Ownership structure in the local Asian companies needs to be balanced for limiting the domination of family stakes in order to help check the alleged practices of manipulating their operational and financial activities through Real Earnings Management (REM)


Ownership structure in local cos needs to be balanced

FE Report

19 January 2015

The Financial Express (Bangladesh)

Bangladesh, Jan. 19 — Ownership structure in the local companies needs to be balanced for limiting the domination of family stakes in order to help check the alleged practices of manipulating their operational and financial activities through Real Earnings Management (REM), a researcher said.

Referring findings of a study report on such an issue in Japan, an expert came up with the observation at an international conference on “Accounting for Capital Governance” Sunday. Dr Mohammed Mehadi Masud Mazumder, assistant professor of the Department of Accounting and Information Systems (AIS), Dhaka University, presented the study on “Real Activity-based Earnings Management in Japan: Examining the Roles of Sophisticated Investors” at a session of the conference.Emerging Credit Rating Ltd and Accounting for Capital Market Development (ACMD) and AIS of Dhaka University organised the international conference at the faculty of business studies at the university.

Chairman of Investment Corporation of Bangladesh (ICB) Dr. Mojib Uddin Ahamed chaired the session, which was attended, among others, by Dr. Mizanur Rahman, associate professor of the AIS.

Limiting the ownership of a single family in the local firms, Dr Mehadi rather suggested inviting more institutional and foreign investors to make their ownership structure ‘balanced’ in order to restrain the bad practices of REM.

The company managers, he said, perhaps prefer to use REM than ‘accrual-based earnings management’ to avoid detection of accounting scandals, as REM is very difficult to detect, subject to less regulatory scrutiny and tougher to be challenged by auditors.

REM is a type of abnormal business actions, including curb in advertisement, influence the outcome positively in the short term, but affect it negatively in the long run.

Summarizing the study findings, Mr Mehadi said, “Like the US firms, Japanese listed firms are increasingly engaging with REM over the recent years. The results show that such tendency become more severe after the year 2008-09.”

The Japanese firms, covered by the research, had comparatively more ownership of the institutional investors, he said.

“The firms with greater foreign institutional ownership are less likely to engage in real earnings management,” as measured by abnormal cash flow from operations, abnormal discretionary expenses, abnormal production costs, and combination of the aforementioned three measures, the study found.

On the other hand, the firms with greater domestic institutional (financial/ corporate) ownership are more likely to engage in REM, he said.

The study findings also found that the institutional investors may vary in respect of their abilities as well as incentives to monitor REM in the listed firms.

At another session, Dr Mohammad I. Azim of the faculty of business and enterprises, Swinburne University of Technology, Melbourne, Australia, presented a paper on “Executive Remuneration, Financial Crisis and ‘Say on Pay’ Rules” prepared on the Australian companies.

The study found that amount of the executives’ remunerations, such as salaries, bonuses and options, has link to the performance in the companies even in a crisis period.

Most top companies in Australia linked their remuneration to earnings per share (EPS), he said, adding that this demonstrated that the country’s reward system was quite effective because the executives’ remunerations were based on performance during the last global financial crisis.

As such, the country might not be affected largely during the crisis, he opined.

The research also supported the idea of ‘Say on Pay’ rules-shareholders’ rights to vote for or against remuneration of executives- introduced in Australia like UK and USA.

However, application of the findings in Bangladesh context is yet to be researched.

The speakers called upon the new researchers to come forward to conduct more researches on the above issues for the betterment and improvement of the local corporate sector.

Study blames GP’s ‘apathy to sustainability, climate change’

Another FE Report adds: GrameenPhone (GP) is not very much concerned about the sustainability and climate change-related issues. The practice demonstrates poor accountability and transparency, although Bangladesh is one of the most vulnerable countries exposed to the threats of global climate change, a study mentioned.

The study was conducted by Professor Dr. Yousuf Kamal of Department of Accounting and Information

Systems (DAIS) of Dhaka University (DU) and his team.

Findings of the study were disclosed in an international conference, held at Faculty of Business Studies of DU on Sunday. Emerging Credit Rating Ltd and Accounting for Capital Market Development (ACMD), a research project of DAIS, organised the programme.

The Financial Express (FE) Editor Moazzem Hossain moderated the first session of the conference. Dr Mizanur Rahman, an associate professor of the department, was the moderator of the last two sessions.

The researchers took GP, as it is the representative of Bangladesh telecom industry, with a customer base of 50 million. They used GP’s annual reports from 2009 to 2013 for the research.

The research paper said mobile phone, its towers and infrastructure concerned are harmful to environment, but disclosures in this regard in the company’s official documents are poor.

It also said information and communication technology (ICT) industry alone accounts for about 2.0 per cent or 860 million tonnes of the world’s greenhouse gas emission.

Of the total volume, contribution from the global telecommunication system – mobile phone, fixed phone and other communication devices – is around 230 million tonnes CO2 or approximately 0.7 per cent.

Dr Yousuf Kamal said mention about climate change as well as trends of sustainability in the annual reports is very poor.

According to the report, although GP is the country’s largest telecom service provider, there is limited research by the company related to sustainability and climate change.

The study used word counts and frequency of disclosures as the measurement tools for research.

Dr Mohammad Tareq, an assistant professor of DAIS, presented a paper titled ‘discriminatory related party transactions: a new measure’.

Professor Dr Mahfuzul Hoque of the same department presented the last paper of the day-long conference, whose title was ‘management accounting practices to strengthen corporate governance’.


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