AN EXAMINATION OF THE IMPACT OF CULTURE ON IFRS RISK DISCLOSURES FOR FIRMS THAT CROSS- LIST IN THE U.S GLOBAL CONFERENCE ON BUSINESS AND FINANCE San José, Costa Rica Carmen B. Ríos-Figueroa University of Puerto Rico-Río Piedras

Introduction  Differences in cultural values across countries may result in different opinions regarding the adequacy or extent of the disclosures on the financial statements.  The objective of this paper is to examine the effect of culture on the level of risk disclosures required by IFRS 7 (Financial Instruments). 2

Research Motivation  Accounting disclosures is an important factor in the decision making process of users of financial statements.  To the best of my knowledge, the cultural effect in the IFRS 7 level of risk disclosures has not been studied in the literature. This study aims to fill that gap. 3

Literature review- culture  Hofstede (1980, 2001) uses five* dimensions to classify a country’s culture: individualism/collectivism (IC), power distance (PD), uncertainty avoidance (UA), masculinity and femininity (MF), and long-versus short term vision.  *In 2010 Hofstede added a sixth dimension (Indulgence versus Restraint) that deals with the subject of happiness.  Hofstede (1983) explains that regional and national differences continue to be one of the main problems for management, specifically, for public or private multinational companies. 4

Literature review- culture  Gray (1988) used a system of accounting values derived from social values ( Hofstede dimensions).  The accounting values were: professionalism versus statutory control, uniformity versus flexibility, conservatism versus optimism and secrecy versus transparency. 5

Literature review- culture  For Gray (1988): (1)the more uncertainty avoidance a country and less individualistic and masculine, more high in terms of conservatism, (2)the more uncertainty avoidance, more power distance, less individualistic and masculine, more likely that the country possesses the characteristic of secrecy.  Gray ranked 10 different cultural areas created by Hofstede. A scale of 1 (low secrecy) to 7 (high secrecy) and a scale of 1 (low conservatism) to 5 (high conservatism) was used to rank each cultural area. 6

Literature review- IFRS 7  IFRS 7(applicable for periods commencing on or after January 1, 2007) revoked IAS 30 and substituted the disclosure requirements under IAS 32, Financial Instruments: Presentation, for hedge accounting and fair value measurement.  It applies to all entities that have financial instruments.  IFRS 7 must disclose: (1) Information about the significance of financial instruments for an entity’s financial position and performance and (2) specified minimum disclosure about credit risk, liquidity risk and market risk. 7

Literature review- Effects of enforcement of risk disclosures  Bischof (2009) finds that the enforcement of the standard increases the disclosure quality of financial statements and risk reports of Banks in Europe.  For Riise and Plenborg (2013), some of the disclosures required by IFRS, including IFRS 7, are highly demanded, but are also among the items most costly to prepare and that users are less satisfied with them.  Dobler, Lajili and Zéghal (2011) conclude that risk disclosures are more common in management reports and on concentration of financial risk categories. 8

Literature review-Factors that may impact accounting disclosures  For Zarsesky (1996), firms operating in the international marketplace are spontaneously disclosing high levels of public information.  Bischof (2009) suggest that disclosures can vary across countries because of the differences in the enforcement and interpretation of IFRS 7 by national banking supervision.  Bentley and Franklyn (2013) find that Anglo cultures are more favorable for the disclosure of risk. 9

Literature Review-Cross Listed firms  Cross-listed firms tend to be more transparent in their disclosures, especially for those in countries with strong investor protection.  By examining analyst earnings forecasts, Arping and Sautner (2012) argue that European Union (EU)-firms that cross-listed on U.S. are more transparent.  Other argues that foreign issuers view the cost of meeting writing disclosures requirements as exceeding the cost of noncompliance. 10

Research questions  Does culture has an effect on risk disclosure levels?  If culture has an effect on risk disclosure levels, how have disclosures changed after the adoption of IFRS 7 (considering Gray’s theory of secrecy and conservatism)? 11

Research data and methodology- sample selection  The study sample consists of 62 firms in 18 countries and in 6 regions (Africa, Asia, Europe, Latin American and Caribbean, North America and Oceania) listed in the New York Stock Exchange at  The Mergent online database was used to identify the firms. 12

Sample Composition 13

Research design A cross country analysis was prepared including: 1. The name of the company 2. The accounting standards used (IFRS, US GAAP or other) 3. The audit firm 4. The country of the company 5. Sector/Industry of the company 6. The region of the company 7. The cultural area of the company (Hofstede 1980) 8. The secrecy and conservatism scale level (Gray 1988) 9. Index of: protection of minority shareholders' interests, strength of investor protection, regulation quality, control of corruption, government effectiveness. political stability and legal origin 10. Level of disclosures (Assigned from 3 levels of disclosures) 11. If the company discloses financial risk in a separate report and/or notes 12. The name of the report 13. The name of the note 14. The number of the note 15. The type of risk disclosures that the company uses 14

Research design 15

Regression Analysis Results AlphaSecrecyConservatism Common law/code law Protection of minority interest Strength of investor protection Political stability Control of corruption Government effectiveness Regulatory quality Cohefficients , p- value *0.002*0.006*0.045* Adj. R This table presents Regression Analysis Results for the relationship between Risk disclosure levels, cultural factor (secrecy and conservatism), and other control variables: common law/code law, protection of minority interest, strength of investor protection, political stability, control of corruption, government effectiveness and regulatory quality. *Significant at the.05 level 16

Concluding comments  The results obtained seem to suggest that culture (secrecy and conservatism) do not have a significant impact in IFRS disclosure levels. The results may also suggest that disclosures have changed since the adoption of IFRS.  Other economic and political factors seem to influence risk financial disclosures. Countries with higher control of corruption and regulation quality appear to have more IFRS risk disclosure levels. 17

Concluding comments  The results partially support the research expectations that countries with higher levels of protection of minority interests, strength of investor protection, regulation quality, control of corruption, government effectiveness and political stability will have increased IFRS risk disclosure levels. 18

Future research  Since the principal cultural variables used in the study were not significant, in contrast with some of the control variables used, future research should consider other methodologies that can measure the impact of cultural factors in IFRS risk disclosure levels.  In addition, future research could consider the risk disclosures levels developed for this study and incorporate factors such as the standard industry code (SIC) and the name of the independent auditing firm. 19

Thank you 20