MAJORITY of state-owned enterprises (SOEs) in Asia do not systematically report to the public in a manner consistent with the practices of listed companies, a report released by the Organisation for Economic Co-operation and Development (OECD) said.

The report “Disclosure and Transparency in the State-Owned Enterprise Sector in Asia: Stocktaking of National Practices” provides an overview of national approaches to disclosure and transparency in state-owned firms in nine Asian economies, namely Bhutan, India, Kazakhstan, Korea, Malaysia, Pakistan, Philippines, Thailand and Vietnam.

“This is, however, by no means unique to Asia. Globally, SOEs are often subject to a weaker disclosure regime than that applicable to listed companies. This often reflects SOEs’ limited degree of corporatization and/or the fact that their accounts are incorporated into the general government budget,” it said.

The report, which is published under the responsibility of the secretary-general of the OECD, examined disclosure requirements and practices at the level of individual SOEs as well as measures taken by the state as an owner to report to the public on the operations and performance of SOEs.

“State ownership arrangements necessarily impact SOEs’ disclosure environment and the degree to which related requirements are harmonized across enterprises. Most of the countries examined herein have predominantly decentralized state ownership models, leading to a somewhat fragmented disclosure landscape,” the report said.

The OECD report cited the Philippines and India as having introduced some degree of policy coordination through the establishment of central agencies responsible for developing and monitoring the implementation of governance and transparency standards.

“However, most have also introduced some degree of policy coordination — including in the domain of disclosure — through the establishment of a central coordinating agency or a holding company overseeing a non-trivial portfolio of SOEs. In practice, these coordinating entities have in most cases developed disclosure requirements for SOEs that either complement — or compensate for the lack of — requirements established via other legislation,” it said.

However, an overarching issue relates to the quality and credibility of corporate disclosure by SOEs. The report noted most national authorities do not systematically require that SOEs keep accounts in accordance with international accounting standards.

“This finding is somewhat countered by the fact that, in most countries, large SOEs reportedly do so in practice and in many countries, national accounting standards are reportedly broadly consistent with IFRS (International Financial Reporting Standards),” it said.

In South Korea, the Philippines, Thailand and Vietnam, the OECD report said the state ownership or coordinating entity has developed distinct reporting and disclosure requirements applicable to all SOEs.

“The majority of countries do not require that SOEs’ financial statements undergo an independent external audit, as called for by the SOE Guidelines. Most countries appear to mandate some form of internal audit function, but further research would be warranted to shed light on the effectiveness of these corporate organs. Together, these findings point to significant scope for strengthening the accounting and audit environment for SOEs in Asia,” it said.

The OECD report mentioned the Philippines as having an arrangement wherein all SOEs are subject to specific disclosure requirements under the Ownership and Operations Manual and the Code of Corporate Governance for GOCCs (government-owned and -controlled corporations).

It added the Philippines’ Governance Commission for GOCCs (GCG) in the country is also reportedly in the process of establishing an integrated reporting system which would contain elements similar to those of South Korea’s system “and would notably result in public disclosure of all GOCCs’ financial statements and corporate operating budgets.”

The OECD report said a few countries have sought to encourage better quality disclosure by SOEs through incentives or penalties. These include a rating for quality and timeliness of disclosure in SOEs’ annual performance evaluations.

“The effectiveness of these compliance mechanisms could be an area for further investigation,” it said.

In the Philippines, the report noted that timely and accurate disclosure is one element taken into account in the annual performance evaluation, which informs performance-based bonuses accorded to GOCC executives.

Overall, the report said surveyed countries have taken “important” steps to strengthen and harmonize disclosure requirements on the SOEs.

“However, the fact that SOEs’ financial statements are not systematically subject to an external audit constitutes a departure from international good practice… In many cases, the different audit practices reflect the low degree of corporatization of SOEs in many Asian countries as well as their closeness to the public administration. As more SOEs are corporatized — and in some cases listed — the quality and credibility of disclosure can be expected to improve,” it said. — Victor V. Saulon