Corporate risk disclosure practice in Saudi Arabia: Secrecy versus transparency

Abstract

Accounting systems and corporate disclosure practices are significantly affected by legal systems and cultural environment. The vast majority of risk reporting research concentrates mainly on Western Europe and other developed countries. However, there is a clear dearth of corporate risk disclosure (CRD) studies in developing countries in general, and in the Arab region in particular. The purpose of this study is to comprehensively explore the level and content of CRD practices in a developing country with a different legal system and cultural values, namely the Kingdom of Saudi Arabia. To the best of our knowledge, no such study has been performed in Saudi Arabia. Content analysis is conducted to analyze and measure CRD in the annual reports of Saudi non-financial listed companies over the period 2008-2011. The findings highlight the role of the legal system and cultural values on CRD practices and confirm the potential conflict between secrecy as a key feature of Saudi accounting system versus transparency as a key pillar of the Islamic Accountability Framework. Consistent with transparency, as an Islamic Sharia requirement, Saudi Arabia provides a moderate level of CRD among developed and developing countries. However, the content of this level is found to be of low quality as non-financial, qualitative, past, present, or non-time-specific and neutral risk disclosures far outweigh the financial, quantitative, future, and bad risk disclosures, which could reflect the inherent secrecy and the unwillingness of Saudi companies to provide high-quality risk disclosure. The findings also reveal a steady increase in the level of CRD over the period of study with a significant variation of disclosure level among industry sectors. Overall, the results suggest that Saudi regulatory bodies and companies pay more attention to the format rather than the content of CRD. The results have implication for national and international standard-setters, policy makers, investors, and researchers to understand and improve CRD practices and its determinants in Saudi Arabia.

The relationship between board committees and corporate risk disclosure in Saudi listed companies

“…Furthermore, and to control for potential omitted variable bias (Gujarati and Porter, 2003;Wooldridge, 2010) and to rule out alternative explanations for the mean results (Singh et al, 1986), this study includes an extensive number of control variables, including board characteristics (i.e., board independence, board size, board meeting frequency) and firm-specific characteristics (i.e., firm size, leverage, audit firm size), and ownership structure such as ownership concentration. There is extensive theoretical and empirical literature that suggests these variables can affect CRD (Alsaeed, 2006;Abraham and Cox, 2007;Ismail and Rahman, 2011;Allegrini and Greco, 2013;Ntim et al, 2013;Elshandidy and Neri, 2015;Allini et al, 2016;Al-Maghzom et al, 2016a;Alotaibi and Hussainey, 2016;2018).…”

“…To measure CRD, this study applies content analysis, a method of analysis which has been employed by prior risk disclosure studies (Linsley and Shrives, 2006;Rajab and Schachler, 2009;Mokhtar and Mellett, 2013;Zhang et al, 2013;Abdallah et al, 2015;Elshandidy and Neri, 2015;Habtoor et al, 2018). Risk-related sentence is used as a unit of analysis to code risk-related disclosures as it is more likely to provide complete, reliable and meaningful data for further analysis (Milne and Adler, 1999).…”

“…To cade risk-related information disclosed in the annual reports, this study adopts the model of risk disclosure crafted by Habtoor et al (2018) (refer to Appendix A), which was built based on an extensive review of the risk-related regulations and previous studies on risk classification as well as taking into account the Saudi regulatory environment in which the sample companies operates, including laws, standards, and governance regulations.…”

“…*Despite the remarkable importance and benefits of CRD to mitigate agency conflicts, information asymmetry, and cost of capital; in addition to increase stakeholders' confidence and the company value, evidence refers that CRD studies are still relatively limited (Dobler et al, 2011;Habtoor et al, 2018), and the quantity and quality of CRD remains inadequate to meet the increased needs of interested parties (Abraham and Cox, 2007;Linsley and Shrives, 2006;Mokhtar and Mellett, 2013;Oliveira et al, 2011).…”

“…Saudi Arabia is the focus of this study due to the following reasons. First, this study is motivated by the call made by Habbash et al (2016), Al-Maghzom et al (2016a;2016b), 2018) and for more research on governance and risk reporting practices in Saudi Arabia to improve transparency and enhance awareness of CRD. Evidence indicates that corporate governance and CRD practices are still relatively new topics in the Saudi business environment (Alamri, 2014).…”