Information asymmetry, transparency and the conceptual framework Online publication date: Sat, 03-Jul-2010
by Benzion Barlev, Joshua Rene Haddad
International Journal of Economics and Accounting (IJEA), Vol. 1, No. 1/2, 2010
Abstract: In 2008, the FASB and the IASB, in collaboration, issued an exposure draft of a conceptual framework for financial reporting. The boards agree that decision-useful information should be the main feature of financial reporting. The boards ignore, however, the fact that information asymmetry, which enables 'insider trading' and 'earnings management', may hamper this objective. US regulators try to thwart 'insider trading' with 'full disclosure' (FD) reporting requirement. FD contracts but does not prevent the phenomena of 'earnings management' – a key factor in recent market debacles. We argue that transparency in financial reporting may further diminish 'earnings management'. This 'see-through' qualitative feature exposes mangers' motivation for business activities, and clarifies their agreement with the firm's objectives. We propose that 'full disclosure' and 'transparency' are complementary features, which may lessen information asymmetry and enhance usefulness. We suggest integration of these qualities into the CF.
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