Regulation by disclosure: the case of internal control
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Regulation by disclosure: the case of internal control Laura F. Spira Æ Michael Page
Published online: 14 July 2009 Springer Science+Business Media, LLC. 2009
Abstract In this paper we explore the use of disclosure as a regulatory tool, using as an illustration the current UK requirements regarding the disclosure of information about internal control. After discussing the broad concept of regulation by disclosure, we trace the evolution of concepts of internal control and its reporting, describing the background to the Turnbull guidance for directors on internal control reporting, the basis of current UK requirements. We then examine recent examples of internal control disclosures, identifying the range of ways in which they address the disclosure requirements and considering the possible impact of the disclosure requirements on corporate behaviour and on the audiences for disclosure. We conclude with some reflections on the disclosure life cycle. The paper contributes to the literature on disclosure by specifically considering the role of disclosure as a regulatory tool and by examining the nature of specific disclosures in an area of continuing interest, that of internal control. Keywords
Disclosure Internal control Turnbull guidance
1 Introduction: disclosure as a regulatory tool The traditional framework of corporate accountability relies on disclosure of information to stakeholders. The form, content and reliability of this disclosure have been a matter of concern and debate ever since the establishment of legislative protection for investors and creditors in the mid nineteenth century. Financial L. F. Spira (&) Oxford Brookes University Business School, Oxford Brookes University, Wheatley, Oxford OX 33 1HX, UK e-mail: [email protected] M. Page University of Portsmouth, Portsmouth, UK
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scandals typically prompt calls for improvements in disclosure. The assumption underlying this form of disclosure is that stakeholders will be provided with information through which they may hold company management to account for the use of resources provided—a stewardship approach. A different view of the purpose of disclosure underlies developments in standardising financial reporting which have been justified on the basis that users of financial statements need information in order to make a broad range of economic decisions about their relationships with corporations, an assumption which underpins the development of conceptual frameworks for financial reporting. More recently, disclosure has become viewed as a tool of regulation. For example, the UK Companies Act 2006 has required companies to make disclosures relating to risks and future prospects. This approach to disclosure as a regulatory tool is reflected in recent discussions of European policy. The Winter Report1 of 2002 stated: Disclosure requirements can sometimes provide a more efficient regulatory tool than substantive regulation through more or less detailed rules. Such disclosure creates a lighter regulatory environm
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