Question:
Discuss About The Continuous Disclosure Framework And Its Effectiveness?
The disclosure of the information is very essential for every business to survive in the market. It is due to fact that this information’s so compiled and disclosed is used by the investors and other stakeholders of the company. The companies are forced to disclose the information which is relevant and material for the users of the financial statements. Through the means of this report, the highlight has been thrown on the financial statements of the company – Surfstitch Limited as to how the company has disclosed the information in their annual report and thereby the financial health and the wealth of the company has been analysed. After that the detailed discussion has been made on the requirement of the continuous disclosure regime. The importance of the regime has been detailed with reference to the listing rules of the Australian Stock Exchange and it has been described as to why the same is followed only by the disclosure entities. Along with the description of the regime, the effectiveness of the regime has also been detailed with the information that has helped the users of the financial statements including the stakeholders to have the more and more insight of the business of the company. With this, the study has been conducted so as to communicate the importance of the continuous disclosure framework.
The company – Surfstitch Limited has been made available for the study. The company has been doing the business of retail. In the business of retail, the main product that the company is selling is the sports items and that too especially for the youngsters including the teenage. The company has been established and incorporated in the year of two thousand and eight in the country of Australia and after that with the rapid expansion the company has opened its offices across Australia, United Kingdom and America. Six years after the incorporation, the company gets itself listed on the Australia Stock Exchange.
In the every daily newspaper of Australia, there has been the biggest headline that the company – Surfstitch Limited has been facing the downfall due to erosion of the shareholders wealth. It has been claimed by the shareholders of the company that the company has fully eroded their wealth leading to the nil value of the share price of the company and thus loss to the shareholders of the company. The shareholders have filed the suit against the company claiming the amount of hundred million dollars. The suit so filed has been named as the class action suit and has made the history in the retailing sector. The shareholders that have filed the class action suit belong the period of ten months only that is who have invested in the shares from the month of august of 2015 to the month of June 2016 (Hatch, 2017). Apart from the erosion of the wealth of the shareholders, the shareholders have claimed that the company has not been able to follow the listing rules as prescribed by the Australian Stock Exchange. The second claim that they have argued is that the company has not been able to meet the forecasts for the future in real terms. Due to the false forecasts the investors have made the investments in high amount but when the company’s actual results are released and which are totally opposite to the forecasts it has led the wave of shock among the investors. The evidence is that the company has forecasted that the company will have the earnings of eighteen million dollars but in actual the company has incurred the loss of nineteen million dollar which is in reality the result of improper forecasts. Thus, such financial situation is being faced by the company (Loughlin, 2017).
The investors shall not invest in the company at the time of before of the decline in share price due to the fact that the financial health of the company is not sound and has been making improper forecasts and unnecessary expansion.
The companies who are required tom disclose the information is commonly known as disclosure entities. In the framework created by the Australia Stock exchange, the entities that are required to disclose the information whether financial or non financial are required to follow the listing rules as prescribed. These listing rules specify the information that is required to be disclosed. Thus, those entities which are required to disclose the information as per the listing rules are known as the disclosure entities. In the given case the company – Surfstitch limited is listed in the year of two thousand and fourteen and since then the company is knows under the listing rules as disclosure entities and has been following the continuous disclosure framework. The listing rules not only includes the companies which has been registered and incorporated in Australia under the Corporations Act, 2001 but also includes the entities which have been registered and incorporated outside India. The main premise is that the company shall be listed in Australia Stock Exchange. In this manner the company under study is the disclosure entity.
The framework is the structure which provides the procedures, rules and regulations and the code of conduct that everyone has to follow that are working within that framework. The framework shall be in defined manner otherwise the framework wills only leads to the non performance and non achievement of the required goals. Similarly, the Australian stock exchange has prescribed the marketing which are required to be abided and to be duly followed and adhered by the disclosure entities. The Australia Stock exchange has prescribed the framework through the introduction of the listing rules. As the name suggests, the rules are applicable to those entities which are listed in the Australian Stock exchange. Australian Stock exchange through the Listing Rule 3.1 has stated that where any entity so listed in the stock exchange gets an indication that any reasonable person has the reason to expects that the particular information related to the company may have the material effect on the share price of the company prevailing in the market (Australian Government ,2017). In this manner, the company will be required to disclose that information immediately. The word immediately has the great impact in this rule (Field, 2005). The immediate does not means with delaying in disclosing rather it prescribes that the company shall provide that information as quickly as possible and in prompt manner. Although it is applicable for every kind of information but Listing rule number 3, clause 1A has defined the following five major exceptions in the disclosure of the information (Lewis, 2013):
Thus, in the aforesaid situations, the entities are not required to disclose the information even if the reasonable person expects that such information will have material impact on the share price of the company. In addition to the aforesaid situations, the listing rule number 3 has prescribed the further two more exceptions. These exceptions are listed below:
Along with the aforesaid exceptions, the listing rules as prescribed by the recognized stock exchange of Australia have defined the procedures that the company shall follow and consider on disclosing the information:
The listing rules have prescribed the features for the continuous disclosure and includes the market shall be informed timely and it shall be available for all (Debreceny, 2005).
Every business requires continuous disclosure in each and every phase to survive and compete in the world economy. Since Australia is the major place for more business to expand and do business, there is requirement of proper laws and rules to regulate the business and companies which are working in Australia for disclosing each and every fact about the business or company. Without such proper law and rules company and its management can hide certain negative information which can harm the decisions of different stakeholders. In order to have a fair and unbiased disclosure of information about the company or business, this regime is necessary to have to indulge investors in taking decisions regarding business combination (Gray, 2009).
Continuous disclosures and related rules are very effective from its inception in Australia. Each company whose stocks are traded in Australian Stock exchange has to follow the continuous disclosure rules and regulations and disclose information publically which can affect the price of securities of the company at the earliest. If the information has not been disclosed on timely manner then there may be high chances of Insider Trading or Frauds in the company. When the continuous disclosure rules were not there then the companies were able to hide the information which have negative impact on investor and collapse of certain companies have happened in that time like HIH Insurance Limited and Lehman Brothers (Beekes and Brown, 2006; Aitken, 2008). Also, along with continuous disclosure correct disclosure is also required otherwise wrong information can lead to fall back of different companies as was done in Lehman Brothers by its management (HO and Wong, 2007).
In the company under consideration which Surf Stitch Limited, the effectiveness of the Continuous Disclosure rules can be assessed easily. The company has huge losses for continuous two which are 2015 and 2016 and has reported the same fact in the Annual Report (Olson, 2017).But the company has not made correct disclosure about the futures forecasts and even not discloses the same fact in the Annual Reports. As a result, the company neither disclose the insolvency nor able to maintain its share price level. And the small and dissenting shareholders of the company have filed the suit for class action. These facts show the effectiveness of the regime for both company and the stakeholders associated with company (Chan, Faff, Ho and Ramsay, 2007).
Conclusion And Recommendation
As from the above study it has been concluded that the continuous disclosure reporting regime is required to be adhered by the listed entities which are listed at the Australian Stock Exchange and it ensures that the company is not engaged in any fraudulent activity and provides the true and fair view of the business of the company.
On the basis of the study, the regime that has been introduced by the stock exchange has played the key role in the industry and has been very useful for the investors.
References
Aitken, M.J., (2008). Short sales are almost instantaneously bad news: Evidence from the Australian Stock Exchange. The Journal of Finance, 53(6), pp.2205-2223.
Australian Government , (2017), “ Part 8: Continuous Disclosure”, available at https://archive.treasury.gov.au/documents/403/HTML/docshell.asp?URL=Ch8.asp accessed on 14/09/2017
ASX, (2017), “ ASX Listing Rules – Guidance Note 8”, available at https://www.asx.com.au/documents/about/guidance-note-8-clean-copy.pdf accessed on 14/09/2017.
Beekes, W. and Brown, P., (2006). Do Better Governed Australian Firms Make More Informative Disclosures?. Journal of Business Finance & Accounting, 33(34), pp.422-450.
Chan, H., Faff, R., Ho, Y.K. and Ramsay, A., (2007). Management earnings forecasts in a continuous disclosure environment. Pacific Accounting Review, 19(1), pp.5-30.
Debreceny, R., (2005). Firm-specific determinants of continuous corporate disclosures. The International Journal of Accounting, 40(3), pp.249-278.
Field, L., (2005), “Does disclosure deter or trigger litigation?”, Journal of
Accounting and Economics, Vol. 39, pp. 490-499.
Gray, P, (2009). Accruals quality, information risk and cost of capital: Evidence from Australia. Journal of Business Finance & Accounting, 36(12), pp.51-72.
Hatch P, (2017), “Surf Stitch faces $100 m class action over share Wipeout” available at https://www.smh.com.au/business/retail/surfstitch-faces-100m-class-action-over-share-wipe-out-20170522-gwatsh.html accessed on 14/09/2017.
HSU,(2009). Impact of earnings performance on price sensitive disclosures under the Australian continuous disclosure regime. Accounting & Finance, 49(2), pp.317-339.
Ho, S.S. and Wong, K.S., 2001. A study of the relationship between corporate governance structures and the extent of voluntary disclosure. Journal of International Accounting, Auditing and Taxation, 10(2), pp.139-156.
Lewis K, (2013), “Continuous Disclosure”, available at https://www.asx.com.au/documents/rules/gn-8-presentation.pdf accessed on 14/09/2017
Loughlin W, (2017), “The Rise and Fall of Surf Stitch” available at https://www.rivkin.com.au/news/investing/2016/08/30/the-rise-and-fall-of-surfstitch-84051.aspx accessed on 14/09/2017
Matolcsy, Z., Tyler, J. and Wells, P., (2012). Is continuous disclosure associated with board independence?. Australian Journal of Management, 37(1), pp.99-124.
Olson F, (2017), “Surf Stitch Limited – Financial Strength Analysis” available at https://simplywall.st/news/2017/03/01/surfstitch-group-limited-asxsrf-financial-strength-analysis/ accessed on 14/09/2017.
White, G, (2007). Drivers of voluntary intellectual capital disclosure in listed biotechnology companies. Journal of intellectual capital, 8(3), pp.517-537.
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