiveness, expectations and feedback within the university concerned. The primary and secondary data was utilised to elicit information on the PMS. In addition, factor analysis was used in this empirical study with the aim of establishing whether four (4) measures do, in fact, measure the same thing. Hence, principle component analysis was used as the extraction method, and the rotation method was Varimax with Kaizer Normalisation. Research method Research participants and sampling procedure This quantitative study adopted a stratified random sampling and the university employees were identified as the total population. Underhill and Bradfield (1998) confirm that stratification is useful when the population is composite in nature, and can be divided into sub-populations that are distinct in characteristics of interest. The employees of the university concerned were divided into three categories, namely, academic, academic support and administration support. A structured questionnaire was administered by the researcher to a population size of 150 as per Sekerans (1992) recommended population size. Of the selected scientific sample, 108 completed the questionnaire generating a response rate of 72% which was used for the final analysis of this study. There were 50% males and females respectively who responded, wherein, 64.4% were between the ages of 25-44 years. Of this 21.3% (23) were females who were between 25-34 years. Nearly half of the respondents (47.2) had postgraduate qualifications. It was observed that by gender, there were no significant differences (male-24.1%) and (female-23.1%) in the number of respondents having the same qualification. Nearly 15% (14.8%) of the respondents had a postgraduate degree were between the ages of 25-34 years. Of the sample 25.9% (28) were academics, 22.2% (24) academic support and 51.9% were administration support. Most 64.8% were at non-management level, 15.7% at junior management, 14.8% at middle management and 4.6% at senior management. Of all the senior managers, 40% had a tenure for at least 20 years. Half of this (20%) was for Academic Managers and the other half for Administration Support Managers. Amongst the description for job type, Administration Support Managers comprised 25% of the respondents. When looking at tenure, this group made up 50% of the respondents.

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Two major aspects of precision (reliability and validity) were used in this study to ensure that the researcher used the appropriate instrument to produce consistent results. The sampling approach was considered relevant because this study is empirical and its aim is to assess the expectations of employees and examine the employees perceptions on the perceived impact of PMS on effectiveness thereof. The questionnaire was piloted to ten employees with the aim of identifying any errors, as well as testing the perceived validity and reliability of the questionnaire. Measuring instruments A self-developed structured questionnaire using a five-point Likert scale was developed to assess the key dimensions of PMS (current perceptions on the impact on effectiveness and current expectations for the PMS. The five-point scale ranging from (1) strongly disagree, (2) disagree, (3) undecided, (4) agree to (5) strongly agree, was used. The Likert scale was used as it enables certain arithmetical operations to be performed on the data collected from the respondents and it also measures the magnitude of the differences among the individuals. The questionnaire the researcher developed for this study consisted of three sections. Section A contained biographical data about age, gender, education, tenure, job type and current job level. Section B (10 sub-dimensions) aimed to gauge employees perceptions on their expectation and the perceived impact of the PMS at the university concerned. An example of a sampled sub-dimension was PMS is needed in my organisation. An example of the response scale was the disporportionately high percentage of 34.3% who disagreed, 21.3% who were undecided and 44.4% who agreed that PMS is needed in this organisation. Section C contained 8 sub-dimensions aimed to identify employees perceptions on the PMS impact on effectiveness. Overall, 78% of the respondents agreed with the sub-dimensions on average, with 5% disagreeing. The first four sub-dimensions showed higher levels of agreement than the remaining four. Even though the percentage disagreeing did not vary much, the levels of uncertainty pertaining to the last four sub-dimensions was approximately double those of the first four. Research procedure This study used a structured questionnaire which was administered by the researcher to a population size of 150 within the university concerned. Empirical Findings Statistical analysis The data collected from the respondents was analysed using Predictive Analytic Software (PASW) Statistics version 18.0 for data capturing, presentation, analysis and interpretation. Descriptive and inferential statistics were used for data analysis and interpretation. Inferential statistics in the form of Pearson Correlation Matrix was used in this study to indicate the direction, strength and significance of the bivariate relationship among the sub-dimensions of the PMS. In addition, the psychometric properties of the questionnaire were statistically assessed using Factor Analysis and Cronbachs Coefficient Alpha (www.ats.ucla.ed/stat/SAS/notes2). Results Descriptive and inferential statistics were used to analyse the data. The results will be presented in the form of a table and narratively. Reliability was computed by taking several measurements on the same subjects, the Cronbachs Alpha values for individual dimensions were high and a reliability coefficient of 0.70 or higher is considered as acceptable (www.ats.ucla.ed/stat/SAS/notes 2). As far as the PMS dimensions are concerned, current expectations for the PMS (Alpha = 0.834) and current perceptions of the PMS impact on effectiveness (Alpha = 0.907). The overall reliability score of Alpha = 0.8715 indicates a high degree of acceptable, consistent scoring for the different categories of this study. Descriptive statistics The respondents were required to respond to the terms of the leading statements of the key dimensions of the study using a 1 to 5 Likert scale.

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The study findings indicate that the mean score values indicate that employees have different views on the sub-dimensions of the PMS, which is in descending level based on mean scores, which are as follows: Current perceptions on the PMS impact on effectiveness (Mean = 4.0694). Current expectations for the PMS (Mean = 3.9204).

The mean score values displayed in Table 1 reflect that on a scale from 1 to 5, the respondents were between 4.0694 and 3.9204. This indicates that a high proportion of employees ranged from agree to undecided on statements relating to each dimension. These averages reflect the current status quo at the university concerned as there are transformational and cultural changes taking place, as well as the fear of the unknown as the PMS is regarded as a threat more especially to academics in terms of their freedom and autonomy. Table 1. Descriptive statistics key dimensions of PMS Statistic Mean Median Standard. Deviation Variance Minimum Maximum Inferential statistics Inferential statistics were computed to make decisions with regard to the hypothesis of the study. Hypothesis 1: There is a significant difference in the perceptions of employees varying in the impact of PMS on effectiveness regarding th other dimension (current expectations for the PMS) at the 1% level of significant. Hence, alternative hypothesis may be rejected. Hypothesis 2: There is a significant intercorrelations in the perceptions of employees varying in the PMS expactations, clarifications and feedback regarding the other dimension of the study (current perceptions on the PMS impact on effectiveness). The p-value of 0.000 is less than the level of significance of 0.05. This implies that there is a statistically significant difference between the number of respondents who agreed with the statement and those who disagreed. Current expectations of the PMS A frequency analysis was conducted and the findings of the study revealed that 34.3% of the respondents disagreed and 21.3% were undecided that PMS is needed within the university concerned. There was a disproportionately high percentage of 36% amongst the academics, of whom disagreed and 18% of whom were undecided about the need for the PMS, which strongly contradicts the 34% of the administration staff who disagreed, 18% who were undecided and 48% who agreed. Almost 60% of senior management were undecided that the system is needed in this institution and 40% agreed. The study results show that 55% of employees with degrees and 49% with postgraduate qualifications agreed that PMS is needed, compared to 25% with matriculation who disagreed and 50% who were undecided. Meanwhile, 6.5% of respondents disagreed and 25.0% were undecided that performance plans will be aligned to the university objectives. It is also noted that 74.1% of respondents have a definite view regarding the question of whether PMS will further and support organisational culture change, while 5.6% disagreed and 20.4% were undecided that PMS will improve interpersonal relations. With regard to non-monetary rewards, 11.1% disagreed and 27.8% were undecided that the system will provide this type of reward. However, 72% of the academics agreed that PMS will provide non-monetary rewards, compared to the 58% of the administration staff. Current expectations for the PMS 3.9204 4.0000 .63552 .404 2.00 5.00 Current perceptions on the PMS impact on effectiveness 4.0694 4.1250 .69025 .476 1.00 5.00

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Current perceptions of the PMSs impact on effectiveness Under the ambit of the current perceptions of the impact of the PMS on effectiveness, a frequency analysis was undertaken, showing that 7.4% of respondents disagreed and 25.0% were undecided that PMS expectations will be clarified and individual performance feedback will be based on mutual understanding. Whereas, 10.2% disagreed and 24.4% were undecided that there would be an open dialogue between evaluators and those evaluated. On the other hand, 64% of the administration staff agreed that there would be an open dialogue between evaluators and those evaluated compared to 46% of academic support staff who agreed. Furthermore, 7.4% of the respondents disagreed and 21.3% were undecided that line managers will provide guidance. A total of 16.7% of respondents were undecided that employees will be measured according to the functions as stated in their job descriptions. Discussion Having reviewed the literature in the previous sections of this article, and statistically presented and analysed the findings of the perception study on the PMS within the university concerned, a discourse is essential to determine the correlation between the literature and research findings. The descriptive statistical results show an average mean value of 4, indicating that there is a need for consideration and improvement for the dimensions of PMS. This in turn reflects negatively to each of the dimensions of the employee readiness survey on the PMS within the university concerned. Such discrepancies require strategic and change management interventions to convert employees who are undecided to be the ambassadors of the PMS throughout its phases. The high proportion of respondents who either disagreed or were undecided means that there is a need for an improvement plan focusing on communication and change management. There is a general tendency of agreement with the statements that constitute this sub-dimension. The average disagreement score is 17% and the disproportionately high percentage (55.6%) of the respondents who were undecided requires a serious investigation into the respondentss uncertainty about the need for the PMS at the university concerned. Current expectations for the PMS Even though there is not much conclusive or empirical evidence on resistance to the application of PMS to institutions of higher learning, such perceptions may emanate from the previous failed initiatives of PMS projects at the well established and well resourced universities, as well as poor knowledge and understanding of the PMSs impact and benefits to organisations. The observations in this study are reminiscent of studies by Cameron & Quin (1999) and Rose, Kumar & Ling (2008), who examine the positive relationship between good organisational culture and performance. The high percentage of academics who disagreed that there is a need for PMS at the university concerned reflects the dissatisfaction level of this specific group, who often complain about being overloaded and who may also perceive the PMS as potentially increasing their workload. Gillespie et al. (2001) concur with this finding, suggesting that contributing factors to the rise in workload include a decline in staff numbers, an increase in student numbers, the changing nature of students, and unrealistic deadlines. Since at the university concerned there are no agreed upon workload norms and agreements to determine the level of the workload, another way of ensuring fair and equitable norms is through the implementation of the PMS. Furthermore, the disproportionately high percentage of the respondents who possess matriculation who disagreed and were undecided about the latter sub-dimension is a reflection of semiliterate employees who lack understanding and knowledge of the PMS in general and its benefits as highlighted in the literature above. This finding is in agreement with Mweemba & Malans (2009: 8) assertion that the role of education should be emphasized in organisations where employees basic education is at a lower level. Furthermore, the higher percentage of senior management who were both undecided and who also disagreed that there is a need for PMS at this institution contradicts a study conducted by Bernthal, Rogers & Smith (2003) which states that effective PMSs are characterised by the involvement of senior management. The literature has reflected various types of perfomance rewards which are both monetary and nonmonetary, whilst the findings of this study reveal that 27.8% of the respondents were undecided with regard to non-monetary rewards. Different authors and successful organisations have learnt that money is not the only compensation strategy to fulfil the needs of employees (see Harte, 1995: 8; Hinkin & Schriesheim, 2004 and Scott-Ladd, Travaglione & Marshall, 2006: 406). The fact that 44% of

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respondents agreed that PMS is needed shows that there was a difference of only 10% between the number of respondents who disagreed than those who agreed. However, an average of the current expectations for the PMS, shows that there is a general tendency of agreement with the statements that constitute this category. On average, 71% of the respondents agreed with the latter dimensions. Hence, the average disagreement score was 17%. Current perceptions of the PMSs impact on effectiveness The mean scores were calculated on the perceptions of employees on the PMSs impact on effectiveness, resulting in a mean score value of 4 for this dimension. This dimension indicates a high mean score value which shows that the respondents are in favour of the impact of the PMS on effectiveness. Thus, this study supports the findings of Edward (2003: 3) that performance effectiveness increases when there is ongoing feedback. Such findings have been confirmed by the present research findings indicating that 67.6% agreed with this sub-dimension even though there is a high percentage of respondents who were undecided, which leaves significant room for improvement. This study produced certain findings which were not consistent with previous studies. These include the highly disproportionate 65.7% of respondents who agreed that there would be an open dialogue between evaluators and those evaluated. On the other hand, the high percentage of 24% of the respondents who were undecided requires further consideration and attention to building trust by ensuring the impartiality and transparency of this system. Futhermore, 71.3% agreed on the role the line managers will play during the duration of the project, which confirms the findings of authors such as Armstrong (2001: 191), who discussed the role to be played by managers in the PMS process. Much room of improvement is indicated for the sub-dimension that employees will be measured against job descriptions, because, while 78.7% agreed, the fact that 16.7% were undecided and 4.6% disagreed raises serious concerns which are confirmed by Fullan & Scott (2009: 37). Due to the fact that there is paucity of published literature on the perceptions of employees in the universities on the employees expectations and the impact of PMS on effectiveness. This study could enlighten human resourcces managers to be prepared when planning and implementing the PMS and to customise it in such a way that it mitigates any aforesaid negative perceptions and uncertainty which might transpire at any stage of the system. Recommendations Various authors have acknowledged that it is impossible to have a single intergrated PMS that can accomodate all type of organisations. However, it is possible that, even under the diverse circumstances presented above, certain principles, as recommended below, do indeed prevail: The university should devise a customised PMS including policy and procedures that accomodates all job categories. The line managers at the university concerned should be trained in the use of the entire PMS in order to provide ongoing feedback to the rated employees with development plans to those who are not achieving to minimum standards. The university should improve organisational culture through organisational development interventions, including change management coupled with trainings to all employees and put more emphasis on the academics and semi-skilled in order to enable the system to be implemented smoothly. The university should implement both financial and non-financial reward systems which would attract, motivate and retain quality employees. Employees key performance management areas (KPAs) should emanate from the departmental strategic plans which are also aligned to the approved university strategic plan.

Conclusion This study argues that PMS is one of the tools instrumental in improving organisational effectiveness associated with equal pay for equal value, promote accountability, collegiality and improve the

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competencies of employees. It seems, though, that poor consultation with key stakeholders, poor and lack of shared understanding of the system, unequal workload distribution and rewards, unrealistic objectives, absence of lobbying and advocacy strategies and unaccustomised system to the institution, perpetuate the failure of the system, especially in South African universities. This study concludes that in order to implement a developmental and all-inclusive PMS, a flexible PMS need to be designed in order to accomodate all employees at different job and education levels. Furthermore, this article recommends that in order for the PMS to improve effectiveness amongst employees, well crafted departmental strategic plans aligned to the organisational strategy, and that roles and responsibilities as well as job descriptions need to be clearly defined and in place, thus responding effectively to the departmental and university objectives. A noteworthy finding of this study is that the majority of the respondents either disagreed or were undecided about the need of the PMS, which creates a never-ending search for the factors underpinning their perceptions. The final point made in this study is the role that should be played by line managers, which is crucial since the responses indicate a perception of poor employee-employer relationships emanating from a lack of trust. This article contributes to the discussion of PMS strategies and models that should be taken into consideration by universities in planning and implementing PMS. In addition, the main limitation of this study is the fact that it only focussed on the quantitative research design, hence, future research can be intertwine both quantitative and qualitative for triangulation purposes which could yield reliable findings. Furthermore, future research is essential on the academics and to semi-literate employees with the view to establish a customised PMS that could accomodate their levels of reasoning and nature of work. References 1. 2. 3. 4. 5. 6. 7. Armstrong, M. & Murlis, H. (1994), Reward management: a handbook of remuneration strategy and practice (3rd edition). London: Kogan Page. Armstrong, M. (1999), Human resource management practice. London: Kogan Page. Armstrong, M. 2001. Performance management: key strategies and practical guidelines (2nd edition). London: Kogan Page:. Barry, J., Chandler, J., Clark, H. (2001), "Between the ivory tower and the academic assembly line", Journal of Management Studies, Vol 38 No. 1, pp. 87101. Bernthal, P. R., Rogers, R. W. & Smith, A. B. (2003), Managing performance: building accountability for organisational success, HR Benchmark Group, Vol 4 No. 2, pp. 1-38. Brennan, J. & Shah, T. (2000), Quality assessment and institutional change: Experiences from 14 countries. Higher Education, Vol 40, pp. 331349. Burney, L. L., Henle, C. A. & Widener, S. K. (2009), A path model examining the relations among strategic performance measurement system characteristics, organizational justice, and extra- and inrole performance. Accounting, organizations and society Vol 34, pp. 305321. Cameron, K. & Quinn, R. E. (1999), Diagnosing and changing organizational culture: based on the competing values framework. MA: Addison-Wesley. Chan, L. L. M. (2004), In search of sustained competitive advantage: the impact of organizational culture, competitive strategy and human resource management practices on firm performance. The international journal of human resource management, Vol 15 No.1, pp. 124. Chau, S. V. (2008), The relationship of strategic performance management to team strategy, company performance and organizational effectiveness. Team performance management, Vol 14 No. , pp. 113117. Edward, E. L. (2003), Reward practices and PMS effectiveness: center for effective organisations. University of California: Los Angeles. Fullan, M. & Scott, G. (2009), Turnaround leadership for higher education. San Francisco: John Wiley & Sons. Gillespie, N. A., Walsh, M., Winefield, A. H., Dua, J & Stough, C. (2001), Occupational stress in universities: staff perceptions of the causes, consequences and moderators of stress, Vol 5 No. 1, pp. 5372. Henson, S. L. (1994), No escape from judgement: appraisal and PRP in higher education. Occasional papers in organisational analysis, University of Portsmouth, Portsmouth, No.2. Hinkin, T. R. & Schriesheim, A. (2004), If you do not hear from me, you know you are doing fine. Cornell hotel and restaurant administration quarterly, Vol 45, pp. 362372.

8. 9.

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11. 12. 13.

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16. Houston, D. J. (2000), Public-service motivation: a multivariate test. Journal of public administration research and theory, Vol 10, pp. 71328. 17. Introduction to SAS.UCLA: Academic Technology Services, Statistical Consulting Group. Cronbachs Alpha. www.ats.ucla.ed/stat/SAS/notes 2. (Accessed November 24 2011) 18. Matunhu, J & Matunhu, V. (2008), Performance management in parastatals: the cases of the Zimbabwe United Passenger Company and the National Railways of Zimbabwe. Africa insight, Vol 38 No. 1, pp. 118135. 19. Minnaar, F. (2010), Strategic and performance management in the public sector. Pretoria: Van Schaik Publishers. 20. Mweemba, R. S. & Malan, J. (2009), The impacts of performance measurement on the quality of service delivery in the Zambian Public Service. Journal of contemporary management, Vol 6, pp. 36. 21. Probst, M. T & Brubaker, T. L. (2001), The effects of job insecurity on employee outcome: crosssectional and longitudinal exploration. Journal of occupational health psychology, Vol 6 No. 2, pp. 139159. 22. Rose, R. C, Kumar, N., Abdullah, H. & Ling, G. Y. (2008), Organizational culture as a root of performance improvement: research and recommendations. Contemporary management research, Vol 4 No. 1, pp. 4356. 23. Scholtes, P. R. (1999), Performance appraisal: state of the art in practice, in J. W. Smither (Ed), Personnel Psychology, Vol 52 No. I, pp. 17781. 24. Scott-Ladd, B., Travaglione, A. & Marshall, V. (2006), Causal inferences between participation in decision making, task attributes, work effort, rewards, job satisfaction and commitment. Leadership & organization development journal, Vol 27 No. 5, pp. 399414. 25. Sekaran, U. (1992), Research methods for business: a skill building approach (2nd edition). New York: John Wiley and Sons. 26. Simon, R., (2001), Performance measurement & control systems for implementing strategy text & cases. Engelwood Cliffs, NJ: Prentice-Hall. 27. Smith, P. J. & Cronje, G. J. (1992), Management principles: a contemporary South African edition. Kenwyn: Juta & Co.

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INTERNAL CORPORATE GOVERNANCE MECHANISMS AND AUDIT REPORT LAG: A STUDY OF MALAYSIAN LISTED COMPANIES
Ummi Junaidda Binti Hashim*, Rashidah Binti Abdul Rahman** Abstract This study attempts to investigate the link between corporate governance mechanisms and audit report lag for companies listed on Bursa Malaysia from 2007 to 2009. The 288 companies listed on Bursa Malaysia have been randomly selected. The corporate governance mechanisms examined include the board of directors and audit committee. It shows that there are significant negative relationships between board diligence, audit committee independence and expertise. The higher the number of meetings being held indicates that the board is discharging their role towards the company. The results show that audit committee independence and audit committee expertise could assist in reducing audit report lag among companies in Malaysia. Its provide some evidence supporting the resource based theory, whereby characteristics of the audit committee, such as the resources and capabilities, could improve companies performance as well as corporate reporting.However, it could not provide any evidence concerning the link between board independence, board expertise, CEO duality and audit committee diligence on audit report lag. This study provides comprehensive examination of ARL on Malaysian listed companies for three years period. It is consider the initial study to provide a thorough examination of the association between corporate governance characteristics and ARL. Keywords: Audit Report Lag, Corporate Governance, Board Of Director, Audit Committee, Malaysia * Accounting Lecturer, Universiti Sultan Zainal Abidin Terengganu, Malaysia ** Accounting Professor, Universiti Teknologi Mara Shah Alam, Malaysia

Introduction Timeliness of the reporting is one of the important attributes in the financial market. Financial reporting will provide users with quality information that could assist them in the decision-making process as investors of companies, particularly, as users rely on the audited financial reports in their assessment and evaluation of companies performance. Audited financial reports will increase reliability and users will feel confident concerning the reports verified by the auditors and would be able to make decisions wisely (FASB, Concepts Statement 2). Effectiveness and efficiency often represents quality information. Efficiency in the context of quality information frequently refers to timeliness concerning the reporting delay from the companys accounting year end to the date that the audit report is completed (Chambers and Penman, 1984). 4 The setback of not achieving timeliness in reporting the financial statements of a company would cause all the information to lose its relevancy. Such a setback may motivate users to seek information about the company from other sources, which is likely to expose any unpleasant reports relating to the company. Consequently, users, particularly investors, would likely postpone their transaction on shares, either purchase or sales, until the report on earnings is announced (Beaver, 1968). This argument is supported by Ashton et al., (1987), who identified that a delay in releasing financial statements would increase

Other than timeliness, the term audit report lag and audit delay also represent efficiency. These terms are used interchangeably in this study.

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uncertainty concerning investment decisions. Therefore, the success in submitting financial statements on time would provide greater benefits to the company. In Malaysia, Bursa Malaysia5 demands timely financial reporting through the provision of Chapter 2 and Chapter 9 of the Listing Requirements (2009), Bursa Malaysia Securities Berhad. The Bursa Malaysia Listing Requirements under chapter 9.23 (a) provide that a public listed company must submit its annual report to Bursa Malaysia within six months of the companys year end. To prevent companies from late submission of their audited financial reports, Bursa Malaysia, in consultation with the Securities Commission, has imposed a penalty on public listed companies for failure to disclose the material facts such as the annual report within the time frame. In spite of the requirement, the current scenario often pictures the inability of Malaysian companies in submitting their audited financial reports on time to Bursa Malaysia (www.bursamalaysia.com). Many professional and regulatory bodies have taken various actions to identify the factors that hinder companies in delaying the submission of their financial reports. Among the factors identified are those that relate to the internal control system of a company (Abdul Rahman and Salim, 2010). Charles River Associates (2005) stated that increased attention to the internal control system could enhance the reliability of financial statements. Internal control is important in enhancing the corporate governance of a company. The board of directors is recognised as one of the most important mechanisms for corporate governance in implementing internal control (Beasley, 1996). The board of directors also affects the composition and structure of the audit committee (AC) (Menon and Williams, 1994), which indirectly influences the timeliness of financial reporting. This argument is consistent with the notation by the Securities Exchange Commission (SEC) and Securities Commission (SC), which state that the audit committee is an important element of corporate governance in ensuring the quality of financial reporting. Bursa Malaysia highlighted that directors and the audit committee play a significant role in the company to ensure the fulfilment of the objectives of Bursa Malaysia concerning timely reporting and, consequently, address corporate governance concern. The Bursa Malaysia Listing Requirements were revised in August 2009 to strengthen the rules in order to become more effective. The revised requirements specify that one third of the members on the board must be independent directors, and place a restriction on the number of directorships not more than 25 directorships at one time. Out of the 25 directorships, 10 positions should be within public listed companies and 15 positions in non-listed companies. In respect of the audit committee, it provides that the members of the audit committee must not be less than three persons, all members must be non-executive directors, the majority of whom should be independent directors, and at least one member must be a member of the Malaysian Institute of Accountants (MIA). If none of the members of the audit committee are members of the MIA, one member must have at least three years working experience. The Malaysian Government also recommended the Malaysian Code on Corporate Governance, which was established in 2000, and was later revised in 2007. The revised code recommends that members on the board of directors should have skills, knowledge, expertise, experience, professionalism and integrity. Concerning the audit committee, the code proposes that to strengthen the role of audit committees, all the members of that committee should be non-executive directors, and be able to read, analyse and interpret financial statements. This is to ensure that they would be able to effectively discharge their functions. Therefore, the existence of good corporate governance would be able to facilitate the work of external auditors in completing the audited financial report and reduce the delay in reporting. This study aims to answer the following research question: Could the board of directors and audit committee play an important role in effectively monitoring the timeliness of the audit report? Thus, the current paper examines whether the existence of the board of directors and audit committee could assist in reducing audit report lag. Such examination is important since the audit literature has identified the role of the board of directors and audit committee in reviewing the financial statement.

Bursa Malaysia was previously known as Kuala Lumpur Stock Exchange.

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Previous studies have proposed that corporate governance is an important determinant to ensure the success of a company in various aspects such as companies performance, financial reporting quality, corporate failure, audit quality, environmental reporting, and earnings management. Afify (2009) and Tauringana et al., (2008) examined the impact of corporate governance mechanisms on audit report lag. Both studies were conducted in a non-Malaysian setting. Within the Malaysian context, studies have examined the issue of timeliness using firm specific variables (Ahmad and Kamarudin, 2003; Che-Ahmad and Abidin, 2008). Furthermore, past studies have provided investigation concerningthe issue of corporate governance in association with companies performance (Mohd Ghazali, 2010), financial reporting quality (Ismail et al., 2008), corporate failure (Hsu and Wu, 2010), audit quality (Wan Abdullah et al., 2008), environmental reporting (Said et al., 2009) and earnings management (Abdul Rahman and Mohamed Ali, 2006). However, these studies did not examine corporate governance mechanisms in relation to audit report lag. Thus, the current study extends the corporate governance literature by examining the issue of the timeliness of annual reports in the Malaysian market by incorporating corporate governance, and firm specific variables in relation to audit report lag. This study contributes to the corporate governance and audit literature by examining the association of corporate governance: board of directors, audit committee and the audit report lag. The findings of the study would have policy implications for the Malaysian Code on Corporate Governance (MCCG). It provides supporting evidence concerning whether the development of corporate governance could significantly increase the timeliness of annual reports among companies in Malaysia. This study could assist the Malaysian Institute of Corporate Governance (MICG) to provide best practice in order to enhance corporate governance mechanisms. The findings could also assist external auditors in evaluating the effectiveness of the board of directors and audit committee in their audit planning. Such assistance would assist the external auditors in identifying the best time to be allocated for their audit engagements in terms of effort, such as whether to reduce or increase effort and the amount of fees to be charged. The remainder of the paper is organised as follows. The following section highlights the literature review and hypotheses development relating to audit report lag, board of directors and audit committee. The third section describes the research design of the current study and follows with the results. Lastly, this paper provides the conclusion, limitations and future research avenues of the study. Literature review and Hypotheses Development Within the corporate governance mechanisms, the board of directors and audit committee play an important role in the monitoring process as well as concerning the reporting role in companies. Bursa Malaysia has outlined the appointment requirements for members being appointed on the board of directors and audit committee. Such requirements would ensure that monitoring targets are achievable since expert members would be able to clarify matters relating to the company. Consequently, these members would reduce auditors task complexity and improve the timeliness. Therefore, arguably, the board of directors and audit committee would be able to reduce the audit report lag. This is because the appointment of the directors and audit committee are in line with the agency theory where agents act on behalf of principles in ensuring the company is performing well and provides quality annual reporting. From the perspective of the resource based theory, ability, qualification, and experience of the board of directors and audit committee are among the other vital resources that the company possesses in enhancing its performance. This study has developed seven hypotheses in meeting the objective of this study, which are related to the characteristics of the board of directors and audit committee. a) Board independence An effective board of directors is an important mechanism of internal governance in managing an organisation (Che Haat et al., 2008). Resolving the agency problem would be more effective when the boards comprise independent directors. Weir et al., (2002) found that boards of directors consisting wholly of inside directors would not be adequate to monitor the company, and, in certain cases, such structure would merely worsen the agency problem. A number of studies have argued that the effectiveness of the board would increase when more non-executive directors are on the board of directors

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(Ho and Williams, 2003; Weir et al., 2002). For example: Beasley and Petroni (2001) investigated the association between board composition and the choice of auditors of 681 property-liability insurance companies. They found that boards of directors with a higher proportion of independent directors would have a greater tendency to employ specialised brand name auditors (high quality auditor) than board of directors with a lower percentage of independent directors. This characteristic of board of directors also ensures greater assurance concerning financial reporting (Carcello et al., 2002). OSullivan, (2000) and Salleh et al., (2006) also found that a proportion of non-executive directors had a positive impact on audit quality. The authors stated that non-executive directors exert pressure to have a proper and intensive audit. It is anticipated that an increase of non-executive directors on the board of directors also improves audit quality. This occurs when boards with independent directors provide more independent monitoring, and, as a result, increase financial reporting quality and also the quality of the audit. Board independence with financial expertise is related to a more transparent disclosure of the companys performance (Felo, 2009). They might require more audit effort than the usual amount of effort being expended, which would eventuate to an increase in audit quality and, consequently, reduce audit report lag. Therefore, this leads to the first hypothesis developed in this study. H1: There is a negative relationship between board independence and audit report lag. b) Board diligence One method that can be used to assess whether the board members play their roles in representing the shareholders is by examining the activities of the board. The activities of the board would reflect the boards commitment in discharging its role as an agent for the company (Jensen and Meckling, 1976). The board of directors is expected to have a firm grip on the companys internal control processes and heighten their vigilance in identifying, addressing and managing risks that may have a material impact on the financial statements and operations of the company (Corporate Governance Guide p.10, Bursa Malaysia). A diligent board of directors would be more concerned with the financial reporting aspects of the company. Lipton and Lorsch (1992), and Conger et al., (1998) provide support that boards of directors that meet frequently are more likely to discharge their duties well. This indicates a good internal control mechanism. A board of directors in a company that has more frequent meetings would allow the board members to discuss identified problems, which leads to the superior performance of the company (Evans and Weir, 1995). Tauringana et al., (2008) found a significant negative relationship between the frequency of board meeting and the timeliness of the annual report for companies listed on the Nairobi Stock Exchange (NSE) in Kenya. This indicates that companies that hold frequent meetings publish their annual reports earlier, increase the companys performance and is evidence of an effective corporate governance mechanism. The most recent guide on corporate governance by Bursa Malaysia highlights that a typical board of directors would hold a minimum of 6 to 8 board meetings annually. More frequent meetings would enable the auditors to rely more on the strong internal control of the companies and reduce their workload. Consequently, this would lead to a decrease in the audit report lag. Therefore, this study hypothesizes that: H2: There is a negative relationship between board diligence and audit report lag. c) Board Expertise

Cross directorships or multiple directorships are also known as interlocking directors. This occurs when a director sits on several boards (Haniffa and Cooke, 2000). Directors that hold cross directorships could offer their valuable insights based on their experience from being on the board of another company (Dahya et al., 1996). The number of additional directorships could reflect a directors prominent reputation and ability in effective monitoring of the companies (Beasley, 1996). Carcello et al., (2002) examined the board characteristics and audit fees and found that boards with multiple directorships are more supportive in looking for high quality auditors. Their results show that the boards are more careful in discharging their duties. Consistent with the resource based theory, the internal resources that the

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company owns may aid the company to be more prosperous or outperform other companies. The resources that the company possesses are the skills, experience and knowledge of the board of directors. This, in turn, would produce higher quality and more reliable financial reporting, and would also lead to a reduction in the auditors workload due to their heavy reliance on the high quality and reliable financial reporting, and, consequently, reduce audit report lag. Therefore, the third hypothesis is developed. H3: There is a negative relationship between board expertise and audit report lag. d) CEO Duality As discussed in agency and organisational economics theories, the interests of the owners would be sacrificed to a degree in favour of management when a CEO holds the dual role of chair. This action would create managerial opportunism and agency loss since power and authority are concentrated in one person. The position of CEO Duality would not act in the best interests of the shareholders. The person who engages both roles would be reluctant to reveal unfavourable information to outsiders, specifically, the shareholders of the company. Forker (1992) affirms that a dominant individuality in both roles causes threat to the monitoring quality. Donaldson and Davies (1991, p. 50) state that where the chief executive officer is chair of the board of directors, the impartiality of the board is compromised. Auditors may face greater risk of audit failure when the roles of the chairman and chief executive are combined (Peel and Clatworthy, 2001). This is because there is a higher possibility for concealment or misstatement of relevant facts and even fraud to be perpetrated. Therefore, CEO duality could influence the auditors assessment of the control risk and audit risk, audit hours and the level of substantive testing increase. The characteristics of CEO duality are not associated with the companies performance (Abdul R ahman and Mohamed Ali, 2006; Mohd Ghazali, 2010). In contrast, Afify (2009) found that CEO duality significantly affects audit report lag whereby the duality of roles imposes a threat for them to monitor the company in an effective manner and, thus, increase the audit report lag. Therefore, this study hypothesizes that a lack of impartiality of the board would increase the audit report lag. H4: There is a positive relationship between CEO duality and audit report lag. e) Audit committee independence

Agency theory highlights that the independent members on the audit committee could help the principals to monitor the agents activities and reduce benefits from withholding information . Audit committees with more independent directors are considered as being a more reliable group than the board of directors in monitoring the company. The effective role provided by the audit committee would be appropriate to represent the rights and privileges for all stakeholders. Audit committee independence would enhance the effectiveness of the monitoring function, as it serves as a reinforcing agent to the independence of internal and external auditors in a company. Audit committees must be comprised entirely of independent directors in order to be more effective, as posited by Menon and Williams (1994).Klein (2002) shows that independent audit committees reduce the likelihood of earnings management, thus, improving transparency. Carcello et al., (2000) found that audit committee independence has a positive significant relationship with audit fees. This provides evidence that the independence of the audit committee would lead to higher quality financial reports. Ali Shah et al., (2009) found that companies in Pakistan are having good corporate governance through having independent audit committees. In contrast, Ismail et al., (2008) found that the independence of the audit committee would not influence the quality reporting of the companies. They argue that this is due to the companies only fulfilling the requirements, rather than the impact of the requirements. The MCCG (2007) and the Bursa Malaysia Listing Requirements (2009) emphasize that the audit committee might institute stronger internal control and good monitoring of the financial reporting process in a company. The strong internal control managed by the audit committee would lead to auditors reducing their work on the companys accounts because of their reliance on the internal control of the company. Consequently, this would lead to a decrease in audit delay. Thus, the fifth hypothesis is developed. H5: There is a negative relationship between audit committee independence and audit report lag.

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f)

Audit Committee Diligence

The audit committee is an integral part of a company that emphasises high level monitoring (Dechow et al., 1996). Moreover, the monitoring function would be more effective in terms of financial reporting. Activities conducted by audit committee members, such as meetings, are considered as an important tool in ensuring they are fulfilling their responsibilities towards the company. Ismail et al., (2008) measure audit committee diligence based on the actual number of audit committee meetings held in a year. Audit committees must carry out activities effectively through increased frequency of meetings in order to maintain their control functions (Bedard et al., 2004). Abbott et al., (2000) in their examination found that audit committees that meet at least twice annually are subjected to less exposure of sanction by the authorities. This is because the conducting of regular meetings would indicate that the audit committee discharges their duties in an appropriate manner as an agent for the company. They also noted that audit committees that are wholly independent are also active by way of having meetings. The American Bar Association posits that an audit committee that holds less than two meetings annually is considered as being uncommitted to its duties. This indicates that the audit committee is unable to contribute to the internal control in that situation. Auditors who really monitor the internal control function of the company would reduce their works. However, Ismail et al., (2008) found that the frequency of audit committee meetings does not influence the quality of reporting of the companies. They argue that this is because the companies are only fulfilling the requirements, rather than the impact of the requirements. Another study, done by Razman and Iskandar (2004), found that Malaysian companies that have good reporting meet more frequently than poor reporting companies. This is because, during the meeting, they can monitor the management activities. Consequently, this will lead to a decrease in the time taken for auditing by the auditors and reduce the reporting lag. Therefore, this study developed the following hypothesis. Ha6: There is a negative relationship between audit committee diligence and audit report lag. g) Audit Committee Expertise

Audit committee expertise is important in order to deal effectively with external auditors. Audit committees typically act as the mediator between the management and the auditors. Members of audit committees with experience in financial reporting and auditing, especially those who are CPAs would understand the auditors tasks and responsibilities (De Zoor t et al., 2003). They would become more supportive of the auditors compared to audit committee members who do not have similar experience. Audit committee members who are experts are more friendly with the auditors, and comprehensible, logical and coherent when they are discussing with the auditors regarding the financial reporting of the company. Audit committees with more expertise would be more concerned about the financial reporting quality of the company. DeZoort (1998) contends that an audit committee with more internal control experience makes decisions or judgments similar to auditors compared to those audit committee members who are without experience. This reflects that experience in the accounting, internal control or auditing is fundamental to enable the audit committee to understand and address problematic issues concerning the financial reporting system of the company. They would also realise the benefits to the market of producing financial statements on time. Audit committees with financial expertise are also identified that they are going to facilitate each other. This characteristic of audit committees shows as the resources and capabilities that the company has, as discussed in resource based theory. Capabilities are the expertise that the audit committee possess, which may assist in improving the performance of the firm. Listed companies in Malaysia will frequently end up with a good financial report when members of the audit committee are financially literate (Razman and Iskandar, 2004). This is because audit committees who have knowledge in accounting and auditing are able to demonstrate their ability in monitoring the internal control and reporting. Strong internal control would also lead to the auditors reducing their work because of their reliance on the credibility of the internal control. Therefore, the following hypothesis is developed:

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Ha7: There is a negative relationship between audit committee expertise and audit report lag. Research design The 288 companies listed on Bursa Malaysia have been randomly selected in this study involving financial years 2007 to 2009.This period is chosen in order to increase the reliability and accuracy of the results in this study. The listed companies are selected because they are governed by the rules and regulations imposed by MCCG and the Bursa Malaysia Listing Requirements. However, listed companies from the Banking and Financial Institution Act 1989 are excluded, because they are heavily regulated and the governance structure is determined by Bank Negara Malaysia. Table 1 shows the number of companies selected from various sectors. Table 1. Total number of companies and sample based on industry Industry Construction Consumer Hotel Industrial Infrastructure Property Plantation Technology Trading & services TOTAL Population 49 139 5 265 7 88 43 29 181 806 Sample of companies 19 53 2 88 3 31 16 12 64 288 Percent 7 18 1 30 1 11 6 4 22 100

There are seven variables that describe the characteristics of boards of directors and audit committees while another three variables describe the control variables. These variables are defined in Table 2. Table 2. Variables Measurements
Variable Dependent ARL (Audit report lag) Independent BDINDs (board independence) BDMEET (Board meeting/diligence) BDEXP (Board experience/expertise) DUAL (CEO duality) ACIND (AC independence) ACMEET (AC meeting diligence) ACEXP (AC experience/expertise) Control SIZE (Company size) AUDIT TYPE (Type of audit firm) PROF (Profitability) Measurement Represents the number of days elapsing between the end of the fiscal year of the company to the completion of the audit for the current year for each individual firm (the audit report date). The proportion of non-executive directors to total number of directors is the number of non-executive directors on the board divided by the total number of directors on the board at the year-end. Number of board meetings for the financial year. Number of multiple directorships by non-executive directors to the total number of non-executive directors. DUAL = 1 if CEO is the chairman and 0 otherwise. Percentage of non-executive directors to the total of audit committee members. Number of audit committee meetings. No of audit committee members with background experience in financial reporting (such as MIA, MICPA) to the total of audit committee members. Natural log of year end total assets. Dummy variable, 1 if auditor is one of the former Big-4 audit firms, 0 otherwise. PROF = Return on assets, measured by net income divided by total assets.

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Results Descriptive statistics Table 3 below presents the descriptive statistics of the variables used. Overall, it shows that companies have improved over the years concerning the number of days taken to complete the audited financial statement although results from previous studies are at variance with these findings. Che-Ahmad and Abidin (2008) found it took442 days while Ahmad and Kamarudin (2003) reveal that 273 days was the maximum number of days to complete the annual report. The current study is similar to Afify (2009) who found that the maximum and mean score number of days to complete the annual report was 115 days and 67 days, respectively. Table 3. Descriptive Statistics for Audit Report Lag (N= 288) Year 2007 2008 2009 2007- 2009
Notes: ARL

N ARL ARL ARL ARL 288 288 288 864

Minimum 40.00 40.00 36.00 36.00

Maximum 184.00 146.00 136.00 184.00

Mean 103.14 103.42 102.46 103.00

Median 110.50 111.00 110.00 111.00

= number of days between the end of the fiscal year to the date of completion of audit

Table 4. Number of companies and audit report lag for 2007 2009 Audit report lag ARL(within) Year / percentage 1 month (30 days) 2 months (60days) 3 months (90days) 4 months (120days) 5 months (150days) 6 months (180days) More than 180days Total No. of companies 2007 0 22 42 198 25 0 1 288 No. of companies 2008 0 20 41 211 16 0 0 288 No. of companies 2009 0 25 41 208 14 0 0 288

Percen t 0.00 7.64 14.58 68.75 8.68 0.00 0.35 100

Percen t 0.00 6.94 14.24 73.26 5.56 0.00 0.00 100

Percen t 0.00 8.68 14.24 72.22 4.86 0.00 0.00 100

Table 4 shows the movements on audit report lag from year 2007 until 2009. For the three-year period, no companies completed or submitted their annual report within a month. Year 2008 shows the least number of companies submitting their annual report within two months, followed by 22 companies in 2007 and 25 companies in 2009. The results also show 41 to 42 companies have completed and submitted their annual report within three months. The results show that most companies completed and submitted their audited reports much earlier than the deadline stipulated by Bursa Malaysia. Such results indicate that the companies are concerned and realise that audited reports are useful for users decision-making. The results support the notion that excessive delay in publishing financial statements would increase the uncertainty in relation to investment decisions (Ashton et al., 1987; Ahmad and Kamarudin, 2003). Table 5 provides the descriptive statistics for the board of directors and audit committees among the listed companies. The mean score of the board independence (BODIND) is 0.63 (63 percent). The results show that most companies have more than half independent directors on their board of directors. The results show that, at minimum, independent directors represented 25 per cent of the board composition in the companies, which is less than one third. The average number of board meetings (BODDIL) held was 5. In table 5, the results also show that, on average, 71 percent of independent directors have interlocking directorships. The results indicate that the management of the companies hold the belief that independent directors who hold directorships in other companies could e nhance the companies performance by

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providing vast experience and skills. In addition, on average, the results also show that slightly less than half of the companies (41 percent) practice CEO duality where the CEO also holds the position of the chairman. Audit committee independence (ACIND) has a mean score of 0.93, which is 93 percent and a minimum score of least 0.60 (60 percent) of their audit committee members being represented by independent directors. The results also show that almost all the audit committees in the listed companies discharge their duties appropriately with five meetings being held. The highest number of meetings held by the audit committee during the three-year period was 12. The mean score of audit committee expertise (ACEXP) is 0.4 (40 percent). Such results indicate that listed companies have audit committee members with experience in financial reporting. Only 24 of the companies (2.78 percent) formed their audit committee with members not having an accounting qualification. Table 5. Descriptive statistics for Board of Directors, audit committee and control variables Variable Independent BODIND BODDIL BODEXP CEODUAL ACIND ACDIL ACEXP Control SIZE -TOTASSET (RM BILLION) TYPEAUD PROFITABILITY
Notes: BODIND BODDIL BODEXP CEODUAL ACINDP ACDIL ACEXP TOTASSET TYPEAUD PROFITABILITY

N 864 864 864 864 864 864 864

Minimum 0.25 1.00 0.00 0.00 0.60 1.00 0.00

Maximum 1.00 13.00 1.00 1.00 1.00 12.00 1.00

Mean 0.63 5.00 0.71 0.41 0.93 4.84 0.40

Median 0.63 5.00 0.75 0.00 1.00 5.00 0.33

Std. Deviation 0.17 1.51 0.29 0.49 0.18 1.67 0.19

864 864 864

9 -3 0 -1.88

36.64 1 11.059

0.79 0.58 0.03

0.24 0.00 0.03

2.86 0.49 0.40

= proportion of independent non-executive director to total number of directors = number of board meetings = average number of outside directorships in other firms held by outside directors = 1 if CEO is the chairman and 0otherwise = percentage of non-executive directors to the total of audit committee members = number of audit committee meetings = no of audit committee members with background experience in financial reporting = total assets that the companies have at the end of the financial year. = 1 if audited by Big-4, 0 if otherwise = net income divided by total assets

Correlation matrix analysis Table 6 provides the results on the normality test. The results show a non-significant value (0.333), which is more than 0.05, indicating data normality. Based on Kolmogorov-Smirnov and Shapiro Wilk tests, this study concludes that audit report lag is normally distributed. Table 6. Normality Test for Audit Report Lag Kolmogorov-Smirnova df Sig. 864 0.021 Shapiro-Wilk Statistic df 0.998 864

NARL

Statistic 0.034

Sig. 0.333

a. Lilliefors Significance Correction

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The Pearson product moment correlation was used to determine the strength and direction of the relationship between the independent variables and dependent variable. Table X presents the results of the correlation matrix analysis. The results show no correlation problem among the variables since the value is less than 0.5. The variance inflation factor (VIF) indicates that all variables have a value below two, which is within the acceptable range of 10(M. Yasin et al., 2009). Table 7. Correlation Matrix Table BOD DIL BOD IND BOD EXP CEO DUAL AC DIL AC IND AC EXP Log_ Asset TYPE AUD ROA

ARL ARL BOD DIL BOD IND BOD EXP CEO DUAL AC DIL AC IND AC EXP 1 0.036

-0.083* 0.172** 1 -0.097** -0.023 0.065 1

0.093** -0.111** -0.279** -0.144** 1 0.096** 0.234** 0.051 -0.068* 0.043 -0.019 0.075* -0.002 0.069* -0.038 1 0.030 1 0.013 1

0.215** -0.002 -0.068* 0.020

0.112** 0.022

LOG -0.170** .0.178** 0.156** 0.128** -0.097** 0.093** 0.078* -0.003 1 _ASSET TYPE AUD ROA -0.170** 0.000 -0.076* 0.013 0.005 0.016 0.104** -0.008 -0.039 0.031 -0.088** 0.010 -0.021 0.195** 1 0.033 0.029 -0.032 -0.021 0.006 1

**Correlation is significant at the 0.01 level (2-tailed).* Correlation is significant at the 0.05 level (2-tailed)

Fixed Panel Regression The current section presents the results of the fixed panel regression using Eviews. The panel data analysis is an increasingly popular form of longitudinal data analysis among social and behavioural science researchers (Hsiao, 2003). A panel is a cross-section or group of people who are surveyed periodically over a given time period. In this study, the group is the listed companies selected and the time is the duration of the data collected, which is the three-year period between2007 and2009. Since the data is bound to be heterogeneous, the panel data technique could take such heterogeneity explicitly into account by allowing individual specific variables (Gujarati, 2003). Normal regression does not adjust for the firms specific effect, which would lead to variables being omitted and the model being mis-specified (Fraser et al., 2005). The fixed effect model could overcome such problems by adjusting the effects through the firms specific intercept by capturing the immeasurable firms specific characte ristics (Fraser et al., 2005). The panel data provides more informative data, variability and efficiency. Under the panel data, the model is generated as follows: ARL = 1BDINDs + 2BDMEET+ 3BDEXP +4DUAL+5ACINDP + 6ACMEET + 7ACEXP +8SIZE+ 9AUDTYPE + 10PROF+ it The fixed panel regression result is shown in Table 8. It shows that board diligence (BODDIL), audit committee independence (ACINDP) and audit committee expertise are significant at the 1% level. One of the control variables, company size is also significant at the 1% level. Other variables board

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independence, board expertise, CEO duality, profitability and type of auditor do not have a significant association with audit report lag. Table 8. Fixed Panel Regression Result Variable BODIND BODDIL BODEXP CEODUAL ACIND ACDIL ACEXP LOG_ASSET ROA TYPEAUD C N Adjusted R-squared F-statistic Prob(F-statistic)
Notes: BODIND BODDIL BODEXP CEODUAL ACINDP ACDIL ACEXP LOG_ASSET TYPEAUD ROA Adjusted R2 F stat *significant at 1%.

Coefficient -0.025864 -0.005616 -0.002881 0.002235 -0.021706 -0.009835 -0.040084 -0.129782 -0.002146 0.002535 5.786734 864 0.802562 12.811 0.000

Prob. 0.288 0.001* 0.205 0.863 0.001* 0.899 0.001* 0.012 0.264 0.294 0.000

= proportion of the non-executive directors divided by total number of directors = number of board meetings = average number of outside directorships in other firms held by outside directors =1 if CEO is the chairman, 0 if otherwise = percentage of non-executive directors to the total of audit committee members = number of audit committee meetings = no of audit committee members with background experience in financial reporting = natural log of total assets (in billions of ringgit Malaysia) = 1 if audited by Big-4, 0 if otherwise = net income divided by total assets = adjusted R2 coefficient determination = indicate how much variation is explained by the regression equation.

Discussion There are seven hypotheses developed in this paper and three are accepted. The first hypothesis states that there is a negative relationship between board independence and audit report lag. However, this study could not provide any evidence concerning the association between board independence and audit report lag. Therefore, Hypotheses one(H1) is rejected. This is consistent with Hsu and Wu (2010) who found no association between board independence and corporate failure among companies listed on the London Stock Exchange. Similar to Buniamin et al., (2008), they indicated that board independence could not play an effective monitoring role in influencing financial reporting quality and, thus, is not effective in resolving the agency problem. The results of this study however, contradict with Afify (2009) who found that board independence could reduce audit report lag. Similarly, Che Haat et al., (2008) found that internal governance mechanisms could lead to significantly higher firm performance and Wan Abdullah et al., (2008) found that board independence is one of the important factors for a company to perform effectively. The results show that there is a significant association between the number of board meetings and audit report lag. This indicates that a higher number of board meetings is more likely to reduce the audit report lag of the companies. Therefore, the second hypothesis (H2) is accepted. The results of this study are consistent with Tauringana et al., (2008) who found that there is a relationship between the number of board meetings held and the timeliness of annual reports for companies listed on the Nairobi Stock Exchange (NSE) in Kenya. The results indicate that companies that hold meetings more frequently tend to publish their annual reports earlier; an evidence of an effective corporate governance mechanism. The

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other study done by Carcello et al., (2002) found a relationship between board meetings and audit fees. A higher number of meetings of the board of directors would likely address problems and, consequently, would instigate the approval of releasing the annual report. This study shows that there is no significant relationship between the number of independent directorships with audit report lag. Therefore, hypothesis three(H3) is rejected. The results of this study are consistent with Carcello et al., (2002) who found that there is no relationship between that variable for a small sample of companies on audit fees. Similarly, Che Haat et al., (2008) also found no relationship on the directorship of the directors in relation to the performance of the company. Such results are consistent with Abdul Rahman and Salim (2010) who explain that too many directorships may impair the level of independence among the directors and, consequently, affect the effectiveness in performing their roles and responsibilities. This is consistent with resource dependency theory, which recognises the importance of addressing the updating of sources of power and dependence and cataloguing the new set of available tactics for managing dependence. The last characteristic for board of directors is CEO duality. The results show that there is no significant association between CEO duality and audit report lag. The results indicate that CEO duality did not influence audit report lag, therefore, hypothesis four (H 4) is rejected. The results of this study are in contrast to the findings of Afify (2009) who found that CEO duality is significantly associated with audit report lag in which CEO duality increases audit reporting lag. As for the characteristics of audit committees, this study hypothesized that there is a negative relationship between audit committee independence, diligence and expertise in relation to audit report lag. Upon the analysis, it provides evidence to reject hypothesis six (H 6) because there is no significant difference between audit committee diligence and audit lag. However, the results support Ha5 and Ha7. Audit committee independence and audit committee expertise may reduce audit report lag, however, audit committee diligence could not influence audit report lag. The results are similar to the study by Klein (2002) who found that more independent audit committee members would effectively influence financial reporting quality. This study supports the view that an audit committee with a simple majority of independent audit committee members is more likely to fulfil its duties effectively compared to an audit committee with no independent members. This is consistent with agency theory where independent members in an audit committee could assist principals to monitor the agents activities and reduce benefits from withholding information. They would provide more effective roles in monitoring the companies. Increasing the number of financial experts on audit committees will reduce the incident of fraud (Farber, 2005). Those who have financial expertise demonstrate a high level of financial reporting knowledge and, thus, are expected to lead the committee, and identify and ask knowledgeable questions that challenge management and the external auditor (He et al., 2009). Generally, it is believed that more meetings and discussion of the committee would improve the performance of the company. However, similar to the study done by Uzun et al., (2004), the results in this study show that the number of audit committee meetings held is not significantly associated with audit report lag. More frequent meetings of the company does not necessarily provide better achievement of the company. Thus, the company needs to ensure that audit committee members raise and try to resolve the issues with management during the meeting, and, as a result, improve the quality of reporting. Conclusion This study provides empirical evidence that audit report lag has a significant negative relationship with the number of board meetings (BODDIL), audit committee independence (ACINDP) and audit committee expertise (ACEXP). The characteristic of board meetings indicates that as the number of meetings increase, the time taken to produce the annual report reduces. The findings of this study support the notion by Dalton and Daily (1999) in that the monitoring role of the board is important in overseeing the process of accounting, financial reporting, auditing and also concerning the disclosure of information to the shareholders, potential investors and other relevant stakeholders for evaluation on company performance. When more

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meetings are conducted, the board may discharge their duty properly regarding the monitoring function of the company, consequently, increasing the quality of reporting of the company, particularly timeliness. Based on this study, board independence is not found to bean influencing factor in reducing audit report lag. The results indicate that board independence does not necessarily assist timely corporate reporting. Of vital importance is that the board of directors needs to fulfil their role effectively and efficiently regardless of whether they are independent directors or non-independent directors. This study could not provide evidence that companies would have better performance even when they comply with the rules provided by Bursa Malaysia Listing requirements concerning board composition. The results indicate that there is a possibility that companies with one third of independent directors on the board are just in form rather than substance. The authors also noted that the directors of listed companies also view that the independent directors must be independent in mind whereby they have to understand the company background, and strengths and weaknesses to ensure they are successful in carrying out their role for the benefit of the company. The characteristics of the board on board expertise do not significantly influence the reduction of audit report lag. This is because of the different skills of the board expertise, which although useful in one company may not be useful in another company. This study proposes that companies should have stricter rules and criteria selection for their directors to ensure their monitoring role can be effectively discharged. Furthermore, the results of this study also provide that CEO duality does not significantly influence audit report lag. Carter and Lorsch, (2004) recommended that a leader needs to appoint independent directors for companies that practice CEO duality. This study provides that audit committee independence and audit committee expertise are important factors that affect the audit report lag of the companies. Thus, it corresponds with the resource based theory where those characteristics of the audit committee, such as the resources and capabilities, may improve companies performance as well as corporate reporting. These two characteristics represent the Bursa Malaysia Listing Requirements, which require audit committees to be composed of not fewer than three members, with the majority of them being independent directors, and with at least one member of the audit committee possessing financial expertise. Audit committees with these characteristics could assist the companies to be timely in their annual reporting. This study did not find a significant association between audit committee meetings and audit report lag. This suggests that audit committees could prioritise important things that need to be resolved during the meeting in order to improve the performance of the company as well as in assuring audit report lag. As an exploratory study of the Malaysian market in relation to corporate governance mechanisms concerning audit report lag, this paper acknowledges a number of limitations. First, this study employs only seven variables that are related to corporate governance. This study did not include other factors such as government policy or political issues, which might also affect audit report lag. Additionally, McGee (2007) noted that the influence of timeliness might be attributed to culture, or the political and economic system of the country. Next, the findings of this study would be more accurate if the study covered the entire population. This would provide greater generalization on the Malaysian listed companies concerning audit report lag and corporate governance characteristics. Examining other corporate governance variables such as corporate ownership in assuring audit report lag of the companies is suggested for future research avenues. In addition, it would be interesting to examine the link between corporate governance mechanisms to share price in relation to audit report lag. As well as looking at the timeliness of annual reports, it is also important to examine the other reports such as the interim and quarterly report since these reports are important in assessing company performance. In addition, which parties are liable for the delay of the annual report the preparers or auditors can also be explored. References 1. 2. Abdul Rahman, R. and Salim, M.R. (2010). Corporate governance in Malaysia: Theory, law and context. (1st Ed.). Malaysia: Sweet and Maxwell, Thomson Reuters. Abdul Rahman, R. and Mohamed Ali F.H. (2006). Board, audit committee, culture and earnings management: Malaysian evidence. Managerial Auditing Journal, 21(7),783-804.

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3. 4.

5. 6. 7. 8. 9.

10. 11. 12. 13. 14. 15.

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