Internal control information disclosure and corporate governance: evidence from an emerging market

• Published date: 01 February 2016
• Pages: 79-95
• DOI: https://doi.org/10.1108/CG-10-2015-0136
• Date: 01 February 2016
• Author: Ben Kwame Agyei-Mensah
• Subject Matter: Strategy,Corporate governance

Internal control information disclosure

and corporate governance: evidence

from an emerging market

Ben Kwame Agyei-Mensah

Ben Kwame Agyei-

Mensah is Associate

Professor at Solbridge

International School of

Business, Daejeon, South

Korea.

Abstract

Purpose –The purpose of this study is to increase our understanding of the impact of corporate

governance factors on the disclosure of internal control information by firms in Ghana.

Design/methodology/approach –A data set from 110 firms in Ghana for the year ending of 2013 was

used. Each annual report was individually examined and coded to obtain the disclosure of internal

control information index. Descriptive analysis was performed to provide the background statistics of

the variables examined. This was followed by regression analysis, which forms the main data analysis

method.

Findings –Results of the disclosure of internal control information mean of 35 per cent indicate that

most of the sampled firms did not disclose sufficient internal control information in their annual reports.

The low level of internal control information disclosure cannot be used by stakeholders to determine the

level of corporate governance practices in the sampled companies. The results of the regression

analysis indicate that board independence is a significant variable that explains the disclosure of

internal control disclosure. This supports the generally held view that independent directors help to

improve the quality of disclosure and increase the transparency of information.

Originality/value –This is the first study in Ghana that considered the impact of corporate governance

factors on internal control information disclosures. This study contributes to the literature on the

relationship between corporate governance and disclosure by showing that the disclosure of internal

control information in Ghana is associated with the proportion of independent board members. This

findings support Sarbanes–Oxley (SOX) 404 requirements, even though this is not compulsory for

Ghanaian firms unlike their US counterparts. The findings of this study will help market regulators in

Ghana and Sub-Saharan Africa, Security and Exchange Commission (SEC) and the Sub-Saharan

African Exchanges in evaluating the adequacy of the current disclosure regulations in their countries.

Understanding the board composition and their impact on voluntary disclosure provides evidence on

the sufficiency of the board of directors’ guidelines in the corporate governance code in Sub-Saharan

African countries.

Keywords Ghana, Disclosure, Corporate governance, Financial reporting

Paper type Research paper

1. Introduction

The role of good corporate governance practice in the management of corporate

organisations cannot be underestimated (Agyeman et al., 2013). According to Elliot and

Elliot (2013, p. 804), a good governance system will ensure that:

comprehensive risk management occurs as a normal course of events; and

there is transparent disclosure to shareholders and regulators of the nature, extent and

management of these risks.

In Ghana, though there are regulations that seek to ensure good corporate governance, the

regulators are not able to enforce the regulations due to several factors. According to

Agyeman et al. (2013), though Ghana has sufficient laws and regulations with respect to

Received 12 October 2015

Revised 4 November 2015

Accepted 10 November 2015

DOI 10.1108/CG-10-2015-0136 VOL. 16 NO. 1 2016, pp. 79-95, © Emerald Group Publishing Limited, ISSN 1472-0701 CORPORATE GOVERNANCE PAGE 79

corporate governance, the major challenge is the absence of active devices for their

effective enforcement, thus leaving Ghana deficient in corporate governance practices.

According to Agyemang and Castellini (2015), a lack of good corporate governance in

state-owned corporate organisations in Ghana has led to abysmal performance and failure

of these corporate organisations.

Corporate governance refers to the way in which companies are governed. It can be

described as the system by which companies are directed and controlled in the interest of

shareholders and other stakeholders. A company should be governed in the best interests

of its stakeholders, and particularly of its shareholders. According to Agyeman et al. (2013),

a company that embarks on good corporate governance practice offers essential

information to its equity holders and other stakeholders, thus minimising information

asymmetry. They go on to argue that the capability of a firm to entice or attract prospective

investors is subject to how effective its corporate governance practice is, as it gives

investors hope that they are investing in a credible company that will safeguard their

investments and in the end reward them appropriately. The government of Ghana is trying

to woo foreign investors into the country; hence, there is a need to adhere to good

corporate governance practices by all firms.

According to Elliot and Elliot (2013, p. 799):

Corporations do not act in a vacuum. They are corporate citizens of society with rights and

responsibilities. The way in which they exercise these rights and responsibilities is influenced by

the history, institutions and cultural expectations of society. A systems perspective recognises

that an entity is not independent but is interdependent with its environment.

A key issue of corporate governance relates to how a company complies with rules and

principles. According to Kaen (2003), the actual value of a corporate business is what

capital providers or investors will make available to the corporate business on the basis of

its anticipated returns to its owners. In all countries, firms are required to operate systems

of corporate governance laid down either by statute or by professional organisations, such

as Securities and Exchange Commission (SEC) and the Stock Exchange. It is important to

note that corporate governance has links to risks and internal controls. While good

corporate governance cannot stop company failure or prevent companies failing to achieve

their objectives, it is a major help, and well-run companies tend to achieve their objectives

in a less risky way. As a result, it is a part of risk reduction strategy for major companies.

Whenever a company collapsed unexpectedly, there is always a suspicion that the internal

control system was ineffective. There usually appears to have been inadequate risk

management generally.

The primary objective of financial reporting is to provide information that will be useful to

financial statement users in making economic decisions. Existing and potential

shareholders use company’s annual reports to evaluate the investment potential of a

company’s shares, creditors and lenders use it to assess the creditworthiness and liquidity

and government uses it to administer the company law. One of the essential aspects of

providing complete and reliable information which is taken seriously by the financial

community is to have a set of rigorous internal controls (Elliot and Elliot, 2013). The collapse

of Enron Corporation fully exposed the malpractices of the company’s internal control

system by authorities and the formalism of information disclosure of internal control.

According to Deumes (2004), reporting on internal control improves the quality of financial

reporting and reduces governance problems.

Although different countries have different corporate governance requirements relating to

internal controls and risk management, the UK guidelines provide a useful benchmark. The

UK Corporate Governance Code (September 2014) states that:

The board is responsible for determining the nature and extent of the principal risks it is willing

to take in achieving its strategic objectives. The board should maintain sound risk management

and internal control systems.

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