naser and nuseibeh - 2003 - quality of financial reporting - evidence from the listed saudi nonfinancial companies

Quality of financial reporting: evidence from the listed Saudi nonfinancial companies Kamal Naser * , Rana Nuseibeh Cardiff Business School, Aberconway Building, Column Drive, Cardiff CF10 3EU, UK Abstract This study assesses the quality of information disclosed by a sample of nonfinancial Saudi companies listed on the Saudi Stock Exchange. The study also compares the extent of corporate disclosure before and after the creation of the Saudi Organization of Certified Public Accountants (SOCPA). We classify information disclosed in the annual reports into three main categories: mandatory; voluntary related to mandatory; and voluntary unrelated to mandatory disclosure. The sample provided 63% and 66% of the total population of companies listed on the Saudi Stock Exchange in the years 1992 and 1999. In departure from most previous studies conducted in this area of research, we weighted the indexes of disclosure by the mean and median responses of seven users of the annual reports in Saudi Arabia. The results of both unweighted and weighted indexes are reported. The outcome of the analysis indicated a relatively high compliance with the mandatory requirements in all industries covered by the study, with the exception of the electricity sector. As for the voluntary disclosure, whether related or unrelated to mandatory disclosure, the analysis revealed that Saudi companies disclose information more than the minimum required by law. The level of voluntary disclosure, however, is relatively low. The analysis also showed that the creation of SOCPA has had little impact on corporate reporting in Saudi Arabia. D 2003 University of Illinois. All rights reserved. Key words: Saudi nonfinancial companies; Financi al reporting; Saudi Organization of Certified Public Accountants * Corresponding author. Tel.: +44-29-2087-5348; fax: +44-29-2087-4419. E-mail address: naser@cardiff.ac.uk (K. Naser). 0020-7063/03/$ – see front matter D 2003 University of Illinois. All rights reserved. doi:10.1016/S0020-7063(03)00002-5 The International Journal of Accounting 38 (2003) 41–69 1. Introduction After two Gulf Wars and continued fluctuations in oil prices, Saudi Arabia and other Gulf States started to experience budgetary deficits. This reality coincided with a revolution in information technology that abolished borders between countries and emphasized global- ization. Because of these developments, policymakers in Saudi Arabia realized the importance of restructuring their economy to be able to compete in the international arena. Consequently, during the 1990s, Saudi Arabia underwent liberalization and privatization programs aimed at reducing government expenditure and inviting the private sector to take a more effective part in shaping the national economy (Naser, 1998). In fact, Saudi authorities introduced a number of measures as a clear indication of their intention to transform the economy. During the 1990s, Saudi authorities issued government bonds to finance their activities and borrowed from the banking sector to cover the budgetary deficit. In April 2000, the Saudi government issued a law that allowed foreign investors, for the first time, to invest in Saudi Arabia. The new law gives tax incentives to foreign investors and, according to the Saudi Finance and Economics Minister, a corporate tax rate on foreign investment that does not exceed 30% of the reported income. 1 The minister also indicated that the corporate income tax rate would be 25% on companies that reported 100,000 Saudi riyals (SR). Foreign companies will be given an unlimited period to write off their losses. 2 More importantly, the Saudi Finance Minister emphasized that Saudi Arabia will undergo an improvement in the accounting and auditing systems that involve the Department of Zakat and Income Tax authorities. Central to the abovementioned developments are the annual reports published by companies operating in Saudi Arabia. These published reports are the main vehicle firms use to communicate information to external users. Given that the report contains information on a firm’s profitability and liquidity, it is expected to help investors, creditors, and other users make informed decisions about the company. Unlike companies operating in the developed world, the annual report published by a Saudi company represents the only source of financial information available to users. 3 In this study, an attempt is made to assess the quality of information disclosed by nonfinancial companies listed on the Saudi Stock Exchange. In particular, the study examines the extent to which Saudi firms comply with stated accounting measurement and disclosure requirements. The first Saudi national accounting body was formed in 1992, at which time company disclosure requirements became effective. Until now, no attempt has been made to assess changes in the quality of accounting measurement and disclosure reported by the Saudi companies. 1 Ibrahim al-Asaf said that ‘‘30% the taxation limit to tax on foreign investment and flexibility will be given to write off losses’’ (Asharq Al-Awsat, April 12, 2000, Wednesday [7806] p. 11). 2 This new law will replace a previous one that permits a company to write off sustained losses 1 year after their occurrence. 3 In a developing country like Saudi Arabia, investors or creditors can get information from the company through direct contact with the management. Yet, the annual report is still the only formal source of information published by the company. K. Naser, R. Nuseibeh / The International Journal of Accounting 38 (2003) 41–6942 The timeliness of this study lends to its importance. It comes a few years after the creation of the Saudi Organization of Certified Public Accountants (SOCPA) in 1993 and shortly after the Saudi authorities passed a new foreign investment law in which accounting information plays a significant role in assuring local, as well as foreign, investors. We expect this study to shed light on SOCPA’s impact on the extent of disclosure by national companies. Our results have the potential to assist Saudi policymakers as they develop the requirements of financial reporting. In addition, it will offer both local and foreign investors an objective assessment of the current reporting practices in Saudi Arabia. Such information is important to all investors who want to make informed decisions before they invest in a company. The remainder of the study proceeds as follows. The framework for financial reporting in Saudi Arabia is presented in the next section. Previous studies that covered the quality of corporate disclosure are reviewed in Section 3. Research questions, data collection, statistical tests, and index construction are all presented in Section 4. The findings are detailed in Section 5 and the conclusion is given in the final section. 2. The framework for financial reporting in Saudi Arabia Accounting practices in Saudi Arabia are regulated by three laws: the Company Law, Accountancy Law, and Income Tax and Zakat Law. None of these laws define the scope, function, or objectives of accounting or financial reporting. The Company Law, the primary authoritative reference for professional accounting practice, includes some accounting guidelines. It determines the legal basis for companies and accountants and its articles deal with the fundamental details of formation, such as registration procedures, minimum capital required number of partners, number of directors, and other related matters. Article 38, for example, asks the board of directors to prepare a balance sheet for every financial year, a profit and loss account, and a report on the company’s operations and financial position. It also provides some guidance on auditing and accounting measurement and procedures. 4 The Accountancy Law was enacted by Royal Decree No. 43 (1974) and was the first to regulate the accounting profession in Saudi Arabia. It is still in effect and sets the standards that should be followed by auditors. It consists of 35 articles, which establish the fundamental requirements of practicing accounting services such as registration procedures and fees, qualifications, the responsibilities of the auditor, violation and trial proceedings, and other related issues. During the past decade, the Ministry of Commerce realized there was an urgent need to update the 1974 Accountancy Law. Accordingly, a new law was enacted by Royal Decree 4 Private as well as publicly owned companies are expected to comply with the Company Law. Hence, it is very likely for privately owned companies to publish an annual report to assist the DZIT in estimating the amount of Zakat that the company should pay. In addition, the private company needs to produce accounts when applying for bank loans. Yet, the accounts produced by the privately owned companies are not as regular and intensive as those produced by the publicly owned companies. K. Naser, R. Nuseibeh / The International Journal of Accounting 38 (2003) 41–69 43 Number 12/M on 13.5.1412 H (1991). This law comprises the following: conditions for registr ation, registration procedures, the obligations of a chartered accountant, and the establishment of the Saudi Public Accountants’ Committee. The Income Tax and Zakat Law was first introduced in Saudi Arabia by Royal Decree No. 17/2/28/3321, dated 21.1.1370H (1950), and has been amended several times. Zakat is a religious duty (tax), in accordance with Islamic Law, charged to Saudi citizens, wholly Saudi- owned companies, and the S audi por tion of prof it of co mpanie s owned jointl y with foreigners. The Zakat is imposed on capital and earnings: all profits, gains, and proceeds from business, industry acquisitions of whatever kind or description, including financial and commercial transactions, and dividends, crops, and livestock. 2.1. The accounting profession The first accounting firm, the non-Saudi firm of Saba, Nawar, and Co., was established in Saudi Arabia in 1955. The first Saudi accounting firm, Daghastani and Abdul Wahab, was established in 1959. By the end of the 1950s, there were still only seven accounting firms in Saudi Arabia. 2.2. The Ministry of Commerce Financial accounting objectives and concepts approved as the basis for financial account- ing principles by Ministry of Commerce Decision No. 692 (1985) are very similar to the accounting principles issued by FASB. In 1986, the Ministry of Commerce issued ‘‘Account- ing Objectives and Concepts,’’ which dealt with three issues, namely financial accounting and objectives, financial accounting concepts, and the standard of general presentation and disclosure. In addition, the Ministry of Commerce issued its ‘‘Auditing Standards,’’ comprising seven standards, which are as follows: adequate professional competence, auditor neutrality and independence, due professional care, auditing planning, documentation and control, auditing evidence, and auditing reports. In 1990, the first accounting standard on the objective and concepts of accounting and general presentation and disclosure was issued. 5 This was followed, in 1992, by the formation of SOCPA. 6 The organization has the responsibility of issuing accounting and auditing standards and has the authority to qualify public accountants. 5 The standard became effective that same year. 6 While the Company Act sets the basic rules and guides for accounting and auditing, SOCPA develops, reviews, and approves detailed accounting and auditing standards. SOCPA affairs are managed by 13 board members and chaired by the Minister of Commerce. The following serve as members: the Deputy Minister of Commerce and Deputy Minister of Finance, the vice president of the General Controller’s Bureau, two representing accounting faculties of Saudi universities, a representative from the Council of Chambers of Commerce and Industry, and six members representing Saudi audit firms to be elected at the organization’s general meeting for a term of 3 years. K. Naser, R. Nuseibeh / The International Journal of Accounting 38 (2003) 41–6944 In addition to the Company Law and the standard issued by SOCPA, companies listed on the stock exchange should meet the requirements set by the market. 7 3. Previous research and study questions In the literature, a number of studies have been undertaken to assess the degree of firms’ compliance with the stated standards and to explain variations in the extent of corporate reporting. In this respect, Evans and Taylor (1982) investigated the impact of IASC on corporate reporting practices of five industrial countries (France, Germany, Japan, United Kingdom, and United States). They observed that the International Accounting Standards (IASs) have little impact on the extent of corporate disclosure. Ahmed and Nicholls (1994) investigated factors that influence the level of compliance by Bangladeshi companies with mandatory disclosure requirements. They found that mandatory disclosure tends to increase in cases where the company is a subsidiary of a multinational company (the company is audited by a large audit firm) and the accounts are prepared by a qualified accountant. They found, however, that company size has no effect on the level of disclosure. In a similar line of research, Murphy (1999) looked at specific firm features distinguishing Swiss firms who voluntarily adopted the IASs from other companies that chose to use national accounting standards. He found that a firm’s involvement in foreign activities, percentage of foreign sales, and foreign stock exchange listing impact the use of the IASs. El-Gazzar, Finn, and Jacob (1999) examined the reasons and company characteristics that influence a company’s choice in adopting the IASs. They found that multiple foreign stock exchanges listing, the magnitude of a firm’s foreign operations, and membership in regional organizations (European Union) dictate the use of the IASs. Tower, Hancock, and Taplin (1999) conducted a regional study that investigates the degree of compliance with the IASs of companies listed on the stock exchanges of six countries in the Asia- Pacific region. They found that the mean of compliance in countries like Australia, Thailand, Malaysia, and Singapore was 90% or more. The degree of compliance of other countries covered by a study by Tower et al. reported a slightly lower mean (88% and 89%). Given that Hong Kong and the Philippines are influenced by British and American accounting standards, respectively, the resulting mean of compliance with the IASs is encouraging. 7 In 1984, the Saudi Arabian Monetary Agency (SAMA) took control of the capital market in Saudi Arabia and became the legislative body that regulates general and operational rules. SAMA circulated the rules and regulations controlling and supervising the Saudi Stock Exchange to commercial banks, responsible for all share- trading activities. The stock market requirements emphasize the requirements set in the Company Law and the accounting standards issued by SOCPA. K. Naser, R. Nuseibeh / The International Journal of Accounting 38 (2003) 41–69 45 On the other hand, Dye (1986) indicated that the lack of voluntary disclosure might result in an increase in the demand for additional information through mandatory dis- closure. This might lead to a positive association between the extent of mandatory and voluntary disclosures. It is therefore important to seek answers to the following research questions. Research question 1: To what extent do Saudi companies comply with the requirements of mandatory disclosure? Research question 2: Do Saudi companies disclose information more than the minimum required by accounting standards? Research question 3: Is there any association between the extent of mandatory disclosure and voluntary related/unrelated to mandatory disclosure? Research question 4: Is there any significant difference in the extent of corporate disclosure before and after the creation of the SOCPA? 4. Index construction, data collection, and statistical tests 4.1. Index construction For the purpose of this study, corporate disclosure was put in three major areas: mandatory, voluntary closely associated with mandatory, and voluntary unrelated to mandat ory. A disclosure index was constructed for each of these areas taking into consideration financial reporting requirements in Saudi Arabia. 8 The literature on the use of indexes was divided between unweighted and weighted indexes. Under the unweighted index, dichotomous scores, where 0 is given for nondisclosure and 1 is given for disclosure item, are used. The weighted index, however, is based on the rank a user of the annual report attaches to the information disclosure item. Those who advocate the use of the weighted index believe that such a score reflects both the extent and importance of each disclosure item that forms the index (Robbins & Austin, 1986). However, those who argue against the use of the weighted index contend that the weighting does not significantly alter the results (Chow & Wong- Boren, 1987; Wallace & Naser, 1995). In all cases, Chow and Wong-Boren (1987) and Robbins and Austin (1986) obtained the same results under the unweighted and weighted indexes. In this study, the analysis is based on both methods. This helps assess the outcome under the two methods and provides new evidence from a developing country such as Saudi Arabia. In departure from previous studies (Chow & Wong-Boren, 1987; Robbins & Austin, 1986; Singhvi & Desai, 1971), which relied on a limited number of accounting information users, the disclosure index is weighted by the importance given to each item of disclosure by seven 8 Details of the disclosure items included in the index and the weight given to each of the disclosure items by various users of corporate report are reported in Appendix A. K. Naser, R. Nuseibeh / The International Journal of Accounting 38 (2003) 41–6946 user groups. 9 This procedure is expected to give a more objective index. Five weighting points were given to items viewed as very important by the respondents; four points for those viewed as important, two points for some importance, and one point for little importance. The disclosure index scored by each company was then divided on the maximum score. This can be presented mathematically as follows: UI x ¼ P n x t ¼1 T tx  n x where UI x is the unweighted index scored by company, x,0 I x 1; T tx is the information item disclosed by company x; n x is the maximum number of items expected to be disclosed by a company; WI x ¼ P n x t ¼1 wT tx  n x where WI x is the weighted index scored by company x,0 I x 1; w is the weighting point, i.e., five weighting points were given to items viewed as very important by the group of users, four points for those viewed as important, two points for some importance, and one point for little importance; and T tx is the information item disclosed by company x. 4.2. Data collection To provide answers to the above research questions, we used the annual reports of companies listed on the Saudi Stock Exchange. By the end of 1999, 91 companies were listed on the Saudi Stock Exchange, 12 of which were operating in the financial sector. Since the purpose of this study is to look at disclosure practices by nonfinancial companies, annual reports were requested from all nonfinancial companies for the years 1992 and 1999. 10 These years were chosen because 1992 precedes the creation of SOCPA and 1999 is the latest annual 9 Two research students scored the accounts. In cases where a significant difference in the score appeared, the authors double-checked them. The weighting, however, was based on a questionnaire survey mailed to a sample of users of the annual reports. The sample includes individual investors, institutional investors, academics, auditors, government officers, bank credit officers, and financial analysts. The disclosure index was then weighted by the mean and the median of the users’ ranking of the importance of each of the items that made the index. Due to variations in the importance that various individual user groups attach to different disclosure items, the mean/ median of the whole sample were used to weight the index. 10 The Saudi companies surveyed in this study vary in size, average volume traded on the Saudi Stock Exchange, and government ownership. For example, the market capitalization ranges between SR 6 million, in the case of Beshah Agriculture and Development, and SR 29,350 million, in the case of the Saudi Basic Industries (SABIC). The average daily volume traded also ranges from as low as 2, in the case of Beshah Agriculture and Development, to more than 100,000, for the Saudi Cement. A government share in the surveyed companies was evident in companies operating in the electricity, transportation, hotel, manufacturing, and real estate sectors. For example, while government ownership reached almost 99% in the case of Saudi Consolidates Electricity Companies (SCECO-Southern), shares in a company like Saudi Arabia Refineries (SARCO) were all owned by the private sector. K. Naser, R. Nuseibeh / The International Journal of Accounting 38 (2003) 41–69 47 report the researchers could obtain. Comparing the extent of corporate disclosure within the two periods would enable us to examine possible changes in the extent of disclosure and the impact, if any, of SOCPA on such disclosures. Annual reports of 40 out of 64 companies were collected for the years 1991/1992 and 52 out of 79 companies for the years 1998/1999. 4.3. Statistical tests The univariate analysis that measures central tendency and dispersion (mean and S.D.) and a test that identifies whether changes in one variable are associated with another (correlation) was employed. Since the data covered three major areas of disclosure (mandatory, voluntary related, and unrelated to mandatory), a Wilcoxon test was performed to identify whether the index of disclosure under the areas of disclosure is coming from the same population. 5. Findings 5.1. Degree of compliance with standards requirements As mentioned earlier, the degree of compliance and the extent of corporate disclosure will be used as a proxy of quality; a high degree of compliance and more disclosure are viewed as better quality. Hence, corporate disclosure was divided into three main categories. The first area covers mandatory disclosure that satisfies the minimum required by the Saudi accounting standard, such as the disclosure of company’s total assets. The second category covers voluntary related to mandatory disclosure, such as the breakdown of assets (current and fixed assets). The third category covers voluntary unrelated to mandatory disclosure, such as future expansion in a company’s assets. Twenty-three disclosure items were derived from the main source of disclosure require- ments, the General Presentation and Procedure Standard in Saudi Arabia, and formed the basis for the mandatory disclosure index. The annual reports of the sample Saudi nonfinancial companies were scored against the index. Descriptive statistics and comparison between the degree of significance of the difference between the unweighted and weighted disclosure indexes are given in Tables 1 and 2, respectively. 11 It is evident from Table 1 that the mean of the mandatory disclosure index is relatively high across different sectors of industry with the electricity sector being the exception. The low level of disclosure achieved by the electricity sector can be explained on the grounds that this industry is viewed as a strategic one and is mainly owned by the government; in some companies, the government owns up to 95% of the outstanding shares. In addition, a view of 11 The weighting was based on a questionnaire survey mailed to a sample of users of the annual reports. The sample includes individual investors, institutional investors, academics, auditors, government officers, bank credit officers, and financial analysts. The disclosure index was then weighted by the mean and the median of the users’ ranking of the importance of each of the items that made the index. Due to variations in the importance that various individual user groups attach to different disclosure items, the mean/median of the whole sample were used to weight the index. K. Naser, R. Nuseibeh / The International Journal of Accounting 38 (2003) 41–6948 the profit and loss accounts of the electricity companies revealed that most of these companies sustained losses over a long period. More importantly, the Saudi government guarantees a 7.5% return to investors in this sector. Consequently, companies were left with little incentive to disclose detailed information. Hence, the low level of disclosure, reported in Table 1, is not surprising. What attracts one’s attention, on the other hand, is that the differences reported between the weighted and unweighted disclosure indexes were small. This might be because the index is formed from mandatory disclosure items that most companies are expected to comply with. Moreover, the users who took part in the survey seem to attach the same importance to the items that made the index. Needless to say, the disclosure items included in the index represent the minimum requirement that most companies are expected to disclose. On the other hand, the Wilcoxon signed ranks test was undertaken to identify possible difference(s) between the unweighted and weighted disclosure index, documented in Table 2, and reported significant differences between the unweighted and weighted disclosure indexes in the agriculture and services sectors. While the difference was marginal in the agriculture sector, it was significant in the services industry. 12 This implies that Saudi users of the accounts attach different importance to the disclosure items that formed the index. In addition, companies operating in the services industry vary in size and their total assets range from SR 6 million to SR 1386. Large companies, rather than smaller ones, are expected to approach external sources of funds to finance their activities. Consequently, we expect them to include a statement of retained earnings in their annual reports as well as detailed and classified information about their assets. Furthermore, government ownership in the agriculture sector ranges between 0% and 100%. This is also expected to impact the degree of compliance by the Saudi companies. Significant differences were also re ported for the sample a s a whole bet ween the unweighted and weighted indexes. The result for the whole sample contradicts results reported by Chow and Wong-Boren (1987) and Robbins and Austin (1986), who obtained the same results under the unweighted and weighted indexes. This implies that external users in Saudi Arabia attach different importance to items disclosed in the annual report. Looking at the individual items of disclosure that formed the index reported in Table 3, the conclusion is that all surveyed companies disclosed information on most of the items. As for items expected to appear on the balance sheet, a number of companies failed to classify assets and liabilities into current and fixed/long-term. A number of companies also failed to report assets and liabilities in order on the balance sheet. Further, few companies showed a statement of retained earnings on their balance sheets. Although some might argue that these issues are not significant and their disclosure might not affect the quality of disclosure, this additional information helps users make more informed decisions. For example, financial analysts will find it difficult to assess the liquidity of a company if the company failed to classify its assets and liabilities into current and long- term. Other profitability indicators, such as fixed assets turnover, which is usually used to 12 A small number of the surveyed companies failed to fully comply with the standards in a limited number of disclosure items. However, the degree of compliance with standards is on average high. K. Naser, R. Nuseibeh / The International Journal of Accounting 38 (2003) 41–69 49 Table 1 The index of the Saudi-listed companies’ mandatory, voluntary related to mandatory, and voluntary unrelated to mandatory disclosures requirements Agriculture Manufacturing Petrochemical Unweighted (n =9) Weighted by mean (n =9) Weighted by median (n =9) Unweighted (n = 26) Weighted by mean (n = 26) Weighted by median (n = 26) Unweighted (n =5) Weighted by mean (n =5) Weighted by median (n =5) The index of the Saudi listed companies’ compliance with mandatory disclosure requirements Mean a .93 .94 .93 .91 .91 .91 .92 .92 .91 Median .94 .95 .94 .91 .90 .90 .92 .92 .91 S.D. .06 .06 .06 .05 .05 .05 .07 .07 .07 Min .84 .84 .84 .81 .80 .80 .82 .82 .82 Max .99 .99 .99 .97 .97 .97 .99 .99 .99 The index of the Saudi listed companies’ voluntary disclosure related to mandatory disclosure Mean .37 .39 .41 .35 .35 .38 .33 .35 .37 Median .36 .39 .41 .36 .37 .39 .32 .34 .36 S.D. .05 .05 .06 .06 .07 .07 .03 .03 .03 Min .28 .30 .31 .23 .25 .24 .30 .32 .34 Max .36 .39 .41 .43 .45 .46 .38 .40 .41 The index of the Saudi listed companies’ voluntary disclosure not related to mandatory disclosure Mean .28 .29 .29 .38 .39 .39 .37 .38 .38 Median .30 .31 .31 .37 .38 .38 .33 .34 .34 S.D. .07 .07 .07 .09 .09 .09 .17 .17 .17 Min .13 .14 .14 .20 .21 .22 .13 .14 .15 Max .37 .39 .39 .53 .55 .54 .50 .52 .51 Indexes in this and the following tables are extracted from the 1999 annual reports of the sampled companies. a The mean represents the average disclosure of items by the sampled companies. K. Naser, R. Nuseibeh / The International Journal of Accounting 38 (2003) 41–6950 [...]... departure from most of the previous studies conducted in this area of research, we weighted the indexes by the mean and the median of responses of seven users of the annual reports in Saudi Arabia The results of both unweighted and weighted indexes are reported The outcome of the analysis indicates a relatively high compliance with the mandatory requirements in all industries covered by the study, with the. .. because some companies reported high levels of compliance with the stated standards There is little room to 13 Annual reports of a sample of the same companies were used K Naser, R Nuseibeh / The International Journal of Accounting 38 (2003) 41–69 61 disclose more information The ability of SOCPA to monitor and enforce the standard might also explain the insignificant change in the level of disclosure... SOCPA has the power to disqualify the accounts of companies that do not comply with the stated standard, we expect little improvement in the extent of disclosure On the other hand, the Wilcoxon signed ranks test reported in Table 2 showed no significant difference in the level of mandatory disclosure in the years 1992 and 1999 between industries and/ or the sample as a whole The outcome of the analysis... information Since companies in Saudi Arabia are dominated by a small number of investors and families, it is possible to request information directly from these companies 5.2 Do Saudi companies disclose more than required by the standards? The analysis of the mandatory disclosure indicated a high degree of compliance with the stated standards It was, therefore, important to investigate whether Saudi companies. .. fair to say that the Saudi companies included in the study comply with the standards and disclose more than the minimum information required by law The level of voluntary disclosure, however, is relatively low Furthermore, the level of disclosure and the importance that the users attach to information item of disclosure appear to vary from one industry to another When we examine mandatory and voluntary... changes in the level of disclosure after its creation To compare the effect of the SOCPA on financial reporting practices in Saudi Arabia, disclosure indexes were constructed from a sample of companies for the years 1992 (1 year before the establishment of SOCPA) and 1999.13 Table 5 provides comparative descriptive statistics on the unweighted and weighted indexes The results of statistical tests on the differences... weighted by the mean 07 * 09 * Index of unweighted mandatory vs index of mandatory disclosure weighted by the median 14 Index of mandatory weighted 02 * by the mean vs index of mandatory disclosure weighted by the median and weighted scores of mandatory disclosure using Level of significance of the difference between unweighted mandatory disclosure using Wilcoxon signed ranks test 05 * Index of unweighted... one of the five pillars of Islam 5.2.2 Voluntary unrelated to mandatory disclosure An index formed from a list of voluntary disclosure items not related to mandatory disclosure was used to score the disclosure of Saudi companies as reported in their annual reports Descriptive statistics on the industry level and comparison between the degree of significance of the difference between the unweighted and. .. impact mandatory rather than voluntary disclosure 6 Conclusion This study set out to give answers to a number of research questions relating to the quality of information disclosed by a sample of Saudi nonfinancial companies listed on the Saudi Stock Exchange In addition, in this study, we compare the extent of corporate disclosure before and after the creation of SOCPA For our sample, we used 63% and. .. activities that affected the current financial year 5.2.3 The relationship between mandatory and voluntary disclosures In this section, the relationship between the level of mandatory and voluntary disclosures is examined In Table 4, the coefficients of correlation together with the level of significance between the unweighted values of disclosure indexes are presented The correlation of the weighted disclosure . auditors, government officers, bank credit officers, and financial analysts. The disclosure index was then weighted by the mean and the median of the users’ ranking of the importance of each of the items. assesses the quality of information disclosed by a sample of nonfinancial Saudi companies listed on the Saudi Stock Exchange. The study also compares the extent of corporate disclosure before and. Nuseibeh / The International Journal of Accounting 38 (2003) 41–69 49 Table 1 The index of the Saudi -listed companies mandatory, voluntary related to mandatory, and voluntary unrelated to mandatory