CORPORATE GOVERNANCE IN RUSSIA: A STUDY OF FINANCIAL REPORTING IN RUSSIAN BANKS

Robert W. McGeeFlorida International University

Thomas TarangeloFlorida International University

Wendy GelmanFlorida International University

ABSTRACT

The Organisation for Economic Cooperation and Development (OECD) has established some benchmarks for various aspects of corporate governance. One benchmark involves the timeliness of financial reporting, a topic that has also been addressed by the American Institute of Certified Public Accountants (AICPA) and other organizations. The crux of the issue is that corporations should issue their financial reports in a timely manner so that stakeholders will have access to information before it becomes outdated. The present study examines the timeliness of financial reporting in the Russian banking sector and compares it to timeliness in the banking sectors of the European Union and the United States.

INTRODUCTION

Reporting financial information in a timely manner is very important. Financial

information becomes stale quickly, so reporting while the information is still fresh and relevant

is essential. The longer one waits to publish financial information, the less useful it is.

Timeliness of financial reporting is one of the benchmarks the Organisation for Economic

Cooperation and Development (OECD) has established to determine the quality of a

corporation’s corporate governance practices.1 The present study examines the timeliness of

1 Discussions of these benchmarks may be found in several places, including OECD, OECD PRINCIPLES OF CORPORATE GOVERNANCE (1999), which was replaced by OECD, OECD PRINCIPLES OF CORPORATE GOVERNANCE (2004). Also see OECD, OECD GUIDELINES FOR MULTINATIONAL ENTERPRISES (2002); OECD, WHITE PAPER ON CORPORATE GOVERNANCE IN RUSSIA (2002); OECD, METHODOLOGY FOR ASSESSING THE IMPLEMENTATION OF THE OECD

financial reporting of the Russian banking sector and compares it to the timeliness of financial

reporting for selected banks in Europe and the United States.

REVIEW OF THE LITERATURE

Corporate governance has become an increasingly important topic in recent years, partly

because corporate governance failures were a contributing factor to several corporate scandals2

and partly because the dismantling of the Berlin Wall and the implosion of the Soviet Union

caused thousands of enterprises in former communist centrally planned economies to become

privatized, which caused top management, shareholders and various stock exchanges to closely

examine what kind of corporate governance policies these newly created companies should

adopt.

One of the main sources of guidance on corporate governance has been the Organisation

for Economic Cooperation and Development (OECD),3 a private-sector, Paris-based organization

that has published several major documents on various aspects of corporate governance. But the

OECD is not the only organization that has published guidance on corporate governance.

Various other organizations and individuals have also published guidance.4

PRINCIPLES ON CORPORATE GOVERNANCE (2006); OECD, WHITE PAPER ON CORPORATE GOVERNANCE IN SOUTH EAST EUROPE (2003); 2 OECD, CORPORATE GOVERNANCE: A SURVEY OF OECD COUNTRIES (2004), especially 19-24.3 The main document is OECD, OECD PRINCIPLES OF CORPORATE GOVERNANCE (2004).4 For examples, see HOLLY J. GREGORY, INTERNATIONAL COMPARISON OF CORPORATE GOVERNANCE GUIDELINES AND CODES OF BEST PRACTICE: INVESTOR VIEWPOINTS (2000) [Published by the law firm of Weil, Gotshal & Manges, this 105-page document provides international comparisons for all of the major corporate governance subtopics.]; ROBERT A.G. MONKS & NELL MINOW, CORPORATE GOVERNANCE (3d ed. 2004) [This book is perhaps the classic book on corporate governance. It is used as a classroom text and also is a popular reference guide for corporate directors.]; HILARY ROSENBERG, A TRAITOR TO HIS CLASS (1999) [describes the philosophy and work of Robert A.G. Monks, a leader in corporate governance reform, and his efforts to change corporate America.]; RALPH D. WARD, 21ST CENTURY CORPORATE BOARD (1997) [Provides a background of the current state of affairs and describes the duties of corporate board members.] The World Bank has published more than 40 studies on

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Studies have also been made of the effect that adoption of good corporate governance

practices has on various economic variables. A group of Spanish scholars found that announcing

the company has adopted a code of best practices has a positive effect on stock price.5

Corporate Governance in Transition Economies

Numerous studies have been done of corporate governance in various transition

countries. Ohanyan applied the lessons learned by microcredit non-governmental organizations

(NGOs) in Bosnia and Herzegovina to NGOs and multi-sectoral partnerships in Armenia.6

Khachaturyan evaluated the overall efficiency of Armenia’s public company law, paying

particular interest to written rules and enforcement issues.7 Jandik and Rennie investigated the

evolution of corporate governance and firm performance in transition economies using a Czech

corporate governance in various transition and developing economies. These studies may be found at www.worldbank.org/ifa/rosc_cg.html. 5 Enrique Fernández-Rodríguez, Silvia Gómez-Ansón & Álvaro Cuervo-García, The Stock Market Reaction to the Introduction of Best Practices Codes by Spanish Firms, 12 CORP. GOVERNANCE 29-46 (2004). 6 Anna Ohanyan, The Governance Potential of NGOs and Multi-Sectoral Partnerships in Armenian Public Sector: Lessons from Microcredit NGOs of Bosnia and Herzegovina, 1 ARMENIAN J. PUB. POL’Y 125-144 (2003). [The author develops a governance focused model of Armenia’s NGO sector and calls for achieving a balance of engagement for the NGO sectors with state structures while at the same time maintaining the NGO sector’s inherent flexibility.]7 Arman Khachaturyan, Corporate Governance in Armenia: A Legal Perspective, WORKING PAPER NO. 04/01, Armenian International Policy Research Group (January, 2004). [Comparing the legal rules to the benchmarks established in the OECD PRINCIPLES OF CORPORATE GOVERNANCE, he concluded that although Armenia succeeded in transplanting good laws onto its books, their enforcement and efficiency are far less than desired.]

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company as a case study.8 A study by 706 Czech firms by Claessens, Djankov and Pohl found

that the more concentrated ownership is, the higher the firm’s profitability and market valuation.9

Nicholl compared the corporate governance practices of the Reserve Bank of New

Zealand and the Central Bank of Bosnia and Herzegovina and concluded that organizational

structures do matter for good governance and good performance.10 Mallin and Jelic analyzed the

changes in corporate governance that have taken place in several Central and East European

countries and provide a taxonomy of changes that have occurred.11 Roth and Kostova examined

data from 1723 firms in 22 countries in Central and Eastern Europe and the Newly Independent

States and concluded that a firm’s adaptation of new governance rules will be facilitated or

hampered depending on the characteristics of the institutional and organizational contexts it

faces.12 Pajuste’s study of corporate governance and stock market performance in nine Central

and East European countries found that stock market performance was lower and risk was higher

than in the more developed western stock markets for the period June 1994 to June 2001.13

8 Tomas Jandik & Craig G. Rennie, The Evolution of Corporate Governance and Firm Performance in Transition Economies: The Case of Sellier and Bellot in the Czech Republic, 14 EURO. FIN. MGMT. 747-791 (2008). [The authors focused on barriers that impeded the adoption of optimal corporate governance at a Czech ammunition manufacturer following the 1993 voucher privatization. They found that exogenously imposed diffuse ownership requirements, as well as legal, accounting and capital market deficiencies, hindered improvements in corporate governance.]9 Stijn Claessens, Simeon Djankov & Gerhard Pohl, Ownership and Corporate Governance: Evidence from the Czech Republic, WORLD BANK OCCASIONAL PAPER (November 1997). 10 Peter Nicholl, Organisational Structures Do Matter for Good Governance and Good Performance, 48 COMP. ECON. STUD. 214-228 (2006).11 Chris Mallin & Ranko Jelic, Developments in Corporate Governance in Central and Eastern Europe, 8 CORP. GOVERNANCE 43-51 (2000). 12 Kendall Roth & Tatiana Kostova, Organizational Coping with Institutional Upheaval in Transition Economies, 38 J. WORLD BUS. 314-330 (2003).13 Anete Pajuste, Corporate Governance and Stock Market Performance in Central and Eastern Europe: A Study of Nine Countries, 1994-2001. School of Slavonic and East European Studies, University College London, Centre for the Study of Economic and Social Change in Europe, WORKING PAPER NO. 22 (2002).

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Elenurm, Terk and Andresoo describes the division of strategic roles between owners and

managers and the changes that took place between 1995-1999 when Estonia was in the transition

stage to European integration.14 Bollaert and Dilé documented the significant improvement in

corporate governance practices in Estonia between 1999 and 2007 using hand collected data

from every public company in Estonia.15 Gillies, Leimann and Peterson identified the policies

that led to the success of the transition from central planning to a market economy in Estonia.16

Melis found that the effectiveness of the systems of financial reporting and corporate governance

were highly correlated.17

The World Bank has done a number of corporate governance studies involving transition

and developing economies.18 A small part of each of those studies examined the timeliness of

financial reporting. Unfortunately, there is as yet no World Bank corporate governance study of

Russia. The results of the studies for other transition economies that were either Soviet republics

or Soviet bloc countries or former communist Balkan countries are given in Table 1. Each

country’s score in the timeliness category is determined based on how close its practice comes to

meeting the OECD benchmark.

CODE O = ObservedLO = Largely Observed

14 Tiit Elenurm, Erik Terk & Jan Andresoo, Cooperation Patterns between Capital Owners and Managers in the Strategic Management Process: Case Estonia, 8 CORP. GOVERNANCE 637-648 (2009). [They found at least three patterns of role distribution. They also found that corporate governance had improved during the period.] 15 Helen Bollaert & Antoine Dilé, Changes in Corporate Governance Quality in Estonia between 1999 and 2007, 21 POST-COMMUNIST ECONOMIES 65-84 (2009). [They also identify areas where corporate governance practices could be enhanced.]16 James Gillies, Jaak Leimann & Rein Peterson, Making a Successful Transition from a Command to a Market Economy: the Lessons from Estonia, 10 CORP. GOVERNANCE 175-186 (2002).17 Andrea Melis, Financial Reporting, Corporate Communication and Governance, 1 CORP. OWNERSHIP & CONTROL 31-37 (2004). 18 Links to these studies may be found at www.worldbank.org/ifa/rosc_cg.html.

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PO = Partially ObservedMNO = Materially Not ObservedNO = Not Observed

Table 1The Timeliness of Financial Reporting19

Selected Transition Economies O LO PO MNO NO

Former Soviet RepublicsArmenia XAzerbaijan XGeorgia XLatvia XLithuania XMoldova XUkraine X

Former Soviet Bloc Countries Czech Republic XHungary XPoland XSlovakia X

Balkan CountriesBosnia & Herzegovina XBulgaria XCroatia XMacedonia XRomania XSlovenia X

As can be seen, none of the countries is operating at the highest level, although Hungary

and Poland, both EU members, largely observe the guideline on timeliness. Moldova is the

worst in this area. The other transition economies are evenly divided between partially observed

and materially not observed.

Corporate Governance in Russia

19 Data for the table were gathered from the various World Bank corporate governance reports, which may be found at www.worldbank.org/ifa/rosc_cg.html.

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A number of studies have been done on corporate governance in Russia. The OECD

published a White Paper on corporate governance in Russia.20 It examined all the main corporate

governance topics that were previously identified in its 1999 principles paper.21 In the chapter

dealing with disclosure and transparency it recommended the following:22

Russia should adopt in full and as quickly as possible International Financial Reporting

Standards (IFRS) for publicly listed and non-private companies.23

Companies should expand disclosure to include non-financial disclosure of all

information material to investment and voting decisions.24

Management and the board of directors need to be fully aware of their responsibility for

all financial and non-financial disclosures.25

Professional audit associations need to raise professional standards and monitor the

quality of their members’ performance.26

The Federal Commission on the Securities Market (FCSM) and stock exchanges should

require publicly listed companies to disclose any changes of auditors as well as the level

of fees paid to auditors for non-auditor services.27

The government should have the ability to impose broader sanctions on compliance

violations by the auditor.28

20 OECD, WHITE PAPER ON CORPORATE GOVERNANCE IN RUSSIA (2002). 21 OECD, OECD PRINCIPLES OF CORPORATE GOVERNANCE (1999).22 OECD, WHITE PAPER ON CORPORATE GOVERNANCE IN RUSSIA (2002) AT 22-27.23 ID., at 23.24 ID., at 24. 25 ID.26 ID., at 24-25.27 ID., at 25.28 ID., at 25-26.

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To improve the fairness of disclosure, the FCSM and stock exchanges should prohibit

asymmetrical disclosure to certain privileged parties and trading on material, non-public

information.29

Companies and the FCSM need to improve information dissemination procedures by

making information available to investors and the public through various channels, such

as press releases, filings with the authorities, and posting information on their website.30

Major training and education programmes should be developed for companies,

accountants and auditors, universities and the government.31

The OECD has examined corporate governance and transparency in Russia in several of

its other publications as well. In 2005 it published a report on transparency for related party

transactions.32 Standard & Poor’s did a country governance of Russia in 2004.33 Lazareva,

Rachinsky and Stepanov surveyed the state of corporate governance in Russia.34 McCarthy,

Puffer and Shekshnia edited a book on corporate governance in Russia.35 The Russian Institute of

Directors36 has conducted a number of annual surveys on corporate governance practices in

Russia.37

29 ID., at 26.30 ID., at 26-27.31 ID., at 27.32 OECD, IMPROVING TRANSPARENCY OF RELATED PARTY TRANSACTIONS IN RUSSIA (2005). 33 STANDARD & POOR’S, COUNTRY GOVERNANCE STUDY: CORPORATE GOVERNANCE INFRASTRUCTURE IN RUSSIA: THE LACK OF RULE OF LAW IS THE MAJOR OBSTACLE TO IMPROVEMENT (2004). 34 Olga Lazareva, Andrei Rachinsky & Sergey Stepanov, A Survey of Corporate Governance in Russia, in CORPORATE GOVERNANCE IN TRANSITION ECONOMIES 315-349 (Robert W. McGee ed., 2008).35 CORPORATE GOVERNANCE IN RUSSIA (Daniel J. McCarthy, Sheila M. Puffer & Stanislav V. Shekshnia, eds., 2004). 36 www.rid.ru. 37 The most recent report that is available in English is RUSSIAN INSTITUTE OF DIRECTORS, ANNUAL SURVEY OF CORPORATE GOVERNANCE PRACTICES IN RUSSIA: 2004 (2005).

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Kasparova has studied the market for corporate control in Russia.38 Kozarzewski

compared corporate governance in Poland, Kyrgyzstan, Russia and Ukraine.39 Melkumov

examined institutional background as a determinant of directors’ internal and external roles.40

Judge and Naoumova speculate as to whether Russia will continue to pursue the Anglo-

American approach to corporate governance by emphasizing external market controls or whether

it will move toward a Western European model, which places more emphasis on internal

control.41

Timeliness in Financial Reporting

Timeliness is an important aspect of financial reporting. Waiting for a long period of time

before releasing financial information makes it less relevant. The Accounting Principles Board in

the United States listed timeliness as one of the qualitative objectives of financial reporting. 42

The U.S. Securities and Exchange Commission also recognizes the importance of timeliness and

requires that listed companies file their annual 10-K reports by a certain deadline. The OECD43

38 I. Kasparova, Financing Mergers and Acquisitions: Specific Russian Characteristics, 15 PROBLEMS OF ECONOMIC TRANSITION 61-72 (2007). 39 Piotr Kozarzewski, Corporate Governance Formation in Poland, Kyrgyzstan, Russia, and Ukraine, STUDIES & ANALYSES, Center for Social and Economic Research, Warsaw, Case No. 247 (June 2007). 40 Dmitri Melkumov, Institutional Background as a Determinant of Board of Directors’ Internal and External Roles: The Case of Russia, 44 J. WORLD BUS. 94-103 (2009). 41 William Judge & Irina Naoumova, Corporate Governance in Russia: What Model Will It Follow? 12 CORP. GOVERNANCE 302-313 (2004). 42 Accounting Principles Board, Statement No. 4 (1970). APB Statement No. 4 was later superseded but the Financial Accounting Standards Board continued to recognize the importance of timeliness in its Concepts Statement No. 4 (1980). 43 OECD, GLOBAL CORPORATE GOVERNANCE PRINCIPLES (1998); OECD, OECD PRINCIPLES OF CORPORATE GOVERNANCE (2004).

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lists transparency as one element of good corporate governance. Kulzick,44 Blanchet45 and

Prickett46 view timeliness as an element of transparency.

The concept of timeliness has several facets. There is an inverse relationship between the

quality of financial information and the timeliness with which it is reported.47 Accounting

information becomes less relevant with the passage of time.48 Studies are mixed regarding the

relationship of the timeliness of reporting to the nature of the information being reported. Some

studies found that good news is reported sooner than bad news49 whereas other studies show that

bad news is reported quicker than good news. One reason for delaying the reporting of bad news

might be because companies reporting bad news take more time to massage the numbers,

possibly resorting to creative accounting techniques.50

Stated differently, there seems to be a tendency to rush good news to the press, such as

better than expected earnings, and delay the reporting of bad news or earnings that are less than

44 R.S. Kulzick, Sarbanes-Oxley: Effects on Financial Transparency, 69 S.A.M. ADVANCED MGMT. J. 43-49 (2004). 45 J. Blanchet, Global Standards Offer Opportunity, FINANCIAL EXECUTIVE 28-30 (March/April, 2002).46 R. Prickett, Sweet Clarity, FIN. MGMT. 18-20 (Sept. 2002). [Other elements of transparency include accuracy, consistency, appropriateness, completeness, clarity, convenience, governance and enforcement.]47 W.J. Kenley & G.J. Staubus, Objectives and Concepts of Financial Statements, 49 ACCT. REV. 888-889 (1974). 48 Roland K. Atiase, Linda S. Bamber & Senyo Tse, Timeliness of Financial Reporting, the Firm Size effect, and Stock Price Reactions to Annual Earnings Announcements, 5 CONTEMP. ACCT. RES. 526-552 (1989); E.S. HENDRIKSEN & M.F.VAN BREEDA, ACCOUNTING THEORY (5TH ED. 1992); J.E. Lawrence & H.D. Glover, The Effect of Audit Firm Mergers on Audit Delay, 10 J. MGMT. ISS. 151-164 (1998). 49 R. J. Bates, Discussion of the Information Content of Annual Earnings Announcements, 6 J. ACCT. RES. 93-95 (1968); W.H. Beaver, The Information Content of Annual Earnings Announcements, 6 J. ACCT. RES. 67-92 (1968). 50 D. Givoli & D. Palmon, Timeliness of Annual Earnings Announcements: Some Empirical Evidence, 57 ACCT. REV. 486-508 (1982); M.L. Chai & S. Tung, The Effect of Earnings-Announcement Timing on Earnings Management, 29 J. BUS. FIN. & ACCT. 1337-1354 (2002); B. Trueman, Theories of Earnings-Announcement Timing, 13 J. ACCT. & ECON. 285-301 (1990).

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expected.51 One study found that this relationship held true for municipalities.52 Another study

found it to be the case with Chinese companies.53 A third study found it to be true of Greek

firms.54

However, one study found that this was not the case for Belgian companies 55 and Han

and Wang56 found that this was not the case for petroleum refining companies, which delayed

reporting extraordinarily high profits during the Gulf Crisis of the 1990s, perhaps because

political repercussions outweighed what would otherwise have been a good market reaction.

Rees and Giner57 found that companies in France, Germany and the UK tended to report bad

news sooner than good news.

A study by Basu58 found that companies tend to report bad news quicker than good news,

presumably because of conservatism. Gigler and Hemmer59 discussed this point in their study,

51 A.E. Chambers & S.H. Penman, Timeliness of Reporting and the Stock Price Reaction to Earnings Announcements, 22 J. ACCT. RES. 21-47 (1984); W. Kross & D.A. Schroeder, An Empirical Investigation of the Effect of Quarterly Earnings Announcement Timing on Stock Returns, 22 J. ACCT. RES. 153-176 (1984). 52 P.D. Dwyer &E.R. Wilson, An Empirical Investigation of Factors Affecting the Timeliness of Reporting by Municipalities, 8 J. ACCT. & PUB. POL’Y 29-55 (1989). 53 In-Mu Haw, Daqing Qi & Woody Wu, Timeliness of Annual Report Releases and Market Reaction to Earnings Announcements in an Emerging Capital Market: The Case of China, 11 J. INT’L FIN. MGMT. & ACCT. 108-131 (2000). 54 Stergios Leventis & Pauline Weetman, Timeliness of Financial Reporting: Applicability of Disclosure Theories in an Emerging Capital Market, 34 ACCT. & BUS. RES. 43-56 (2004). 55 Jan Annaert, Marc J.K. DeCeuster, Ruud Polfliet & Geert Van Campenhaut, To Be or Not To Be … “Too Late”: The Case of the Belgian Semi-Annual Earnings Announcements, 29 J. BUS. FIN. & ACCT. 477-495 (2002).56 Jerry C.Y. Han & S-wu Wang, Political Costs and Earnings Management of Oil Companies during the 1990 Persian Gulf Crises, 73 ACCT. REV. 103-117 (1998).57 William P. Rees & B. Giner, On the Asymmetric Recognition of Good and Bad News in France, Germany and the UK, 28 J. BUS. FIN. & ACCT. 1285-1332 (2001).58 Sudipta Basu, The Conservatism Principle and the Asymmetric Timeliness of Earnings, 24 J. ACCT. & ECON. 3-37 (1997).59 Frank B. Gigler &Thomas Hemmer, Conservatism, Optimal Disclosure Policy, and the Timeliness of Financial Reports, 76 ACCT. REV. 471-493 (2001).

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which finds that firms with more conservative accounting systems are less likely to make timely

voluntary disclosures than are firms with less conservative accounting systems.

Building upon the Basu study,60 Pope and Walker61 found that there were cross-

jurisdictional effects when extraordinary items were either included or excluded, using U.S. and

UK firms for comparison. Han and Wild62 examined the potential relationship between earnings

timeliness and the share price reactions of competing firms. But Jindrichovska and Mcleay63

found that there was no evidence of conservatism in the Czech accounting system when it comes

to reporting bad news sooner than good news, presumably because the Czech tax system offers

little incentive to do so. Ball et al.64 found that companies in jurisdictions that have a strong

shareholder orientation tend to disclose earnings information sooner than companies in countries

operating under a legal code system.

There is also a relationship between the speed with which financial results are announced

and the effect the announcement has on stock prices. If information is released sooner, the effect

on stock prices is more pronounced. The longer the time lapse between year-end and the release

of the financial information, the less effect there is on stock price, all other things being equal.65

This phenomenon can be explained by the fact that financial information seems to seep into the

60 Sudipta Basu, The Conservatism Principle and the Asymmetric Timeliness of Earnings, 24 J. ACCT. & ECON. 3-37 (1997).61 Peter F. Pope & Martin Walker, International Differences in the Timeliness, Conservatism, and Classification of Earnings, 37 J. ACCT. RES. 53-87 (1999).62 Jerry C.Y. Han & John J. Wild, Timeliness of Reporting and Earnings Information Transfers, 24 J. BUS. FIN. & ACCT. 527-540 (1997).63Irina Jindrichovska & Stuart Mcleay, Accounting for Good News and Accounting for Bad News: Some Empirical Evidence from the Czech Republic, 14 EURO. ACCT. REV. 635-655 (2005).64 Ray Ball, S.P. Kothari & Ashok Robin, The Effect of International Institutional Factors on Properties of Accounting Earnings, 29 J. ACCT. & ECON. 1-51 (2000).65 Ray Ball & Philip Brown, An Empirical Evaluation of Accounting Income Numbers, 6 J. ACCT. RES. 159-178 (1968); Philip Brown & J.W. Kennelly, The Information Content of Quarterly Earnings: An Extension and Some Further Evidence, 45 J. BUS. 403-415 (1972).

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stock price over time, so the more time that elapses between year-end and the release of the

financial reports, the more such information is already included in the stock price.

Some countries report financial results faster than other countries. DeCeuster &

Trappers66 found that Belgian companies take longer to report their financial results than do

Anglo-Saxon countries. Annaert, DeCeuster, Polfliet & Campenhout67 found this to be the case

for interim information as well. Companies can report financial results faster on the internet and

the information can be more widely disbursed but posting two-year-old annual reports does

nothing to improve timeliness.68

Atiase, Bamber & Tse69 found that large companies report earnings faster than small

companies and that the reporting of earnings has a more significant market reaction for small

firms than for large firms. In a study of Australian firms, Davies & Whittred70 found that small

firms and large firms made significantly more timely reports than medium-size firms and that

profitability was not a significant variable.

Whittred71 found that the release of financial information for Australian companies is

delayed the first time an audit firm issues a qualified report and that the extent of the delay is

66 Marc DeCeuster & Dirk Trappers, Determinants of the Timeliness of Belgian Financial Statements, Working Paper, University of Antwerp (1993), cited in Jan Annaert, Marc J.K. DeCeuster, Ruud Polfliet & Geert Van Campenhout, To Be or Not To Be … “Too Late”: The Case of the Belgian Semi-annual Earnings Announcements, 29 J. BUS. FIN. & ACCT. 477-495 (2002).67 Jan Annaert, Marc J.K. DeCeuster, Ruud Polfliet & Geert Van Campenhout, To Be or Not To Be … “Too Late”: The Case of the Belgian Semi-annual Earnings Announcements, 29 J. BUS. FIN. & ACCT. 477-495 (2002).68 Hollis Ashbaugh, Karla M. Johnstone & Terry D. Warfield, Corporate Reporting on the Internet, 13 ACCT. HORIZONS 241-257 (1999).69 Roland K. Atiase, Linda S. Bamber & Senyo Tse, Timeliness of Financial Reporting, the Firm Size Effect, and Stock Price Reactions to Annual Earnings Announcements, 5 CONTEMP. ACCT. RES. 526-552 (1989).70 B. Davies & Greg P. Whittred, The Association between Selected Corporate Attributes and Timeliness in Corporate Reporting: Further Analysis, 16 ABACUS 48-60 (1980).71 Greg P. Whittred, Audit Qualification and the Timeliness of Corporate Annual Reports, 55 ACCT. REV. 563-577 (1980).

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longer in cases where the qualification is more serious. Keller72 replicated that study for US

companies and found the same results. Whittred and Zimmer73 found that it took Australian firms

in financial distress a significantly longer time to publish their financial information. A study of

more than 5,000 annual reports of French companies found that it took longer to release audit

reports where there had been a qualified opinion, and that the more serious the qualification, the

greater the delay in releasing the report.74

Krishnan75 found that the audit firm’s degree of expertise has an effect on the timeliness

of the publication of bad earnings news. Audit firms that specialize in the industry in which the

company operates are timelier in reporting bad financial news than are audit firms that have less

industry expertise.

Ahmad and Kamarudin76 did a study of audit delay and the timeliness of financial

reporting for 100 companies listed on the Kuala Lumpur Stock Exchange during the period

1996-2000 that had an audit delay of more than 100 days where the standard deviation for audit

delay was 36 days. They found the audit delay to be most significant for companies that (1) are

not in the financial industry, (2) receive other than unqualified audit opinions, (3) have a year-

end other than December 31, (4) are audited by non-Big-Five firms, (5) have negative earnings,

and (6) have higher risk.

72 Stuart B. Keller, Reporting Timeliness in the Presence of Subject to Audit Qualifications, 13 J. BUS. FIN. & ACCT. 117-124 (1986).73 Greg Whittred & Ian Zimmer, Timeliness of Financial Reporting and Financial Distress, 59 ACCT. REV. 287-295 (1984).74 Bahram Soltani, Timeliness of Corporate and Audit Reports: Some Empirical Evidence in the French Context, 37 INT’L J. ACCT. 215-246 (2002).75 Gopal V. Krishnan, The Association between Big 6 Auditor Industry Expertise and the Asymmetric Timeliness of Earnings, 20 J. ACCT., AUDITING & FIN. 209-228 (2005).76 Raja Adzrin Raja Ahmad & Khairul Anuar Kamarudin, Audit Delay and the Timeliness of Corporate Reporting: Malaysian Evidence, MARA University of Technology, Shah Alam, WORKING PAPER, 2003.

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Afify77 conducted a study involving 85 companies listed on the Cairo Stock Exchange.

The study found that audit delay was significantly affected by (1) board independence, (2)

duality of the CEO, (3) the existence of an audit committee, (4) company size, (5) industry, and

(6) profitability. Ownership concentration had no significant impact on audit delay.

A study of audit delay in Spain78 found that companies having the least delay were in

industries that were subject to regulatory pressure such as the financial and energy sectors. The

size of the company relative to the industry sector also had a significant correlation to the length

of audit delay. Audit firm, regulatory change and qualifications did not have a significant

correlation to audit delay.

THE PRESENT STUDY

Although the World Bank conducted corporate governance studies on about forty

transition and developing countries, unfortunately Russia was not one of the countries it studied.

Thus, we were unable to use the World Bank template as the starting point of our study. So we

used another approach.

Methodology

The goal was to measure the timeliness of financial reporting in the Russian banking

system, then compare it to the timeliness of financial reporting for American and European

banks. We determined timeliness by counting the number of days that elapsed between year-end

and the date of the auditor’s report. Some data was obtained from www.rustocks.com, a website

that contains a great deal of financial information about publicly listed Russian companies. Other

77 H.A.E. Afify, Determinants of Audit Report Lag: Does Implementing Corporate Governance Have Any Impact? Empirical Evidence from Egypt, 10 J. APPLIED ACCT. RES. 56-86 (2009). 78 Enrique Bonsón-Ponte, Toms Escobar-Rodríguez & Cinta Borrero-Domínguez, Empirical Analysis of Delays in the Signing of Audit Reports in Spain, 12 INT’L J. AUDITING 129-140 (2008).

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data were gathered from the U.S. Securities and Exchange Commission website79 as well as the

websites of various U.S. and European banks.

One criticism that could be made of this methodology is that the date on the auditor’s

report might not be the same date that the financial information was released to the general

public. However, there is no way to determine when the annual financial statements were

released to the general public for each and every company included in the study, so using the

auditor’s report was thought to be a good surrogate.

Another criticism that could be made is that the data were only gathered from annual

reports that were published in the English language. Annual reports published in the Russian

language might yield a different result. Such a criticism is valid.

However, this possible difference skews the research in a positive direction, since it

shows the Russian banks in a more positive light. Russian banks that want to attract foreign

capital will practically be forced by market pressure to publish English language financial

statements. Banks that are not interested in attracting foreign capital will not feel the urge to

publish their financial statements in English. Likewise, banks that want to attract foreign capital

will feel pressure from the market to publish their financial statements sooner rather than later,

whereas banks that are not interested in raising foreign capital will not feel this pressure. Thus,

the subset sample included in the present study is likely to include Russian banks that publish

their financial information sooner than does the total sample, which includes Russian banks that

do not publish English language annual reports.

Findings

79 www.sec.gov.

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Table 2 shows the data, which included several years of information in cases where banks

published annual reports for several years on their websites. We included data on 73 Russian

banks and 14 non-Russian banks.

Table 2Timeliness of Financial ReportingA Comparison of Russian and non-Russian Banks

RussianBanks

Non-RussianBanks

Number of banks included in the sample

73 14

Years of data 254 95

Range 18-346 days [January 18 – December 12]

31-88 days [January 31 – March 29]

Mean 98.8 days [April 9] 44.9 days [February 14]

Median 104 days [April 14] 59 days [February 28]

The range for the Russian banks was 18 to 346 days, meaning that at least one Russian

bank published its financial information 18 days after year-end whereas at least one Russian

bank waited until 346 days after year-end. Russian banks took an average (mean) of 98.8 days to

publish their financial information, compared to an average of 44.9 days for non-Russian banks.

The respective median days were 104 for Russian banks and 59 for non-Russian banks. A

Wilcoxon test found these differences to be significant at the one percent level (p <= 0.01). The

chart below illustrates the relative timeliness for the two groups of banks.

17

Comparison of Russian and Non-Russian Banks - Days Delay

0

50

100

150

200

250

300

350

400

Russian Non-Russian

CONCLUDING COMMENTS The study found that it takes Russian banks significantly longer to report their financial

results. This lack of timeliness is highly likely to impede their ability to raise capital in foreign

equity markets. However, just because Russian banks do not report their financial information to

the general public in a timely manner does not necessarily mean that their ability to raise debt

capital is seriously impaired. Russian corporations have traditionally (since 1991) gone to debt

markets to raise capital, so failure to publish financial information to the general public on a

timely basis may not have much of an effect on their ability to raise debt capital. More research

is needed on this point.

However, the failure to publish financial information in a timely manner is a symptom of

a more serious problem, the lack of a good system of corporate governance. If a company does

not report its financial information in a timely manner, it likely does not follow many other

corporate governance guidelines either. And since the banking sector of transition economies

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tends to be more highly advanced than other sectors of transition economies, it is likely that the

other sectors of the Russian economy are doing an even worse job of publishing their financial

information. More research is needed on this point as well.

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