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Regulation by disclosure: the case of internal control

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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.

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Notes

  1. Report of the High Level Group of Company Law Experts on a Modern Regulatory Framework for Company Law in Europe, European Commission 2002 http://www.ecgi.org/publications/documents/report_en.pdf, accessed 29th Feb 2008.

  2. MacNeil and Li (2006) present evidence to show that investors may be more influenced by share price movements, tolerating non-compliance when the companies concerned are performing well: on this basis, they argue that the Combined Code could be effectively integrated into company law.

  3. The reasons for this are discussed in the SEC Final Rule on Management’s Reports on Internal Control over Financial Reporting issued in August 2003 (www.sec.gov/rules/final/33- 8238.htm).

  4. The resource allocation role of financial information is often used as a means of advancing the view that it is the purpose of financial reporting to allow users of financial information to estimate future cash flows, however lists of these users never include competitors, who are the people most likely to use the information to make resource allocation decisions.

  5. Available at www.grant-thornton.co.uk/publications.

  6. For example Bruce (2008).

  7. This usage derives from text distributed to many small town newspapers by American news agencies and syndicates in the nineteenth century. The text was distributed as ready type-set matrices or ‘mats’ that could be fitted into available slots in the typesetting for the newspapers’ pages. The writing of such text was often very unimaginative so the term soon acquired an implication that the material was hackneyed and of little interest. The term probably derives from the similarity with ready-cut boiler-plates made in foundries to fit into a fabrication such as a ship or a boiler.

  8. Note that the extracts from the guidance refer to the 1999 document which the sampled companies would have been following, rather than the revised guidance issued in October 2005.

  9. “Internal control is broadly defined as a process, effected by an entity's board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories:

    • Effectiveness and efficiency of operations.

    • Reliability of financial reporting.

    • Compliance with applicable laws and regulations.”

    http://www.coso.org/publications/executive_summary_integrated_framework.htm. Accessed 13 Oct 2006.

  10. It should be noted that these responses to the consultation were made in the light of the expectation that the Operating and Financial Review would include further narrative information that would expand on individual company contexts.

  11. Available at http://www.frc.org.uk/corporate/reviews.cfm.

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Authors and Affiliations

  1. Oxford Brookes University Business School, Oxford Brookes University, Wheatley, Oxford, OX 33 1HX, UK

    Laura F. Spira

  2. University of Portsmouth, Portsmouth, UK

    Michael Page

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  1. Laura F. Spira
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  2. Michael Page
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Correspondence to Laura F. Spira.

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Spira, L.F., Page, M. Regulation by disclosure: the case of internal control. J Manag Gov 14, 409–433 (2010). https://doi.org/10.1007/s10997-009-9106-9

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