ACCOUNTING

Voluntarily Disclosure of Accounting Information

Voluntarily Disclosure of Accounting Information

Introduction

In the current market dynamics, the need for investors to maximize their assets and the obsession of creditors to minimize their risks, arouse in them a growing need for information, to achieve a better allocation of resources. Accounting information is meant to be a tool for decision making for various stakeholders. Thus, wide disclosure of information to various parties (both internal and external) in an organisation is essential (Ball, 1968, 159). A need that businesses are trying to fill in voluntarily disclosing, in addition to legally required financial statements, non-financial information about their economic potential and organizational performance. This proved in order to ensure not only a better understanding of their activities by investors and creditors, but also an evaluation and a more accurate estimate of their prospects for financial analysts who provide recommendations to them.

Discussion

Voluntary disclosure has been an area of research since the sixties of last century. The literature regarding the disclosure of information about theoretical approaches that explain five factors that influence disclosure; and it consists of various theories. All these approaches are part of the line of the positive theory of accounting.

Positive Accounting Theory

Accounting research examining firm disclosure and market responses is based in Positive Accounting Theory developed by Watts and Supreme (1986) and Watts and Zimmerman (1978) and (1990). Positive accounting views the firm as a “nexus of contracts” with accounting serving as a tool to facilitate the formation and performance of contracts as well as mitigation of potential agency conflicts between stakeholders and management. Accordingly, accounting practices develop to mitigate agency costs associated with contracting by establishing agreements with parties prior to executing contracts. Two types of contracts are included in this theory: debt contracts and management contracts with shareholders.

Positive Accounting Theory expanded into Disclosure Theory through its basis in the “nexus of contracts” view of the firm. Specifically, the firm acts, in relationship to the market, to mitigate potential information asymmetry problems that managers hold by disclosing information through accounting disclosure. These disclosures are the potential mitigant to the agency problem of information asymmetry.

The Theory of Agency

The network theory of contract or agency considers the firm as a nexus of contracts and accounting information is used to reduce agency costs. The need for funds to finance large projects leads to organizations separate ownership and control. The agency theory recognizes that managers sometimes overtake shareholder interests as their own. This is possible because managers have more information about the company, controlling the procedure for electing the board of management and shareholders are widely dispersed (Mitnick, 1974, pp. 45-68). This phenomenon, therefore, is called "agency problem" or "problem of risk moral": the possibility that the search agent targets at the expense of personal interest on the principal. The agency problem arises when the desires of the principal and the agent collide; it is difficult or costly for the principal to verify that the agent is doing his ...