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Risk reporting of Japanese companies and its association with corporate

characteristics

Article in International Journal of Accounting Auditing and Performance Evaluation · February 2007
DOI: 10.1504/IJAAPE.2007.016281 · Source: RePEc

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 Int. J. Accounting, Auditing and Performance Evaluation, Vol. 0, No. 0, 0000 1

111
2 Risk reporting of Japanese companies and its
3 association with corporate characteristics
4
Please provide
full postal
address and e- Noriyuki Konishi* and Md. Mohobbot Ali
mail for Md.
Mohobbot Ali. Okayama University, Japan
Thanks
E-mail: [email protected]
*Corresponding author
Is Noriyuki
Konishi cited
as the correct Abstract: This study aims to examine the relationship between corporate
corresponding
author? characteristics and level of risk reporting and to reveal the impact of issuing
regulatory guidelines on risk reporting in annual reports. One hundred
5 non-financial companies were randomly selected from the first section of the
6 Tokyo Stock Exchange. Firstly, we find that, consistent with prior research, the
7 size of the company and the number of risk disclosures are positively correlated.
8 On the other hand, no significant relationship exists between the number of risk
disclosures and other corporate characteristics. Secondly, the findings show that
9 most of the companies disclose descriptive risk information but are reluctant to
1011 quantify risk. It also shows that the level of risk reporting has increased, at least
1 in quantity, in annual reports after the issuance of regulatory guidelines on risk
2 reporting by the Financial Service Agency.
3
Keywords: Accounting Standards Board of Japan; annual reports; ASBJ;
4 corporate characteristics; Financial Service Agency; FSA; risk reporting; Tokyo
5 Stock Exchange; voluntary risk reporting.
6
7 Reference to this paper should be made as follows: Konishi, N. and Ali, Md.M.
8 (0000) ‘Risk reporting of Japanese companies and its association with corporate
characteristics’, Int. J. Accounting, Auditing and Performance Evaluation,
9 Vol. 0, Nos. 0/0, pp.000–000.
2011
Please provide Biographical notes: .
biographical
details for
both authors
of up to 150
words to
conform to
Inderscience
house style.
Thanks

1
2
3
4
5
6
7
8
9
30
1
2
3
Copyright © 0000 Inderscience Enterprises Ltd.
 2 N. Konishi and M.M. Ali

111 1 Introduction
2
3 If management were to disclose the complete picture of risk,1 along with other financial
4 disclosures, shareholders would better understand events involving the company.
5 However, more often than not, company annual reports cannot satisfy their users,
6 particularly regarding the risk information that they contain. Perhaps management does
7 not perform this responsibility with full integrity and good intentions, either because of
8 commercial sensitivity of the disclosed risk information or because they wish to avoid
9 possible questions about their efficiency and future legal complications. Ali and Konishi
1011 (2005) highlighted the inadequacy of the existing reporting requirements for fair
1 disclosure of risk information. Companies usually do not want to disclose more risk
2 information than other companies as risk information, by definition, is commercially
3 sensitive (Woods et al., 2004). In contrast, the Institute of Chartered Accountants of
4 England and Wales (ICAEW, 1997) states that the disclosure of risk information helps to
5 reduce the cost of capital as such disclosure can increase the confidence of market
6 investors in a company. Moreover, the ICAEW recommends that, if necessary, companies
7 need not disclose commercially sensitive risk information in their annual reports.
8 However, material risks and their potential future impacts on business should be disclosed
9 along with applied risk identification and measurement systems.
2011 Japan, the second largest economy in the world, is still in its infancy in this regard
1 though a recent initiative has been taken by Financial Service Agency (FSA) of Japan.
2 Traditionally, Japanese companies have a strong resistance towards disclosure, are
3 inherently secretive and are unwilling to supply accounts to non-shareholders (Cooke,
4 1991, 1992). It has been said that there is some sort of information asymmetry between
5 firm (manager) and market (outside investors) and it shows that foreign (institutional)
6 investors are attracted to Japanese firms with low information asymmetry (Jiang and Kim,
7 2004). After the bubble burst in the Japanese economy, Japanese accounting systems went
8 through big changes and reconstruction to harmonise the accounting systems with IFRS or
9 US GAAP. The Japanese government announced details of an ‘Accounting Big Bang’
30 after 1997 that required massive reformation of the accounting regulations (commercial
1 law and accounting standards). Ministry of Economy, Trade and Industry (METI, 2002)
2 of Japan mentions that a review of the system for financial reporting in Japan has been
3 progressing rapidly in order to reconstruct the economic condition. As for the accounting
4 standards, under the trends towards international harmonisation, begun by a significant
5 enhancement of the consolidated financial reporting system, many reviews have been
6 carried out. In addition, various reviews of auditing standards and the certified public
7 accountant systems were also carried out. Ali (2005) mentions that Japanese companies
8 have been voluntarily reporting risk information in their annual reports for much longer
9 than since March 2003. It may be that companies were voluntarily disclosing risk
40 information from the viewpoint of added responsibility towards the shareholders and
1 prospective stakeholders. However, that kind of reporting was carried out in an
2 unorganised and unsophisticated way as there were no guidelines. Some recent cases, for
3 example, Nikko Cordial Ltd. and Kanebo Corporation have compelled concerned parties
4 in Japan to be cautious about companies’ risk positions and their disclosure in security
5 reports. Their reports have been manipulated jointly by company management and
6 external auditors which scared the concerned parties. To reconstruct the Japanese
711 economy, the Accounting Standards Board of Japan (ASBJ) and the FSA also put further
8
Is this
shortened
running Risk reporting and its association with corporate characteristics 3
header OK? If
not, please
provide copy
that will fit emphasis on enhancement of the usefulness and trustworthiness of the information
this space. contained in the financial reports of Japanese companies. The FSA is set to force listed firms
Thanks.
to significantly expand the scope of information they disclose including potential risk factor
111
in their security reports starting from April 2003. Konishi (2006) mentions that there is no
2
explicit guidance about how to identify and measure the risk and how to report that.
3
This study will attempt to reveal the risk disclosure patterns of Japanese companies in
4
their annual reports and try to find out the interrelation between the risk disclosure and
5
company characteristics such as size, profitability, industry type, ownership distribution
6
pattern and cross-corporate shareholdings. This study will also explore the improvement
7
in risk reporting of Japanese companies after the issuance of guidelines on risk reporting
8
by the Board of Japan (ASBJ, 2004). The findings of this study will help us to realise
9
whether Japanese companies are conservative in reporting risk information or keeping
1011
them more open and transparent to their stakeholders. This study will help us to compare
1
the findings with those of the UK (Linsley and Shrives, 2004).
2
3
4
2 Risk reporting initiatives in the UK, Canada, Germany and Japan
5
6
2.1 Risk reporting in the UK, Canada and Germany
7
8 In the UK, the risk reporting issue has been gaining more and more importance in the
9 corporate area. The risk disclosure debate was brought into the spotlight by the ICAEW
2011 through a discussion paper ‘Financial reporting of risk – proposals for a statement of
1 business risk’, published in 1997. Subsequently, the ICAEW has issued some other
2 consecutive pronouncements regarding risk reporting (see Table 1).
3
4 Table 1 Pronouncements issued in the UK
5
6 No Title Year
7
1 Financial reporting of risk: proposal for a statement of business risk 1997
8
9 2 No surprises: the case for better risk reporting 1999
30 3 Internal control: guidance for directors on the combined code 1999
1 4 Implementing Turnbull – a boardroom briefing 1999
2 5 No surprises: working for better risk reporting 2002
3 6 Internal control: revised guidance for directors on the combined code (issued 2005
4 by the Financial Reporting Council – FRC)
5
6
7
8 According to this proposal, companies with publicly traded shares should lead in the
9 introduction of enhanced risk reporting in annual reports. The report also stated that
40 enhanced information about what companies do to assess and manage key business risks
1 of all types will
2
provide practical forward-looking information
3
4
reduce the cost of capital
5
6
711
 4 N. Konishi and M.M. Ali

111
encourage better risk management

2

help to ensure the equal treatment of all investors
3
4
improve accountability for stewardship, investor protection and the usefulness of
5 financial reporting.
6
There are some other ways that were being used even before the Financial Risk Reporting
7
proposals came into light in 1997. These can be enumerated as follows:
8
9
OFR: the Operating and Financial Review has been introduced by Accounting
1011 Standard Board (ASB) for listed companies in July 1993 for disclosing information
1 on risk outside the financial statements. It recommends that listed companies should
2 present an operating review, including ‘a discussion identifying the principal risks
3 and uncertainties in the main lines of business, together with a commentary on the
4 approach to managing theses risks and, in qualitative terms, the nature of the
5 potential impact on results’.
6

SSAP 18: accounting for contingencies alerts users to circumstances where an
7
enterprise could incur losses in a future period as a consequence of risks resulting
8
from past business decisions.
9
2011
SSAP 25: segmental reporting requires major companies to disclose information
1 about the different classes of business and the different geographical areas in which
2 they operate. Segment information is designed to aid users in understanding accounts
3 more thoroughly and gain an appreciation of the potential for certain forms of risk
4 (political, industry, market) impacting on significant components of the business
5 (ICAEW, 1997).
6
FRS 4: capital instrument has lead to a more useful measurement of risks by
7 requiring debt/equity ratios to be comparable and consistent between enterprises.
8
9
FRS 5: reporting the substance of transactions has the effect of bringing on to the
30 balance sheet certain assets and liabilities that might have been treated as off balance
1 sheet. This provides a better indication of the risk of an enterprise.
2
FRS 8: related party disclosures require disclosure of transactions involving related
3 parties who may not be on ‘arm’s length’ terms.
4
5
FRS 13: derivatives and other financial instruments: Financial Reporting Standard
6 (FRS) 13 is a standard that deals with the disclosure of financial instruments. A key
7 objective of the FRS is that users should be able to receive relevant and reliable
8 information about the extent to which financial instruments contribute to business
9 risk. Appendix 1 to the FRS identifies four components of risk arising from financial
40 instruments. These are as follows:
1
credit risk
2
3
liquid risk
4
cash flow risk
5
6
market price risk.
711
8
 Risk reporting and its association with corporate characteristics 5

111 The risk reporting issue has been gradually gaining importance since the initiative taken
2 in 1997 in the UK. Countries such as Canada, Germany and others are also well advanced
3 in this regard. The Canadian Institute of Chartered Accountants (CICA, 2002) has issued
4 ‘Management’s discussion and analysis (MD&A) – guidance on preparation and
5 disclosure’, the German Accounting Standard Board (GASB, 2001) has also issued an
6 accounting standard (GAS 5) making risk reporting mandatory and, from 2005, risk
7 reporting has been explicitly required in all member countries of the European Union (EU,
8 2003).
9
1011 2.2 Revised accounting systems in Japan and risk reporting initiatives
1
2 Since the Japanese ‘Financial Big Bang’ of 1996, accounting, auditing and disclosure
3 systems have been substantially revised and have essentially become equivalent to and
4 consistent with internationally recognised systems (FSA, 2004). The revisions include, for
5 example: revision of consolidated financial statements, retirement benefits, accounting for
6 income taxes, fair value accounting for financial instruments, impairment of assets and
7 business combinations. The establishment of the new auditing standards including ‘going
8 concern’ and ‘risk approach’ and the measures to enhance disclosure include risk
9 information, corporate governance-related information and MD&A.2 The FSA, an
2011 external organ of the cabinet office, has made extensive efforts to ensure the proper
1 functioning of the financial system of Japan. From April 2003, it has issued regulations to
2 enhance the disclosure of business risk information in security reports along with
3 governance-related information, such as internal control systems, as well as improved
4 MD&A disclosure. It has advised to disclose more future business risk in the security
5 reports. However, the FSA does not provide any clear directions about what kind of risk
6 information should be disclosed, how to measure risk or how to measure the effects of risk
7 to business. It considers risk disclosure as an internal affair of the concerned companies
8 and has left it to them as to when and how to report risk information.
9
30 3 Hypotheses of the study3
1
2 3.1 Risk disclosure and size of company
3
Studies relating to financial disclosure reveal that there is a positive relation between
4
company size and number of disclosures (e.g. Adams et al., 1998; Marston and Shrives,
5
1991). These studies do not focus on the risk disclosure issue, rather these are on general
6
disclosure. Linsley and Shrives (2002) show that a positive association exists between
7
company size and the total number of risk disclosures. They also find the existence of a
8
positive association between company size and number of financial risk and non-financial
9
risk disclosures. Their study focussed particularly on UK companies after the issuance of
40
risk reporting guidelines by the ICAEW. Japanese companies may have different patterns
1
of disclosure as they have to operate in a separate, so-called ‘secretive’ environment
2
(Cooke 1991, 1992) and they do not have any explicit guidelines in this regard. Therefore,
3
this study will also test the same set of hypotheses to see whether the result is consistent
4
with the previous findings of Linsley and Shrives.
5
6 Hypothesis 1: there will be a positive association between company size and the total
711 number of risk disclosures.
8
 6 N. Konishi and M.M. Ali

111 3.2 Risk disclosure and the level of company risk

2
It could be postulated that companies with higher levels of risk will disclose greater
3
amounts of risk information, as the directors need to explain the cause of this risk. On the
4
other hand, companies could have a strong incentive to disclose, in detail, to their
5
stakeholders how they are actively managing risk and this may also result in higher levels
6
of disclosure. Therefore, there should be a positive association between risk disclosure and
7
level of risk. In contrast, it could be argued that companies with higher levels of risk may
8
feel that they do not want to draw attention to their ‘riskiness’ and, therefore, they may
9
show a reluctance to voluntarily disclose significant amounts of risk information.
1011
Companies with lower levels of risk may wish to publicly declare that this is so, with
1
directors wanting to signal that this has arisen from their better risk management abilities.
2
A circular relationship between risk levels and risk disclosure may also exist. The
3
ICAEW, amongst others, argue that companies that disclose more risk information will
4
portray an image in the market place that they are less risky than before. Therefore,
5
increased risk disclosure could impact upon the company risk level, although to what
6
extent is unknown. Since the nature of the relationship between the volume of risk
7
disclosures and risk levels is indeterminate the authors present the hypotheses in a null
8
form:
9
2011 Hypothesis 2: there is no association between the level of company risk and the total
1 number of risk disclosures.
2
3
3.3 Risk disclosure and profitability
4
5 It is argued that those companies that are better at risk management will have higher levels
6 of relative profitability and will want to signal their superior risk management abilities to
7 the market place via disclosures in the annual report (Linsley et al., 2003). When
8 disclosing more risk information, management not only shows their risk management
9 efficiency but also show their transparent attitude to stakeholders. Whatever may be the
30 actual intention of disclosing risk information, it seems that there is a relation between
1 profitability and number of risk disclosures. Therefore, the hypothesis is:
2
Hypothesis 3: there will be a positive relationship between the relative profitability of a
3
company and the total number of risk disclosure.
4
5
6 3.4 Risk disclosure and ownership distribution patterns
7 It is thought that, if the majority or a significant number of shares in a company are owned
8 and controlled by a few persons, risk disclosure patterns would be different from those of
9 a firm having an evenly distributed ownership. If few people control the majority of shares
40 then most risk information will be disclosed at boardroom meetings or in any other
1 informal ways. In this situation, general stakeholders will not get material risk information
2 through annual reports. Fan and Wong (2002) claim that when an owner controls a firm,
3 he/she in effect also controls the production of the firm’s accounting information and
4 reporting policies. From these arguments, we can postulate that a negative relationship
5 exists between the level of shareholdings of the top few shareholders and levels of risk
6 disclosure. In contrast, if the number of individual shareholders and foreign shareholders
711
8
 Risk reporting and its association with corporate characteristics 7

111 is high there will be more pressure on directors to disclose more risk information. These
2 arguments induce us to say that the relationship between the level of individual and foreign
3 shareholdings and risk disclosure will be positive. Therefore the hypotheses will be:
4
Hypothesis 4(a): there will be a negative relationship between the level of shareholdings
5
of the top few shareholders and the total number of risk disclosure.
6
7 Hypothesis 4(b): there will be a positive relationship between the level of shareholdings
8 by individuals and the total number of risk disclosure.
9 Hypothesis 4(c): there will be a positive relationship between the level of shareholdings
1011 by foreign shareholders and the total number of risk disclosure.
1
2 3.5 Risk disclosure and cross-corporate shareholdings
3 Fan and Wong (2002) show that cross-holding structures create agency conflicts between
4 controlling owners and outside investors. Consequently, controlling owners are perceived
5 to report accounting information for their own purposes, causing reported earnings to lose
6 credibility to outside investors. In Japan, cross-corporate shareholding propensity is
7 relatively high. If few institutional buyers hold the major portions of the issued shares of
8 concerned company, it creates a better understanding among them. In this way,
9 institutional buyers can get risk information earlier than non-institutional buyers, for
2011 whom it is difficult to get adequately and timely information. Therefore, the hypothesis
1 will be as follows:
2
3 Hypothesis 5: there will be a negative relationship between cross-corporate
4 shareholdings and the total number of risk disclosures.
5
6 3.6 Risk disclosure and industry type
7 There are some mixed research findings regarding the relationship between levels of
8 disclosure and industry type. Belkaoui and Kahl in Canada (1978), Cooke (1989a,b) in
9 Sweden and Stanga (1976) in the USA found a significant relationship but McNally et al.
30 (1982) in New Zealand, Wallace (1987) in Nigeria and Wallace et al. (1994) in Spain did
1 not find any relationship between levels of disclosure and industry type.
2 In our study, we have not included the financial companies in our sample as they have
3 some specific characteristics that are different from non-financial companies. As we have
4 conducted the study only with non-financial companies, their risk disclosure level should
5 be more or less the same. Therefore, our hypothesis would be:
6
7 Hypothesis 6: there will be no relationship between industry type and the total number
8 of risk disclosures.
9
40 4 Methodology of the study
1
2 4.1 Sample selection
3 In 2002, there were 1495 Japanese companies listed in the first section of the Tokyo Stock
4 Exchange (TSE, 2003). Companies listed in the first section who publish English annual
5 reports on the internet have been considered for this research. Marston (2003) shows, in
6 her study on Japan, that internet financial reporting has been increasing in recent years. In
711
8
 8 N. Konishi and M.M. Ali

111 1998, most of the top companies (about 58% of her study sample) had English websites
2 and disclosed detailed accounting information. Furthermore, Marston’s latest research in
3 2001 (Marston and Shrives, 2001) showed that, among the sample companies that had no
This sentence web sites or Japanese-only web sites in 1998, many now have English web sites and
was missing a publish full annual reports.
quantifying
word. We have For our research, we have visited about 400 randomly chosen companies’ official web
inserted ‘many’
so that it makes sites.4 The annual reports of some companies were found to be unsuitable for this research
sense. Please
confirm if this because they do not contain enough relevant information. For example, they do not
is correct. disclose the number of shares issued or share distribution patterns. Another aspect
4 concerning the sample selection was whether a company had any foreign business or
5 not. We have ignored those companies that do not have foreign business transactions,
6 i.e. companies that only have absolute domestic business have not been included in the
7 sample. This is because companies which have only domestic business may not have any
8 English annual reports and their reporting pattern may not be similar to that of companies
9 which have foreign business. Financial companies are also excluded from our sample as
1011 they report some information according to their special nature. Among the rest, 100
1 non-financial companies were randomly selected for the study. The annual reports that
2 were selected had a year-end date nearest to 31st March 2003. Table 2 shows the list of
3 the sample companies.
4
5
Table 2 List of sample companies
This table has
been moved Aichi Steel ESPEC Corporation Nichias Corporation
from the
Appendix in Aisin Seiki Co. Ltd Fuji Electric Co Ltd Nichicon Corporation
accordance
with house Ajinomoto Co Fuji Fhoto Film Co Ltd Nippon Light Metal Co Ltd
style.
Akebono Brake Industries Fuji Heavy Industries Ltd Nippon Shokubai Co Ltd
6 All Nippon Airways Co Ltd Fuji Kura Ltd Nippon Yusen Kabushiki Kaisha
7 Alpine Electronics Inc Fuji Oil Co Ltd Nissan Motor Company
8 Alps Electric Co Ltd Fujisawa Pharma Co Ltd Nisshinbo Industries Inc
9 Amano corporation Fujitec Co Ltd Nissin Electric Co Ltd
2011
Anest Iwata Corp Fujitsu Ltd Oki Electric Industry Co Ltd
1
Anritsu Corporation Hakuto Co Ltd Oriental Construction Co Ltd
2
3 ARGO21 Corp Hamamatsu Photonics K.K Osaka Gas Co Ltd
4 Asahi Breweries Co Ltd Hanwa Co Ltd Pioneer Corporation
5 Asahi Glass Co Ltd Hino Motors Limited Sharp Corporation
6 Asahi Kasei Corp Hitachi Cable Ltd Shikoku Electric Power Co Inc
7
Bridgestone Corporation Hitachi Ltd Shin- Etsu Chemical Co Ltd
8
Casio Computers Ltd Hitachi Metals Ltd Shiseido Company Ltd
9
30 Chiyoda Corporation Horiba Ltd Sumitomo Chemical Co Ltd
1 Chugai Pharmaceuticals Co Ltd Inabata & Co Ltd Sumitomo Metal Industries Ltd
2 Chugai Ro. Co Ltd Itochu Corporation Sysmex Corporation
3 Chugoku Elect Power Co Ltd Juki Corporation Taisei Corporation
4 Citizen Watch Co. Ltd Kanamoto Co Ltd Takeda Chemical Industries Ltd
5
6
7
 Risk reporting and its association with corporate characteristics 9

111 Table 2 List of sample companies (continued)

2
Cosmo Oil Co Ltd Kansai Elect Power Co Inc Tanabe Seiyaku Co Ltd
3
4 Dai Nippon Printing Co Ltd Kao Corporation The Furukawa Electric Co Ltd
5 Daido Steel Co Ltd Kawasaki Heavy Ind Ltd Tohoku Electric Power Co Inc
6 Daihatsu Motors Co Ltd Kirin Brewery Co Ltd Tokyo Electron Limited
7 Daiichi Jitsugyo Co Ltd Kubota Corporation Tokyo Seimitsu Co Ltd
8 Daiichi Pharm Co Ltd Kuraray Co Ltd Tomen Corporation
9
Daimei Telecom Eng Corp Kurita Water Ind Ltd Toray Industries Inc
1011
1 Dainippon Ink and Chem Inc Mabuchi Motor Co Ltd Toshiba Corporation
2 Dainippon Screen Mfg. Co Ltd Marubeni Corporation Toyota Industries Corporation
3 Daiwa House Ind. Co Ltd Meitec Corporation Yamaha Corporation
4 Daiwabo Inf Sys Co Ltd Mitsubishi Chem Corp Yamaha Motor Co Ltd
5 Ebara Corporation NGK Insulators Ltd Yokogawa Electric Corporation
6
Zeon Corporation
7
8
9 4.2 Content analysis
2011
As a method of research, content analysis has been performed. Content analysis has been
References defined as a systematic, replicable technique for compressing many words of text into
highlighted in
blue are not fewer content categories based on explicit rules of coding (Berelson, 1952; GAO, 1996;
cited in the
reference Krippendorff, 1980; Weber, 1990). Holsti (1969) offers a broad definition of content
section. Please analysis as, “any technique for making inferences by objectively and systematically
supply full
reference identifying specified characteristics of messages”. It enables researchers to sift through
details or
delete these large volumes of data with relative ease in a systematic fashion (GAO, 1996). It is a
entries. Thanks
research tool used to determine the presence of certain worlds or concepts within texts or
sets of texts. Researchers quantify and analyse the presence, meanings and relationships
1 of such words and concepts, then make inferences about the messages within the texts.
2 Texts can be defined broadly as books, chapters, interviews and so on. For this research
3 study, company annual reports are considered as the text. Their contents have been
4 analysed. Content analysis of the annual reports was performed based on decision rules
5 applied by Linsley and Shrives (see Appendix A). They used the sentence as the main unit
6 of analysis following Milne and Adler (1999) who claim that it is “far more reliable than
7 any other unit of analysis”. The sentence coding was performed according to the grid used
8 by Linsley and Shrive (see Appendix B) with some modification of the risk categories. For
9 example, Linsley and Shrives have used the coding grid making six broad categories of
30 risk while, for this study, we use five categories. We have excluded three categories of risk
1 i.e. empowerment risk, integrity risk and strategic risk from the coding grid. Instead, we
2 have included two more categories named business risk and compliance risk considering
3 their suitability based on the experience gathered from going through Japanese annual
4 reports and the risk matrix issued by Turnbull. Depending on the nature of disclosed
5 risk categories by Japanese companies, risks are categorised into five categories (see
6 Appendix C). For reliability of the extracted data, researchers have coded an initial sample
7 of five companies separately. There is found to be more than 94% similar risk numbers in
8 various categories. Differences have been discussed and reconciled and then, finally, both
9 the authors have coded the risk information and compiled thereon.
40
1
 10 N. Konishi and M.M. Ali

111 4.3 Measurement of variables

2
Total turnover and total assets were selected as the proxy variables for the size of firms.
3
Levels of risk can be measured in many ways. Among them, gearing ratio, beta factor and
4
market to book value are used very often. Researchers have decided to use the market to
5
book ratio (MBR) and gearing ratio as the risk proxy variables. Fama and French’s (1992)
6
study advocates the use of book to market value ratio as the appropriate proxy of risk. The
7
year-end figure has been considered for the calculation of gearing ratio and book to market
8
value ratio. Return on asset (ROA) and return on equity (ROE) were selected as proxy
9
variables for the relative profitability of the sample companies. To analyse the relationship
1011
between ownership distribution and risk disclosure, the shares held by the top ten
1
shareholders and the holdings of individual and foreign shareholders were taken as
2
proxies.
3
The Pearson’s correlation coefficient was calculated in order to test the first five sets
4
of hypotheses. A box plot graph was drawn to compare the mean risk of the concerned
5
industry types and some graphs have also been used to show comparative risk disclosure
6
positions in March 2003 and 2005.
7
8
9
5 Results and discussion
2011
1
5.1 Descriptive statistics
2
3 The results of the descriptive statistics are shown in Table 3. For the purpose of statistical
4 calculation, two variables named total turnover and total assets have been converted into
5 their natural logarithm. Table 3 shows that the total number of risk disclosures varies from
6 5–126 with an average of 47.14. The average number of financial and non-financial risk
7 disclosures is 7.95 and 39.25 respectively. Table 3 shows that companies are disclosing
8 more non-financial risks than financial risks, more non-monetary risks than monetary risks
9 and that past risk is significantly higher than future risk information. The descriptive
30 statistics regarding the relationship between good, bad and neutral disclosures show that
1 the number of good disclosures is significantly higher than that of the bad and neutral
2 disclosures. It also shows that there is no significant difference between the number of bad
3 and neutral disclosures. From the table, we can also see that some companies do not
4 disclose some categories of risk at all. These include non-monetary risk, future risk
5 information and good risk information.
6 The descriptive statistics show that the frequency of the reporting of good news is
7 significantly higher than bad or neutral news. This implies that management may want to
8 signal that they are capable and efficient at managing the risks of the company. Findings
9 show that the neutral news disclosure is lower than good news which is a positive aspect
40 of risk reporting of Japanese companies. Sometimes, companies disclose a huge number
1 of neutral information that makes reporting as ‘boiler plate’. In contrast, future risk
2 information is significantly lower than past risk information which supports the argument
3 that managements are very reluctant to disclose future risk information or, as the future is
4 uncertain and prediction about the future cannot be done objectively, management will
5 tend to avoid reporting risk. Both the above findings are in disagreement with the findings
6 of Linsley and Shrives (2002).
711
8
 Risk reporting and its association with corporate characteristics 11

111 Table 3 Descriptive statistics

2
Minimum Maximum Mean Standard
3
deviation
4
5 Corporate characteristics
6
Natural log of total asset 23.7400 29.9500 26.8825 1.3955
7
Natural log total turnover 23.8128 29.9787 26.8106 1.4377
8
9 Market to book ratio 0.0019 18.9990 2.0012 2.1061
1011 Gearing ratio 2.0795 1916.4695 127.7097 242.0808
1 Return on asset (ROA) – 9.6600 13.1900 1.3182 3.6047
2 Return on equity (ROE) –152.9100 72.8000 1.4822 19.9431
3 Top ten shareholders holding 19.8000 74.4900 42.9223 11.3991
4
Individuals shareholdings 4.5000 57.2900 22.6993 11.4467
5
6 Foreign shareholdings 0.6200 49.5100 16.9419 9.4997
7 Cross-corp holdings 34.3000 87.8000 59.3237 10.1963
8 Risk figure
9 Total risk 5 126 47.14 24.80
2011 Financial risk 1 35 7.95 5.30
1
Non-financial risk 4 116 39.25 21.46
2
3 Monetary risk 4 81 19.54 11.88
4 Non-monetary risk 0 95 28.15 18.62
5 Past risk 5 125 38.55 20.22
6 Future risk 0 77 8.59 11.39
7 Future risk excluding F category 0 35 2.89 4.56
8
Good risk information 0 94 20.71 13.71
9
30 Bad risk information 0 45 13.95 8.61
1 Neutral risk information 0 65 12.48 11.94
2 Average risk 25.67 71.88 47.11 11.72
3
4
5 In addition to the test results, researchers have some observations regarding the risk
6 related practices of the sample companies. Sample companies do not have any kind of
7 standard risk identification and measuring systems and risk management policies. There
8 are some companies that disclose very negligible risk information. Even these companies
9 do not disclose such risk information giving priority to the risk, rather, they disclose that
40 risk information as part of their regular financial disclosure. Since they do not have any
1 policy to report risk, they do not report in a homogenous way. However, one of the
2 interesting findings of the study is that most companies report risk information either
3 through Operating and Financial Review (OFR)5 or through Management Discussion and
4 Analysis (MD&A). These two systems have been recommended as a medium of reporting
5 risk information in the UK and Canada respectively.
6 Table 4 shows that 49% of the sample companies report through OFR and 38% disclose
711 their information through MD&A. Some companies disclose risk information through their
8
 12 N. Konishi and M.M. Ali

111 president’s message and in other more informal ways. Only 3% of the companies use a
2 separate risk related section in annual reports for disclosing risk information.
3
4 Table 4 Medium of reporting risk information
5
Number Percentage
6
7 OFR 49 49
8 MD&A 38 38
9
President’s message 10 10
1011
1 Informal and others 5 5
2
3 One frustrating observation is that almost all the companies do not disclose any
4 information about the nature of risk. They also do not disclose any information regarding
5 the identification and measurement systems, if any, that they use. Neither do they mention
6 the specific effects of a risk to the company other than financial risk. Only three companies
7 out of the 100 that were sampled use a separate section for risk related issues. This
8 indicates that companies that are using MD&A as their medium of risk disclosure and are
9 not well aware of the proper use of MD&A.
2011
1 5.2 Hypotheses test
2
3 Table 5 shows that both the proxy variables for the size of the company, the natural log of
4 assets and the natural log of turnover are significantly correlated with the number of total
5 risk disclosures and the number of non-financial risk disclosures. However, the number of
6 financial risk disclosures and company size is not significantly correlated. The results
7 confirm that there is a positive relationship between company size and level of risk
8 disclosure. More specifically, it shows a positive relationship between company size and
9 total number of risk disclosures (at the 1% level of significance both for total assets and
30 turnover). It also shows a positive correlation between company size and the total number
1 of non-financial risk disclosures (at the 1% level of significance for both total assets and
2 turnover).
3
Table 5 Pearson’s correlation coefficient for variables
4
5 Variables Total number of Total number of Total number of
6 risk disclosures financial risk non-financial risk
7 disclosures disclosures
8
9 Pearson Sig. Pearson Sig. Pearson Sig.
40 correlation (2-tailed) correlation (2-tailed) correlation (2-tailed)
1 for for for
Pearson Pearson Pearson
2
3 Nat log of assets 0.314** 0.001 0.056 0.579 0.280** 0.005
4
Nat log of turnover 0.418** 0.000 0.092 0.364 0.363** 0.000
5
6 Note: ** Correlation is significant at the 0.01 levels (2-tailed).
711
8
 Risk reporting and its association with corporate characteristics 13

111 Table 6 shows that there is no significant relationship between the level of company risk
2 and number of total risk disclosures. For both the risk proxies, there is no significant
3 relationship between level of risk and the level of risk disclosures, irrespective of financial
4 and non-financial or total risk.
5
6 Table 6 Pearson’s correlation coefficient for variables
7
Variable Total number of Total number of Total number of
8 risk disclosures financial risk non-financial risk
9 disclosures disclosures
1011
1 Pearson Sig. Pearson Sig. Pearson Sig.
2 correlation (2-tailed) correlation (2-tailed) correlation (2-tailed)
3 for for for
4 Pearson Pearson Pearson
5
MBR – 0.123 0.221 – 0.106 0.295 – 0.110 0.277
6
7 Gearing ratio 0.039 0.701 0.007 0.945 0.036 0.719
8
9
2011 Table 7 shows that the correlation between relative profitability and total number of risk
1 disclosures is not significant for both the variables of ROA and ROE. According to Table
2 8, the Pearson’s correlation coefficient for the top ten shareholders is – 0.127 and the
3 correlation coefficients for individual shareholdings and foreign shareholdings are – 0.018
4 and 0.091, respectively. These correlations indicate that the distribution pattern of
5 shareholdings and number of risk disclosures is not significantly correlated.
6
7 Table 7 Pearson’s correlation coefficient for variables
8 Total number of risk disclosures
9
30
1 Variable Pearson correlation Sig. (2-tailed) for Pearson
2 ROA 0.081 0.424
3
ROE 0.424 0.292
4
5
6
Table 8 Pearson’s correlation coefficient for variables
7
8 Variable Total number of risk disclosures
9
40 Pearson correlation Sig. (2-tailed) for Pearson
1
2 Top ten shareholder’s holding – 0.127 0.209
3 Shareholding by individuals – 0.018 0.859
4 Shareholding by foreign shareholders 0.091 0.367
5
6
711
8
 14 N. Konishi and M.M. Ali

111 Table 9 shows that the correlation between cross-corporate shareholding and total risk
2 disclosure is – 0.053, which indicates that risk disclosure is not significantly related to
3 cross-corporate shareholding.
4
5 Table 9 Pearson’s correlation coefficient for variables
6
Variable Total number of risk disclosures
7
8 Pearson correlation Sig. (2-tailed) for Pearson
9
1011 Cross-corporate holding – 0.053 0.601
1
2
3 The box plot graph (Figure 1) shows that the average risks of the individual industries are
4 significantly different from each other. The test of homogeneity of variance is needed and,
5 for getting a higher number of samples, the method of multiple comparisons should be
6 used.
7
8 Figure 1 Industry type and total risk number

Please check
the quality of
the graphics
as some
appear
blurred, and
resupply if
necessary.
Thanks

9
2011
1
2
3
4
5
6
7
8
9
30
1 5.3 Discussion of the results
2
3 The results of the study reveal that Japanese companies are voluntarily disclosing risk
4 information. The statistical mean numbers of various kinds of risks disclosures may be
5 relatively lower if they are compared with other countries that have some kind of risk
6 disclosure guidelines.
7 Table 5 shows that the size of a company and the number of risk disclosures are
8 significantly correlated. This is consistent with the findings of Linsley and Shrives (2002)
9 in the UK. However, the result is not consistent with their findings regarding the
40 relationship between the number of financial risks and company size. Their study was
1
2
 Risk reporting and its association with corporate characteristics 15

111 conducted after the issuance of the ICAEW’s risk reporting proposals to disclose more risk
2 information. Our findings may also show that the relationship between the number of risk
3 disclosures and company size was not influenced by the introduction of risk reporting
4 guidelines. Non-risk disclosure studies also show the existence of this kind of relationship
5 between the size of a company and volume of disclosures (Adams et al., 1998; Linsley and
6 Shrives, 2002). Table 6 shows that the correlation between level of company risk and
7 number of risk disclosures is insignificant. These findings also support the previous
8 findings of Linsley and Shrives (2002).
This has been
The results also show that there is no significant relationship between the number of
changed from risk disclosures and the level of relative profitability of the sample companies (Table 7).
2003 to match
the ref list. This is consistent with the findings of Linsley and Shrives (2002). The results do not
Please confirm support the argument that a firm which has better risk management capability earns
this is correct.
Thanks relatively higher profit and wants to signal to the stakeholders about their superiority.
There is no significant relationship between ownership distribution pattern and the number
9 of risk disclosures (Table 8). However, we still feel that there may a connection between
1011 the two factors. This is because any release of risk information cannot be done without the
1 involvement of the board or the top management. If the board members hold the majority
2 shares or a significant portion of total shares they may have some influence on the
3 disclosure of risk information.
4 Table 9 shows that the relationship between cross-corporate shareholdings and level of
5 risk disclosure is insignificant. This result may suggest that there is no information
6 asymmetry particularly in risk information among Japanese companies. Jiang and Kim
7 (2004) also highlighted the fact that foreign (institutional) investors are attracted to
8 Japanese firms with low information asymmetry.
9 Figure 1 shows that the mean risk numbers of various industries are significantly
different, although the homogeneity of variance is not clearly significant. We can say that
This has been
changed from there is a difference in risk reporting among various industries. This finding is consistent
2003 to match with the findings of Dunne et al. (2004). We have excluded some categories of companies,
the ref list.
Please confirm for example, services, oil and coal products and marine transportation for statistical
this is correct.
Thanks analysis, as they are insignificant in number.

2011
1 6 Issuance of guidelines and its impact on risk reporting
2
This section of the study describes the update of the most recent status of risk reporting in
3
Japanese companies. In February 2004, the ASBJ issued guidelines to strengthen the
4
disclosure system that included enhanced disclosure of risk information and urged
5
companies to report business risk information. These initiatives may have some influence
6
on the reporting of risk in annual reports. This section will explore the influence of the
7
FSA and ASBJ on risk reporting in annual reports. Twenty one companies in the electric
8
appliances industry have been taken as the study sample. We selected this industry as it
9
has the highest number of companies among all types of industries in our study of 2003
30
and the average number of risk disclosures of electric appliances companies is almost
1
equal to the average of all Japanese companies. Therefore, they represent the common
2
nature of risk reporting of Japanese companies. Annual reports on March 2005 have been
3
taken for content analysis. In order to compare the results with that of 2003, the same 21
4
companies have been used as a sample.
5
6
7
 16 N. Konishi and M.M. Ali

111 Table 10 gives a comparative statement of total risk and other categories of risk
2 disclosure in annual reports. The total risk number (1562) of 2005 is significantly higher
3 than that (923) of 2003. Figure 2 also shows differences between individual companies
4 regarding risk information. It shows that, in 2005, the risk number has increased for most
5 companies with only two exceptions.
6 Figure 2 Total risk number of the individual electric appliances companies
7
8
9
1011
1
2
3
4
5
6
7
8
9
It is important to mention that Table 10 and Figure 3 show some good changes, for
2011
example total risk and future risk has increased by 69 and 352% respectively. Past risk has
1
not increased significantly (24%) compare with future risk (352%). This huge change in
2
the future risk disclosure is considered as positive because future risk information is
3
considered to be very useful by the users for taking economic decisions. However, at the
4 same time we have to consider the nature of future risk information. In particular,
5 non-monetary/neutral/future risk is considered to be less useful and this is about 63% of
6 the total neutral risk (Figure 4). Therefore, huge increases in future risk information do not
7 ensure a high quality of risk disclosure. Table 10 also shows some changes which can not
8 be treated as positive for fair and quality risk reporting: non-monetary risk and neutral risk
9 disclosure have increased by 106 and 173%, respectively. Both types of risk information
30 are considered less useful for making economic decisions. Therefore, advice from ASBJ
1 has influenced the increase in number of risk disclosures in annual reports but cannot
2 ensure the quality of the disclosed information.
3 Table 11 shows the place where company management discloses risk information in
4 annual reports. Most of the companies use either OFR or MD&A as the place to discuss
5 the risk information. There are some companies which disclose risk information through
6 their president’s message and in other informal ways. There is no big change in 2005
7 regarding the position except use of a separate section in annual reports for the disclosure
8 of risk information. In 2005, about 50% (11 companies out of 21) of companies used a
9 separate section for disclosing risk information, whereas only one company used a
40 separate section in 2003. This change reflects the awareness of the company management
1 towards risk disclosure.
2 Therefore, we find that initiatives taken by ASBJ for enhanced risk disclosure have
3 influenced companies to report more risk information in their annual reports. As per the
4 suggestion of the guidelines, future business risk information disclosure has been
5 increased by a remarkable 352% but non-monetary future risk disclosure is the most
6 dominating type. However, we can conclude that company management is actively
711 recognising the urge of the risk information disclosure in annual reports.
8
8
6
5
4
3
2
1
9
8
7
6
5
4
3
2
1
9
8
7
6
5
4
3
2
1
9
8
7
6
5
4
3
2
1
9
8
7
6
5
4
3
2

40
30
111

711
2011
1011
Total risk Good Bad Neutral Past Future Monetary Non-monetary

Year 2005 2003 2005 2003 2005 2003 2005 2003 2005 2003 2005 2003 2005 2003 2005 2003
Total 1562 923 596 397 330 293 636 233 983 795 579 128 503 408 1059 515
Changes (%) 69 50 13 173 24 352 23 106
Table 10 Risk disclosure pattern of electric appliance industry
Risk reporting and its association with corporate characteristics
17
 18 N. Konishi and M.M. Ali

111 Table 11 Place of risk disclosure in annual reports

2
OFR MD&A President’s Others Separate
3
message risk section
4
5 10 14 8 5 2 2 1 1 11 1
6
7
8 Figure 3 Category of risk information
9
1011
1
2
3
4
5
6
7
8
9
2011
1
2
3
4
Figure 4 Neutral risk disclosures pattern (2005)
5
6
7
8
9
30
1
2
3
4
5
6 7 Concluding remarks
7
8 Risk reporting is becoming an integral part of a management report. In the absence of any
9 kind of risk reporting guidelines, some Japanese companies were reporting risk
40 information in their annual reports. The study results for 2003 show that company size and
1 the number of risk disclosures are significantly correlated, which helps us to conclude that
2 larger companies disclose more risk information than smaller companies. Possibly, larger
3 companies do not much consider the risk of risk disclosure; rather, they disclose risk
4 information for getting the advantages of lower cost of capital. The study results also show
5 that level of risk, cross-corporate shareholding pattern, ownership distribution pattern and
6
711
8
 Risk reporting and its association with corporate characteristics 19

111 average profitability of the company do not have a significant relationship with risk
2 disclosure level. Other findings include the fact that risk disclosure varies among various
3 types of industries and that average good risk information was higher than bad and neutral
4 risk information in 2003, which may reflect the fact that management is interested in
5 demonstrating their efficiency. The study also finds that companies are reluctant to
6 quantify risk, as non-monetary information is significantly higher than monetary
7 information. Even after the risk reporting guidelines came into effect, non-monetary risk
8 disclosure has increased by a larger margin than monetary risk disclosure.
9 The study also reveals that, in 2003, about 48% of companies used OFR and 39% used
1011 MD&A as the reporting medium in their annual reports. Only three companies disclosed
1 risk information in a separate section for risk in the annual reports. Following FSA and
2 ASBJ’s risk reporting initiative, about 50% of companies are using a separate section for
3 risk disclosure in their annual reports. This is also a reflection of the awareness developed
4 among the company management regarding risk disclosure.
5 After issuance of guidelines on risk reporting in 2003, the number of risk disclosures has
6 increased remarkably in the annual reports. In 2005, the total number of risk disclosures
7 increased by 69%. In this study, we documented a huge increment (352%) of future risk
8 information which can be considered as a positive move towards better corporate risk
9 reporting. If future risk information is dominated by non-monetary and neutral information,
2011 it will definitely lose its usefulness in taking economic decisions. We see that non-monetary/
1 neutral/future risk numbers is about 63% of the total neutral risk disclosure, which can not
2 be treated as a very effective and useful risk disclosure. Non-monetary/neutral/future risk
3 predominantly consists of general statements of risk management policy and internal control
4 systems that are not considered as useful information for decision-making. Findings of
5 Linsley and Shrives (2002) also show the dominance of this type of risk information in the
6 UK annual reports. The above findings lead us to realise that guidelines in different countries
7 alone cannot ensure the quality of risk reporting.
8 The study findings lead us to conclude that Japanese companies have been reporting
9 risk information in their annual reports (and security reports) in accordance with their
30 suitable ways. Since regulatory bodies like FSA and ASBJ have kept them involved in this
1 regard, it seems risk reporting is on the right path. More explicit reporting guidelines may
2 bring even more progress in this regard. It is also important to mention that, since human
3 beings are involved in the risk reporting process, motivation to directors is very important
4 along with the regulatory guidelines for better risk reporting.
5
6
References
7
8
Adams, C.A., Hill, W. and Roberts, C.B. (1998) ‘Corporate social reporting practices in Western
Please provide
Europe: legitimating corporate behaviour?’, British Accounting Review, Vol. 30, pp.1–21.
journal / issue Ali, M.M. (2005) ‘Corporate risk reporting practices in annual reports of Japanese companies’,
number and
page range. Journal of Japanese Association for International Accounting Studies.
Thanks
Ali, M.M. and Konishi, N. (2005) ‘The UK guidelines for company risk reporting – an evaluation’,
9 Okayama Economic Review, Vol. 37, No. 1, pp.1–18.
40 ASBJ, Accounting Standards Board of Japan (2004) The Guideline of the Business Risk Disclosure
1 in Security Reports, Japan.
2 Belkaoui, A. and Kahl, A. (1978) ‘Corporate financial disclosure in Canada’, Research Monograph
3 No. 1, Vancouver: Canadian Certified General Accountants Association.
4
5
 20 N. Konishi and M.M. Ali

111 CICA, Canadian Institute of Chartered Accountants (2002) Management’s Discussion and
2 Analysis – Guidance on Preparation and Disclosure, Ontario, Canada.
3 Cooke, T.E. (1989a) ‘Disclosure in the corporate annual report of Swedish companies’, Accounting
4 and Business Research, Vol. 19, Spring, pp.113–122.
5 Cooke, T.E. (1989b) ‘Voluntary corporate disclosure by Swedish companies’, Journal of
International Financial Management and Accounting, Vol. 1, No. 2, pp. 171–195.
6
7 Cooke, T.E. (1991) ‘An assessment of voluntary disclosure in the annual reports of Japanese
corporations’, International Journal of Accounting, Vol. 3, pp.174–189.
8
Cooke, T.E. (1992) ‘The impact of size, stock market listing and industry type on disclosure in the
9 annual reports of Japanese listed corporations’, Accounting and Business Research, Vol. 22,
1011 No. 87, pp.229–237.
1 Dunne, T., Helliar, C., Power, D., Mallin, C., Ow-Yong., K. and Moir, L. (2004) ‘The introduction
2 of derivatives reporting in the UK: a content analysis of FRS 13 disclosures’, Journal of
3 Derivatives Accounting, Vol. 1, No. 2, pp.205–219.
4 European Union (2003) ‘Directive 2003/51/EC of the European Parliament and of the Council’,
5 Official Journal of the European Union, July 17.
6 Fama, E.F. and French, K.R. (1992) ‘The cross-section of expected stock returns’, The Journal of
7 Finance, Vol. 47, No. 2, pp.427–465.
8 Fan, J.P.H. and Wong, T.J. (2002) ‘Corporate ownership structure and the in formativeness of
9 accounting earnings in East Asia’, Journal of Accounting and Economics, Vol. 33, pp.401–425.
FSA, Financial Service Agency (2004) Accounting, Auditing, and Disclosure Systems in Japan,
Please provide Japan.
issue number
if known. GASB, German Accounting Standard Board (2001) Risk reporting, GAS 5, Berlin, Germany.
Thanks
Gordon, W.D. (1997) A Critical Evaluation of Japanese Accounting Changes Since 1997, an MA
dissertation submitted to University of Sheffield, UK.
2011
ICAEW, The Institute of Chartered Accountants in England and Wales (1997) Financial Reporting
Reference of Risk: Proposals for a Statement of Business Risk, ICAEW, London.
highlighted in
blue is not Jiang, L. and Kim, J.-B. (2004) ‘Foreign equity ownership and information asymmetry: evidence
cited in the from Japan’, Journal of International Financial Management and Accounting, Vol. 15, No. 3,
main text.
Please insert pp.185–211.
relevant Konishi, N. (2006) The Reliability of Risk Reporting in the Security Reports, The Special Committee
citation or
delete this Report of Japanese Accounting Research Association.
entry. Thanks
Linsley, P.M. and Shrives, P.J. (2002) Risk Disclosure in the Corporate Annual Reports of UK
1 Companies, Working paper, Northumbria University, UK.
2 Linsley, P.M. and Shrives, P.J. (2004) Risk Reporting: Finding a Way Forward Through the
3 Boilerplate Towards Better Risk Reporting, Working paper presented in the EAA conference
4 2004.
5 Linsley, P.M., Shrives, P.J and Crumpton, M. (2003) Risk Disclosure Practices: A Study of UK and
6 Canadian Banks, Working paper. Northumbria University, UK.
7 Marston, C. (2003) ‘Financial reporting on the internet by leading Japanese companies’, Corporate
Communications: An International Journal, Vol. 8, No. 1, pp.23–34.
8
9 Marston, C.L. and Shrives, P.J. (1991) ‘The use of disclosure indices in accounting research: a
review article’, British Accounting Review, Vol. 25, pp.195–210.
30
McNally, G.M., Eng, L.H. and Hasseldine, C.R. (1982) ‘Corporate financial reporting in New
1
Zealand: an analysis of user preference, corporate characteristics and disclosure practices for
2 discretionary information’, Accounting and Business Research, Vol. 13, Winter, pp.11–20.
3 Milne, M.J. and Adler, R.W. (1999) ‘Exploring the reliability of social and environmental
4 disclosures content analysis’, Accounting, Auditing and Accountability Journal, Vol. 12, No. 2,
5 pp.237–256.
6
7
8
 Risk reporting and its association with corporate characteristics 21

111 Ministry of Economy, Trade and Industry (2002) Policy Information. Summary of Reports from the
2 Study Group on Corporate Management and Financial Reporting, pp.1–54.
3 Stanga, K.G. (1976) ‘Disclosure in published annual reports’, Financial Management, Winter,
4 pp.42–52.
5 TSE, Tokyo Stock Exchanges (2003) Tokyo Stock Exchanges Fact Book 2003, Tokyo, Japan.
6 Wallace, R.S.O. (1987) Disclosure of Accounting Information in Developing Countries: A Case
7 Study of Nigeria, PhD Thesis, University of Exeter, UK.
8 Wallace, R.S.O., Naser, K. and Mora, A. (1994) ‘The relationship between comprehensiveness of
corporate annual reports and firm characteristics in Spain’, Accounting and Business Research,
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1011
Woods, M., Dowd, K. and Humphrey, C.G. (2004) ‘Credibility at risk? The accounting profession,
1 risk reporting and the rise of VaR’, CRIS Discussion Paper Series – 2004.III.
2
3
4 Bibliography
5
6 ASB, Accounting Standard Board (1981) SSAP 18 – Accounting for Contingencies, ASB, UK.
This ASB, Accounting Standard Board (1990) SSAP 25 – Segmental reporting, ASB, UK.
Bibliography
section is ASB, Accounting Standard Board (1993a) FRS 4 – Capital instrument, ASB, UK.
made up of ASB, Accounting Standard Board (1993b) New Operating and Financial Review, ASB, UK.
uncited
references to ASB, Accounting Standard Board (1994) FRS 5 – Reporting the Substance of Transactions, ASB,
conform to
Inderscience UK.
house style. If
you wish them ASB, Accounting Standard Board (1995) FRS 8 – Related party disclosures, ASB, UK.
to appear in ASB, Accounting Standard Board (1998) FRS 3 – Derivatives and other Financial Instruments:
the reference
list please Disclosures, ASB, UK.
insert relevant
citations in the ASB, Accounting Standard Board (2003) New Operating and Financial Review, ASB, UK.
text.
Alternatively FSA, Financial Service Agency (2003) ‘Ordinance of disclosure in financial information’,
you can delete Ordinance of MOF, No. 5, revised March 2003, Japan.
this section
G8, Group 8 (2003) Fostering Growth and Promoting a Responsible Market Economy – a G8
7 Declaration, France.
8 JICPA, Japanese Institute of Certified Public Accountants (2002) Corporate Disclosure in
9 Japan – Reporting, fourth edn., JICPA, Japan.
2011
1 Notes
2
3 1
The term ‘risk’ refers both to the threat and the possibility of gain to the business. It has been
4 used in a broader sense, not only confined to a negative aspect.
5 2
MD&A intends to give the investor opportunity to look at the company through the eyes of
6 management. The financial statements and MD&A together now form the foundation for
7 business reporting: each needs to be read with the other in order for investors to get an integrated
and forward-looking understanding of a company’s performance and prospects.
8 3
The authors gratefully acknowledge the adoption of the first three hypotheses from the research
9
study of Linsley and Shrives on the UK and Canada. These three hypotheses are chosen because
30 the findings of this study can be compared with that of Linsley and Shrives.
1 4
http://www.toyokeizai.co.jp/english/e_link/index.html has been visited for the official websites
2 of sample companies.
3 5
OFR is a document intended to persuade publicly traded companies to adopt best reporting
4 practices. OFR should be issued by companies to ensure that market demands are met for clear,
5 narrative explanations of their performance.
6
7
 22 N. Konishi and M.M. Ali

111 Appendix A: decision rules for risk disclosures

2

all disclosures must be specifically stated, they cannot be implied
3
4
if a sentence has more than one possible classification, the information will be
5 classified into the category that is most emphasised within the sentence
6

tables (quantitative and qualitative) that provide risk information should be
7
interpreted as one line equals one sentence and classified accordingly
8
9
any disclosure that is repeated shall be recorded as a risk disclosure sentence each
1011 time it is discussed
1

if a disclosure is too vague in its reference to risk then it shall not be recorded as a
2
risk disclosure.
3
4
5 Appendix B: disclosure coding grid
6
7 Text disclosures Financial Business Operational Information Compliance
8 risk risk and processing risk
9 other risk and
2011 technology
1 risk
2 Sentence
3 Characteristics
4
Monetary/good news/future A
5
6 Monetary/bad news/future B
7 Monetary/neutral/future C
8 Non-monetary/good news/ D
9 future
30 Non-monetary/bad news/ E
1 future
2 Non-monetary/neutral/future F
3 Monetary/good news/past G
4
Monetary/bad/past H
5
6 Monetary/neutral/past I
7 Non-monetary/good J
8 news/past
9 Non-monetary/bad news/ K
40 past
1 Non-monetary/neutral/ L
2 past
3
4
5
6
711
8
 Risk reporting and its association with corporate characteristics 23

111 Appendix C: risk disclosure categories

2
3 Financial risk Interest rate
4 Exchange rate
5 Liquidity risk
6 Credit risk
7 Market risk
8 Treasury risk
9 Going concern problems
1011 Breakdown of accounting system and unreliable records
1 High cost of capital
2 Business risk Wrong business strategy
3 Competitive pressure on price/market share
4 General economic problem
5 Regional economic problem
Political risk
6
Obsolescence of technology
7
Adverse government policy
8
Industry sector in decline
9 Substitute products
2011 Take-over target
1 Inability to obtain further capital
2 Bad acquisition
3 Too slow to innovate
4 Operational and other risk Customer satisfaction
5 Product/project development
6 Sourcing
7 Efficiency and performance
8 Business processes not aligned to strategic goals
9 Failure of major change initiatives
30 Loss of entrepreneurial spirit
1 Stock – out of raw materials
2 Skills shortage
3 Physical disasters (fire and explosion)
Loss of physical assets
4
Failure to create and exploit intangible assets
5
Loss of intangible assets
6 Lack of orders
7 Loss of key people
8 Breach of confidentiality
9 Health and safety
40 Brand name erosion
1 Ineffective and inefficient management process
2 Other business honesty issues
3 Missed business opportunities
4 Lack of employee motivation
5
6
711
8
 24 N. Konishi and M.M. Ali

111 Compliance Breach of listing rules

2 Breach of financial regulations
3 Breach of companies act requirements
4 Litigation risk
Breach of other regulations and laws
5
VAT and Tax problems
6
Health and safety
7 Environmental problems
8
Information processing Integrity
9 and technology risk Access
1011 Availability
1 Infrastructure
2 Y2K
3 others
4
5
6
7
8
9
2011
1
2
3
4
5
6
7
8
9
30
1
2
3
4
5
6
7
8
9
40
1
2
3
4
5
6
711
8

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