FINANCIAL REPORTING AND PUBLIC TRUST ISSUES AND PROSPECT

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Public trust in a country has been shown to affect its economic growth and development, capital market development, government regulation and international trade (Knack and Keefer, 1997, Stulz and Williamson, 2003, Guiso, et al., 2006 and 2008). These studies are premised on the idea that interpersonal trust affects contracting costs in an economy: greater trust enables greater economic activity that requires an agent to rely on another agent‟s future actions. In public corporations, capital market participants (investors and creditors) entrust managers with their invested capital and rely on them to create value by deploying these assets in the most productive manner available. Periodic accounting reports are an important source of information for capital market participants to monitor managers‟ actions that affect the value of their investments. In this study, the we posit that the level of trust in an economy affects capital market participants‟ subjective beliefs about the credibility of periodic accounting reports, thereby affecting investors‟ demand for accounting disclosures.

The in informativeness of firms‟ financial reports are affected by regulations that mandate accounting disclosures as well as by investors‟ and other stakeholders‟ demand for information. Accordingly, we distinguish between firms‟ accounting quality that is influenced by regulated (mandated) reporting requirements and firms‟ accounting and disclosure practices that are affected by managerial choices made in response to the institutional environment within a country. The level of trust in an economy potentially affects both regulators‟ incentives to mandate firm disclosures and capital market participants‟ demand for accounting information. Public trust is potentially negatively associated with financial reporting and disclosure quality if investors‟ demand for information declines in their trust  of firm insiders In high trust economies, arms length investors would place a low likelihood of being cheated by firm managers or controlling owners, and therefore choose a low disclosure regime (Pinotti, 2008, and Aghion et al., 2010). The upshot being that public trust is negatively associated with both mandatory and voluntary firm accounting quality. From the forgoing therefore, the study is determined to examine the issues and prospect of financial reporting and public trust.