FINANCIAL DISCLOSURE OF MALAYSIAN LOCAL AUTHORITIES: AN INSTITUTIONAL THEORETICAL PERSPECTIVE

International Journal of Business and Economy (IJBEC) eISSN: 2682-8359 [Vol. 2 No. 4 December 2020]

Journal website: http://myjms.mohe.gov.my/index.php/ijbec

FINANCIAL DISCLOSURE OF MALAYSIAN LOCAL AUTHORITIES: AN INSTITUTIONAL THEORETICAL

PERSPECTIVE

Neilson Anak Teruki^1*

1 Faculty of Humanities, Management & Science, Universiti Putra Malaysia Bintulu Sarawak Campus, Bintulu, MALAYSIA

*Corresponding author: neilson@upm.edu.my

Article Information:

Article history:

Received date : 21 October 2020 Revised date : 3 November 2020 Accepted date : 25 November 2020 Published date : 4 December 2020

To cite this document:

Teruki, N. (2020). FINANCIAL DISCLOSURE OF MALAYSIAN LOCAL AUTHORITIES: AN INSTITUTIONAL THEORETICAL PERSPECTIVE. International Journal Of Business And Economy, 2(4), 57-75.

Abstract: The role of organizational and environmental factors in explaining financial disclosure has thus far not been adequately addressed. Neither has there been an attempt to use field studies to explain the financial disclosure practices in the organization. There has thus been a consistent failure to relate the effect of institutional and social aspects and the quality of disclosures in organizations’ financial statements. Consequently, there is a need to carry a study to explain the disclosure practices and management in the public sector by incorporating organizational, social and environmental factors. These factors are expected to have an influence on the manager’s decision to disclose information. This study seeks to investigate the range of issues considered when making financial disclosure decisions, the role of auditor(s) and other external parties in the disclosure process, and the influence of external disclosure rules on disclosure decisions. The concept of isomorphism is examined under the institutional theory lens and used to explain the influences on the disclosure practices in MLAs. The study adopts a case study approach using semi-structured interviews and internal documents. The fieldwork consists of interviews with 33 people who worked at different levels, held different positions and were from a variety of backgrounds of five MLAs together with document

1. Introduction

There has been growing interest, especially in the accounting profession and in part of the academe, regarding the need for disclosure of financial information by the public sector. The focus on public sector financial disclosure stems from the fact that in recent decades, the public sector has been subjected to various criticisms such as inefficiency, lack of flexibility, lack of accountability, poor performance, imperious bureaucracy, and corruption (Siddiquee, 2006;

Tooley, Hooks & Basnan, 2010a). Within the public sector, the search for the appropriate financial disclosure model has given rise to some questions, among others with regards to the incentives for making disclosure, the parties which utilise the financial information, the scope of information required and why. Many incentives have been identified for the accounting choice. However, the findings on the incentives for disclosure are difficult to compare given that the methods of accounting disclosure adopted in previous studies differed from each other. Further, the research outcome on public sector financial disclosure did not make clear who makes particular disclosure decisions, what are the range of issues considered when making these decisions, the influence of various actors in disclosure practices, as well as the reasons for disclosing financial information (Gibbins et al, 1990; 1992). Previous research mostly focused on the influence of socio-economic, political, and economic incentives (Ingram and Gore, 2004; Perez, Bolivar and Hernandez, 2008;

Felix, 2014; Cuny, 2016; Beck, 2018) and institutions (e.g. Capenter and Feroz, 2001) on disclosure, but did not go a step further to analyse how these factors influence the day to day decision-making on disclosure. Furthermore, most studies on disclosure have tended to focus on the private sector (Laswad, Fisher & Oyelere, 2005) in developed countries. The few studies which focused on local government in the developing countries of South East Asia did not examine this important issue (Arifin, Tower and Poeter, 2012; Tayib, Coombs & Ameen., 1999; Tooley, Hooks and Basnan, 2010b).

This study employs an interpretivist methodology, multiple case studies, and field-based methods.

This approach is in line with the notion that in order to understand the influence of institutional factors on the daily disclosure practices of organisations, researchers need to adopt methodologies that capture the context within which disclosure decisions are made (Craswell and Taylor, 1992;

Adams, 1997). Field-based techniques should be used because they offer “…insights into the complex and multi-dimensional phenomenon of corporate disclosure and usefully complement conventional statistical analyses” (Adams, 1997, p. 731). This paper therefore complements a limited number of studies that have employed field research methods to study accounting mimetic rules (regulations and legislations, the pressure from state authority), normative rules (professionalization) as well as mimetic rules (disclosure practices of other councils, and the influence of external auditor).

Keywords: Malaysia, Financial disclosure, Isomorphism, Case-study, Local authorities.

2005; Pilcher and Dean, 2009). The aim of this study is hence, to understand and explain the financial disclosure practices and disclosure management in Malaysian Local Authorities (MLAs).

The current study fills the gap in the literature by drawing on the theory of institutional isomorphism (DiMaggio and Powell, 1983, 1991) to examine how coercive, mimetic and normative pressures from the state, other local governments and government agencies affect cash management practices

2. Disclosure Context of Malaysian Local Authorities

This research study was conducted with its subjects being five local government bodies in Malaysia. They comprised one city councils, two municipal councils, and two district councils.

The city councils and municipal councils have great growth potential due to their well-developed financial systems and fast-growing information technology sectors (Setapa, 2003). The Malaysian local government represents the third tier of government and is the “government closest to the people” (Phang, 2008a). Local government provides urban services using financial assistance or grants from the state and federal governments (Kuppusamy, 2008). MLAs are also subjected to the authority of a host of other entities, namely regulators, policy-makers, and other regulatory bodies at both state and federal levels of government (Othman, Taylor, Sulaiman & Jusoff, 2008).

State and federal governments are particularly interested in the performance of MLAs because the inefficiencies and poor performance of MLAs may reflect on them and in turn negatively affect their popularity amongst the people (Tooley et al., 2010b).

The government provides a number of avenues for members of the public to obtain information as well as to furnish input pertaining to the quality of services delivered by the MLAs. Section 23 of the Local Government Act 1976 (―Act 171‖) provides that the proceedings of local authorities must be made open to the public and media representatives. Section 27 of the same Act permits taxpayers to have access to and to scrutinise the MLAs’ minutes of meeting. Meanwhile, by virtue of Section 60(4) of Act 171, audited financial accounts of MLAs are required to be published in the Government Gazette, whilst Section 142 stipulates that “citizens who are dissatisfied with the authorities‟ performance have a right to make objections in writing and are allowed an opportunity of being heard at the consequent enquiry”.

With respect to the financial reporting in MLAs, there are no specific financial reporting requirements, either statutory or non-statutory, currently imposed on Malaysian Local Authorities in preparing their annual financial accounts (Coombs & Tayib, 1999; Tooley et al., 2010b)¹. Although Sections 53 and 54 of the Local Government Act 1976 make it mandatory for MLAs to maintain proper accounts and to do up their annual financial reports, it does not dictate the required form and content of the report. Instead, the respective state authorities are left to determine the form and content of their own financial reporting. Thus, the financial disclosure practises of MLAs have essentially been voluntary in nature, rather than compelled by the legal force of statute.

(Coombs & Tayib, 1999). Without a set of accounting standards to follow, local authorities have

the flexibility and freedom to decide on the treatment of accounting items as well as on how they are presented and disclosed in the financial reports. This discretion has been characterised by the marked differences in terms of the substance and layout of the financial accounts prepared annually by the many local authorities in Malaysia (Tayib et al., 1999). Tayib et al. (1999) recommended that specific financial disclosure requirements or standards be tailored to the appropriate public sector body. In particular, MLAs should meet the needs and interests of stakeholders. Although this suggestion was put forward more than a decade ago, so far, no announcement pertaining to this issue has been made by the state authorities (Tooley et al., 2010b).

In the absence of specific statutory guidance in Malaysia, a number of local authorities have, in drawing up their financial reports and accounts, relied on the Federal Treasury Circular (FTC) No.

15, 1994 (superseded by FTC No. 4, 2007) – Guidance for Preparing and Presenting Annual Reports and Financial Statements for Federal Statutory Bodies (Coombs & Tayib, 1999).

Furthermore, Tayib et al. (1999) revealed that typically, the MLAs would draw up some but not all of the financial statements required in the FTC. According to Coombs and Tayib (1999), there are two major factors which hindered the development of local authority financial reporting in Malaysia. These two factors are weak financial disclosure regulations (amplified by the lack of qualified accountants employed in the MLAs) and the lack of involvement of relevant professional bodies. Despite their backgrounds as public sector accountants, the members of the Malaysian Institute of Public Sector Accounting (IPSAM) have not shown the initiative to develop accounting and reporting standards (Coombs & Tayib, 1999). It is therefore not surprising that the annual financial accounts of Malaysian local authorities have differed widely in both content and format (Tayib et al., 1999). This has motivated us to investigate the disclosure practices among the MLAs at a closer level.

The reasons why Malaysia is selected as the country of the study are interesting. Firstly, some taxpayers and the state governments have recently begun to make known their disappointment with the unsatisfactory level of service delivered by their local authorities and are consequently demanding more accountability. Furthermore, a range of stakeholders have started to question the transparency and integrity of local public servants in delivering services (The Star, January 15, 2020; Siddiquee, 2010). The choice of MLAs is also notable for a number of other reasons. As revealed by Tayib et al. (1999), easy access to annual financial accounts is limited to councillors, auditors, the State Authority, and the Ministry of Housing and Local Government (MHLG).

Secondly, members of the public are unaware of the existence of financial information (Tayib et al., 1999). Thirdly, there are no specific legal provisions compelling MLAs to prepare annual financial accounts (Coombs & Tayib, 1999; Tooley et al, 2010b). The absence of accounting standards and regulations has given local authorities much leeway to decide on the treatment of accounting items and how the financial reports are to be prepared and presented (Coombs & Tayib, 1999).

3. Literature Review

The institutional theory has been used to provide a more flexible approach in interpreting the findings of this study. Given that this study is based on the local government setting, which is subject to many institutional influences, it is beneficial to adopt the institutional theory to rationalise the financial disclosure practices in MLAs. Generally, the central notion behind the institutional theory is that an organisation would have to accept and follow the convention of socially acceptable behaviours in order to survive and gain legitimacy (Meyer and Rowan, 1977;

Dimaggio and Powell, 1983; Scott 1987; Brignall and Modell, 2000). Institutional theory assumes that formal organisation structure, policies, and procedures are shaped by the social environments and “...serve to demonstrate conformity with institutionalised rules, thereby legitimising it, to assist in gaining society’s continued support” (Covaleski and Dirsmith, 1988, p.563). In respect of the public sector, Carpenter and Feroz (2001) stated that “…institutional theory suggest that an organisation’s tendency toward conformity with predominant norms, traditions and social influences in their internal and external environments will lead to homogeneity among organisations in their structures and practices, and that successful governments are those that gain support and legitimacy by conforming to

social pressures…” (p.569).

Dimaggio and Powell (1983) identified two categories of isomorphism, namely competitive isomorphism and institutional isomorphism. However, taking into consideration the nature of MLAs, institutional isomorphism is the more appropriate out of the two to be examined in this study. Institutional isomorphism is concerned with the weight of political, social, and other external influences upon the organisations in their quest for political power, social fitness, and legitimacy. Dimaggio and Powell (1983) identified three mechanisms that pressure organisations towards institutional isomorphism namely coercive, mimetic, and normative respectively. This section summarises the findings of past studies on accounting choices that have employed institutional isomorphism as their theoretical underpinning mechanism. The studies found that there were multiple isomorphism mechanisms that influenced organisational actions. However, as noted by Dimaggio and Powell (1983), it is sometimes difficult and not always possible to differentiate the three mechanisms of institutional pressures from one another. The three mechanisms of institutional force may be operating concurrently, making it difficult to ascertain which of them is playing a dominant role in influencing the institutionalisation of a norm or practice. This view is supported by Carpenter and Feroz (2001). They argued that “…empirically, it is may be difficult to distinguish the three forms of isomorphic pressures that may be acting upon an organisation at any given point in time, since it is possible that two or more forms will be acting at the same time. Identification of one form of isomorphism acting on an organisation at a particular point in time does not preclude the possibility that another form of isomorphism pressure is also present and potent...” (p.593).

Similarly, Frumkin and Galaskiewicz (2004) pointed out that there is an overlap between these three mechanisms. However, according to them, these three mechanisms tend to derive from different conditions or environments. For instance, coercive isomorphism is associated with the surroundings in the organisational field, while mimetic and normative processes are internal and can contribute towards rationalising the choices of roles and structures. Despite the difficulties in differentiating these three institutional isomorphisms, the general idea behind institutional isomorphism is to promote and encourage homogenisation of an organisation and to strive for its legitimacy. Although these three mechanisms may function in different ways, it is imperative to understand each of them individually in order to fully appreciate the influence each of them has on the process of decision-making. Several past studies were conducted to investigate the influence of institutional isomorphism mechanism on accounting rule choice. The findings of some past studies are summarised and presented below.

Pilcher (2011) studied the effects of local governments adherence to IFRS in Australia within the New Public Management (NPM) and institutional theory framework. Her study found the existence of coercive isomorphism with regards to local government ‘s compliance with IFRS, and that the councils are succumbing to the coercive pressure exerted by the legislative bodies. The study suggested that local councils have complied with IFRS in varying degrees so that they can maintain their claim of legitimacy. However, according to the study, total conformity had not yet been reached. Given that the implementation process was both lengthy and expensive without much significant gain, the councils did not come together to merge and become part of the

‘transaction-neutral’ reporting regime.

Carpenter and Feroz (2001) used the institutional isomorphism mechanisms to identify factors that potentially influenced four state governments in the United States (“the U.S.”) to either accept or reject the application of generally accepted accounting principles (GAAP) for external financial reporting. Their study identified three factors which potentially caused the initial resistance to use GAAP for financial external reporting. These factors were: (1) the passive role of accounting bureaucrats within the professional groups that call for the adoption of GAAP (normative); (2) issues related to organisational printing (mimetic), and finally, (3) powerful interest (coercive).

However, regardless of the different strategies adopted by each state to resist the adoption of GAAP, this study claimed that all these strategies were unsuccessful due to the force of the institutional pressures coming from the professional accounting and governmental institutional fields.

Baker and Rennie (2006) used the institutional theory, particularly the concept of isomorphism, to examine the elements which could potentially influence the federal government ‘s decision to implement full accrual accounting in Canada. The findings of their study indicated that the said decision could be due to coercive and normative pressures exerted by the Office of the Auditor General of Canada and supported by the normative influence of the Canadian Institute of Chartered Accountants’ Public Sector Accounting Board. Meanwhile, the increase in permeability of the organisational field of sovereign governments illustrates the potential of mimetic isomorphism on the adoption of the accrual accounting. This study also highlights similar findings by Carpenter

and Feroz (2001) with regards to how government regulatory agencies and professional accounting bodies play a part in government organisations’ accounting practices.

Ryan and Purchell (2004) applied institutional theory to understand the factors that motivated the local government to prepare their annual reports in such a way which discloses corporate governance information in Australia. This study found that both coercive and mimetic pressures were present, influencing the local government’s decision on the manner and scope of their corporate governance disclosure. The local government’s willingness to insert a separate section in their annual reports on corporate governance can be attributed to a certain level of coercive isomorphic pressures from the community, which had expectations of a higher level of accountability and transparency, and also in order to fulfil the criteria provided in annual report competitions. Mimetic isomorphism occurs when the councils mimic other local councils' ways of doing things, especially the ones which are superior in terms of size and resource, as well as those who have been successful in annual report competitions. However, evidence of normative isomorphic pressure was not found in local government council disclosure practices.

Amran and Siti Nabiha (2009) explored and interpreted the perceptions and motives of selected Malaysian managers on corporate social reporting (CSR) by applying the institutional theory. They found that notwithstanding the managers’ lack of awareness on CSR matters, there is a rising trend of reporting to include CSR, and the explanation offered by the participants is the need to follow the reporting trend. The study revealed that by following the reporting trend, the companies felt that it was more valid for them to expect to be accepted as one of the international players, and this served as evidence of the mimetic isomorphism on CSR practices. This mimetic action is particularly apparent when there are glaring social and environmental issues which have been brought into the limelight. This study concluded that the rising trend in the number of CSR can only be explained by western mimicry.

Most recently, Nukpezah and Abutabenjeh (2018) examine how coercive, mimetic and normative pressures from the state, other local governments and government agencies affect cash management practices among counties in Mississippi. They found that institutional isomorphism drives cash management practices in the counties by influencing how they follow state and agency mandates. Moreover, while urban counties have superior socio-economic indicators compared to their rural counterparts, no differences exist regarding standardized financial indicators, which suggest that local governments in the state may be imitating the practices of one another.

4. Research Methods

The data were collected from five MLAs case study organisations using 33 interviews over a period of seven months from April 2017 to October 2018. The case studies consisted of one city council, two municipal councils and two district councils. The five field sites were selected purposefully in order to obtain a mix of local governments of different characteristics in terms of size and organisational form. This mix of local authorities with different sizes were chosen because prior literature (e.g. Allen and Sanders, 1994) posits that size influences disclosure practices. The study employed the explanatory case study method. This approach enabled the researchers to understand the subjects’ own description of social reality and the meanings that inform their actions (see Yin, 1989). Scapens (2004) argued that the explanatory case study is normally used when the researcher is attempting to explain observed accounting practices. The interview questions were semi-structured and designed to allow the participants to interpret and describe the phenomena in their own way (Holland and Stoner, 1996). The interviewees worked at different levels, held different positions and were from a variety of backgrounds, but more fundamentally were chosen through a snowballing technique. Views of people with different work backgrounds and experiences enabled the researchers to obtain broader and diverging perspectives on the same topic or issue. The interview data were supplemented with internal documents and published sources, including annual reports, monthly management reports, legislative documents, financial reports, newspaper reports and MLAs’ website reports. The audio interviews, interview transcripts, field notes and other documents were then coded using NVivo software. The interview data were read several times to gain familiarity with the information. The data were open coded and then systematically analysed and coded. The concept of isomorphism was examined under the institutional theory lens and used to explain the influences on the disclosure practices in MLAs.

The interpretation was, however, open enough to enable a new and deeper understanding of the events observed during the research. The study remained open to possible alternative explanations of issues uncovered and thus hoped to advance theory (Dyer & Wilkins, 1991).

5. Research Findings

As MLAs are government bodies in the public sector, they are also subject to institutional pressures to follow set ways and expectations in order to maintain or establish legitimacy. As mentioned earlier, the three mechanisms that exert pressure upon organisations towards institutional isomorphism are coercive, mimetic, and normative. These three types of isomorphism may provide fruitful insights into explaining the financial disclosure practices and management in the public sector, particularly in MLAs. These are further discussed in the following sections.

5.1 Coercive Rules

The MLAs are particularly sensitive to the coercive influence that comes from statutory requirements. In Malaysia, there are three main pieces of legislation passed and enforced to control and regulate the operations of MLAs in Peninsular Malaysia, namely the Local Government Act 1976 (Act 171), the Street, Drainage and Building Act 1974 (Act 133), and the Town and Country Planning Act 1976 (Act 172). Evidence from the interviews showed that out of the three, Act 171 is the most significant piece of legislation in terms of accounting requirements as it sets out the general financial provisions of MLAs as well as imposes the requirement for MLAs to maintain proper accounting records:

“…We are obliged under Section 53 of Local Government Act 1976 to prepare the annual financial statements. It‟s a must. It is important for us to follow whatever required by this regulation. In addition, the Act requires the financial statements to be inspected by any councilor at any particular time or period. The Act also requires the financial statements to be audited by the AG or other auditor appointed by the state authority based on the AG‟s recommendation….” (Treasury Director of Beta).

In addition, Section 55 (5) imposes the requirement for the MLAs to forward their respective budgets to the state authority for approval:

“…. We in local council are operating under several Acts. Therefore, it is important for us to follow all these legislations and regulations…We forward our budget to the state authority for approval as required by Act 171 under Section 55 (5)...According to the Act, we can only spend the money after our budget is approved by the state authority…”

(Finance Director of Alpha).

Therefore, conformity with the social norms as prescribed in the regulations can be interpreted as coercive pressure on the disclosure practices in MLAs. The interview evidence also revealed that the most frequently cited reason for disclosure is to comply with the legalrequirements as laid down in the Local Government Act 1976 (Act 171).

Coercive pressure can also be seen to come from the state authorities. Under List II of the Ninth Schedule of the Federal Constitution, local government has been categorised as a state matter, except for those in the Federal Territories of Kuala Lumpur, Putrajaya, and Labuan. Hence, the state government by virtue of its powers could exert their influence and enforce the implementation of policies in MLAs which fall under its jurisdiction. In this respect, the MLAs can be subjected to close scrutiny by the state government. Further, the daily financial transactions carried out by local authorities who provide local services should be regulated by the state authority in which they operate. It was highlighted by the interviewees that they are required by Act 171 to disclose their financial information to the state authority on a monthly basis.

Evidence gathered from the interviews suggest that the disclosures made in the monthly reports are used for decision-making and also to determine which councils are financially sustainable and which ones are not. The purpose of making financial disclosure to the state authority is to keep the state authority informed as to the financial position of the MLAs. With this pertinent information, the state authority will be able to identify which council(s) is/are in good financial position and which ones are struggling to keep afloat. The state authority may then take the necessary steps to help those councils which are facing financial difficulties:

“…The purpose of the disclosure is to keep the state authority informed of our financial performance and position. Once we disclose financial information to them, they will do the analysis and comparison. The purpose of the analysis is to know the financial position and performance of local councils. So, once they know our financial position and performance, it makes it easy for them to monitor us. They will be able to know which local councils perform better and which local councils need help. They will be able to know which local councils perform better in the collection and which local councils are struggling with it.

….” (Treasury Director of Omega).

Thus, as revealed by the interviewees, the disclosures made by the MLAs are linked to the possible receipt of financial assistance. Given the persistent deficit in some of the local councils in Malaysia, the interviewees stated that grants and contributions given by both the state and federal governments seem to be inevitable sources of funding. Thus, this form of financial dependency can be considered as a formal coercive pressure. This finding is in line with the contention put forth by DiMaggio and Powell (1983) and Carpenter and Feroz (2001) that it is more probable for coercive isomorphism to surface when there is lack of financial independence.

5.2 Normative Rules

Normative isomorphism stems from professionalisation that describes how the characteristics of an organisation can be shaped and influenced by professional standards and the professional communities. (Dimaggio and Powell, 1983). With regards to normative isomorphism, evidence gathered from the interviews highlighted the importance of professionalism, particularly in relation to competent accountants who have been hired to handle the functions of financial management.

The interview evidence clearly suggests that the responsibilities of the accountants in local councils are not merely limited to financial management, but extends to advising the Mayor/President and the Finance Committee in making decisions pertaining to financial disclosure. Given this influential role, the experience of accountants is crucial:

“…Given the position to advise the President and FAC in making disclosure decision, I would say experience and expertise are crucial. We have five accountants in the council.

Accountants know best when it comes to accounting and finance matters in local council and we are the expert in this area. At the same time, given the workload as an accountant in the local council, we must adopt to the environment quickly. Even, if you do have the qualification, but if you are unable to adapt to the environment, you might fail to work as an accountant in the local council…” (Finance Director of Gamma).

Similarly, the experience of the Mayor/President who are authorised to handle disclosure issues, including making decisions on financial disclosure, is also considered to be one of the factors that may influence disclosure practices in the local council. As such, having relevant past experiences is very important to ensure that they are equipped to handle disclosure issues

and to make judgments and decisions pertaining to disclosure. Based on the findings of the interview, all the Mayors/Presidents have sat in the council for a period of at least five years and have previously worked in various positions in the government sector. Therefore, as indicated by the interview evidence, they are all very experienced especially with regards to handling financial issues in the public sector:

“…Our President is very experienced in disclosure practices. He has been in the council for years and he has been dealing with the disclosure practices for long time. He has the power to instruct us whether or not to disclose certain financial information…Although most of the times he needs our advice, he can handle disclosure issues professionally based on his experiences…” (Finance Director of Omega).

In addition, the transcription of the interviews also mentioned the significance of the members of the Finance Committee. The various professional backgrounds of the councillors who sit on the FAC have positively influenced the financial practices of the council, where the different perspectives and views points offered by these councillors on financial and disclosure issues have proven to be beneficial:

“…The committee members (FAC) are councillors. The committee is chaired by the President. Currently, the FAC members comprise of three professional accountants who work in the corporate sector; two businessmen with finance and business background; two lawyers; one former lecturer, one engineer, and the rest are from NGOs (non-government organisations). They are from various professions. As their backgrounds are different, each of them has their own opinion on one particular issue. Therefore, we receive lot of different comments and recommendations during the meetings. For those councilors with the accounting knowledge, they do give comments and recommendations up to the technical level. I consider this is good because we will get different opinions and views for different professional backgrounds in financial matters and issues…. (Internal Auditor of Alpha).

Thus, our findings with regards to normative isomorphism in MLAs is consistent with Dimaggio and Powell‘s (1983) argument that normative isomorphism which stems from professional standards in an organisational field will cause organisations to replicate each other in their structures and processes. In order to manage environmental shifts and uncertainty, a council relies on its professional workforce, such as accountants, who will be expected to steer the council in the right direction, influencing both corporate strategy and practices, such as disclosure practices.

5.3 Mimetic Rules

Mimetic isomorphism arises when an organisation attempts to copy other organisations’ practices, policies, or structures which they regard as being exemplary and more effective, especially in situations “…when technologies are poorly understood, when goals are ambiguous, or when the environment creates symbolic uncertainty…” (Dimaggio and Powell, 1983, p. 151). Evidence gathered from the interviews conducted in this study lends support to this statement. The interview evidence showed that local councils in MLAs did imitate the way other councils carried out their financial disclosure activities, especially those which are larger and well-equipped in terms of resources. Thus, as argued by Collin et. al. (2009), in order to appear legitimate, organisations tend to mimic their successful counterparts in their organisational field, hoping to also be able to carry out their own activities in ways which are accepted as valid. Further, DiMaggio and Powell (1983) argued that uncertainty derived from new systems or practices could encourage imitation. The interview evidence suggests that the council will copy the practices of other councils especially those councils which have successfully adopted and implemented the new practices. Based on the interviews with the accountants, it appears that it is normal practice for them to discuss the disclosure practices with their peers from other councils:

“…I would say other councils' disclosure practices do influence our financial disclosure practices. For example, if we are unsure on how to record “new” type of expenses or revenues, we will refer to other accountants in other councils who have been through this process and have disclosed this kind of expenses or revenues in their financial statement….Normally, we just follow their practice…In addition, it is a normal practice that we meet or call other accountants from other councils to discuss on financial disclosure practices. I think every accountant in this state does this….” (Assistant Finance Director of Alpha)

The absence of specific financial reporting requirements has compelled the accountants of MLAs to refer to other sources for guidance on the preparation of their financial accounts and other matters relating to disclosure of financial information. Thus, as argued by Carpenter and Feroz (2001), when an organisation is faced with fundamental uncertainty about what action is appropriate and will likely lead to success, it may select structures or practices which are used by other organisations which they perceive as being successful in the institutional environment.

Similarly, Gibbins et. al. (1990) argued that if there is a great deal of uncertainty on how financial disclosure should be prepared, this could encourage the financial disclosure to be modeled on the behaviours of certain reference groups. The interview evidence revealed that the accountants of MLAs have maintained good relationships with each other. They normally refer to each other when unsure about how to disclose certain accounting items. They also consult one another if they are uncertain on how to implement the requirements of new circulars. This is evident in the case of smaller councils. The smaller councils often refer to either same sized or larger councils when they are unsure about how to disclose certain accounting items:

“…. Having the difficulties due to the absence of the specific reporting requirements and standards, we normally follow the practices of other local councils. If I am unsure of certain accounting treatments, or unsure about a new circular, I normally refer to the accountants from other local councils. We maintain a close relationship with other accountants from other councils….I must admit that the fellow accountants from other

councils have helped us a lot. Most of the time, I refer to the fellow accountants at the same level. I even have discussions and receive guidance from the accountants from larger councils….” (Finance Director of Gamma).

Further, Gibbins et. al. (1992) asserted that “…the precise form of financial disclosure is rarely spelled out in the regulations. There remains a great deal of uncertainty as to how disclosure should be prepared and the likely consequences, if any, of alternate disclosures...” (p.55). Along the same lines, the interview evidence revealed that the Local Government Act 1976 does not stipulate any details pertaining to the specific form and content of the financial statements to be prepared. Although the said Act confers the state authorities with the powers to dictate the form and content of MLA’s financial reports, no specific reporting requirements with regards to the form and content of financial statements have been imposed on MLAs just yet. The absence of specific financial reporting requirements has compelled the accountants of MLAs to refer to other sources for the preparation of their financial accounts. The interview evidence revealed that the guidelines issued by the FTC (Federal Treasury Circular) are heavily relied on by the accountants of MLAs in preparing their financial accounts. Every councillor interviewed in this study have taken steps to comply with all the minimum disclosure requirements prescribed by the FTC in the preparation of their financial statements. The FTC had been drawn up to serve as guidance for federal statutory bodies in the preparation and presentation of their annual reports and financial statements. Although compliance with the FTC is purely voluntary in nature, it is argued that by complying with FTC requirements, the MLAs are adopting similar practices with that practiced by other government bodies. This gives a strong suggestion of legitimacy since they act in accordance with other organisations’ standards. Moreover, it is argued that by complying with the FTC, the MLAs have shown proper stewardship of public monies and have also demonstrated the ability to manage affairs and resources efficiently and effectively:

“...I have a lot of experience auditing the government statutory bodies. FTC is used by all federal and state governments including government statutory bodies. Therefore, the adoption and compliance of FTC in MLAs indicate that we are in line with all other government bodies, which means that we maintain proper accounts on public monies and are able to show a proper stewardship of public monies. Furthermore, it also demonstrates our ability to manage affairs and resources efficiently and effectively...” (Director of Audit Unit of Beta).

Thus, the adoption and compliance with FTC requirements indicate the mimetic isomorphism on MLAs’ disclosure practices. Another important point to highlight is the practice of the accountants in MLAs who customarily consult and adhere to the advice given by external auditors in order to get a favourable audit report. This can be cited as another example of mimetic isomorphism in MLAs’ disclosure practices. In this study, all the accountants interviewed placed emphasis on the significant influence of external auditors on their financial disclosure and practices. These findings are consistent with that of several earlier studies (e.g. Gordon et. al., 2002; Adams, 1997; Giroux, 1989). The influence of external auditors is evident particularly in the presentation format of the financial statement as well as the form and content of the financial statement:

“…. The Auditor General plays an important role in our financial disclosure especially on the preparation of financial statements. They advise us especially on the disclosure of items in the financial statements…. Basically, we prepare our financial statement according to the Federal Treasury Circular and the Act (Act 171). The AG‟s role is to make sure that we prepare our financial statements according to these regulations. Therefore, I must say that the form and content of our financial statements is guided by the circulars and advice from the AG…” (Finance Director of Delta).

However, as revealed by the interview evidence, the auditor-general normally makes use of the FTC guidelines as reference for auditing purposes. This suggests that the auditor-general has indirectly encouraged the disclosure practices in MLAs to be similar with that of other government bodies (federal, state, and their statutory bodies) which fully utilise the FTC guidelines in preparing their financial accounts. These government bodies are regulated by the Auditor-General who typically applies the said FTC extensively:

“…Like the Federal Government and State Government, we are all dealing with public money. Therefore, the AG has the right to comment and advise on our financial statements as they are the ones who audit our financial statement. In auditing our financial statement, the AG mainly refers to the Treasury Circular…” (Finance Director of Beta).

Therefore, the adoption of FTC and the practice of accountants in MLAs who routinely seek and generally follow the advice from the external auditors suggest the mimetic isomorphism to promote and encourage homogenisation of organisations, in order to strive for legitimacy. As argued by Meyer and Rowan (1977), organisations tend to be homogeneous in their practices through a process of isomorphism which reflects institutionalised rules. In summary, our research findings indicate the existence of coercive, normative, and mimetic isomorphism in MLAs’

disclosure practices. The isomorphism stems from regulations and legislations, pressure from the state authority, professionalisation, disclosure practices of other councils, and the influence of external auditors.

6. Discussion and Conclusion

In this study, the concept of isomorphism was examined in the context of the institutional theory which is used to explain the influences on the disclosure practices in MLAs. The findings indicate that there is existence of coercive, normative, and mimetic isomorphism in MLAs’ disclosure practices. The isomorphism comes from mimetic rules (regulations and legislations, the pressure from state authority), normative rules (professionalisation) as well as mimetic rules (disclosure practices of other councils, and the influence of external auditor). In relation to coercive isomorphism, the findings suggest that the MLAs are particularly susceptible to the coercive influence that comes from regulations and legislations. Among the various legislations passed to regulate MLAs, the Local Government Act 1976 (Act 171) is the most important piece of legislation for accounting purposes as it contains prescriptions pertaining to MLAs’ duties on making financial disclosures and keeping proper accounting records.

In addition, MLAs have been included under List II of the Ninth Schedule of the Federal Constitution as a state matter, except for those under the Federal Territories of Kuala Lumpur, Putrajaya and Labuan. Hence, the state has the jurisdiction to oversee the implementation of policies in MLAs which fall under its purview. This is connected to the MLAs’ need for financial assistance from both state and federal governments in the form of grants, contributions, and others.

As mentioned earlier, this type of financial dependency is viewed as a formal coercive pressure.

With regards to normative isomorphism, the interview evidence highlighted the importance of professionalism, particularly the experience and expertise of the in-house accountants as well as the Mayor/President in handling financial disclosure issues. The number of professionals who form the members of the Finance Committee were also believed to exert the normative influence in the disclosure practices in MLAs. Clearly, as a strategy to manage environmental uncertainties, reliance is placed upon professional specialists to perform their intended roles in shaping corporate strategy and practices, including disclosure practices.

Further, the findings also suggested that local council in MLAs did tend to replicate the disclosure practices of other larger and better resourced councils. Without any specific financial reporting requirements having been prescribed, the accountants of MLAs are left with other sources of guidance to refer to for the preparation of their financial accounts and for making financial information disclosures. The main sources of guidance were the FTC and the disclosure practices of other councils. Another form of mimetic isomorphism is the practice of MLA accountants seeking and generally following the advice of external auditors, with the primary motive of obtaining favourable audit report. Institutional theory offers a useful framework for understanding the dynamics of financial disclosure practices in a particular organisation. It explains how the organisation shapes its organisational rules and structures and designs them to be in accordance with socially acceptable beliefs, values, and norms. In conclusion, this research study has found there to be the existence of coercive, normative, and mimetic isomorphism in MLAs’ disclosure practices. The isomorphism stems from various sources, namely regulations and legislations, pressure from state authority, professionalisation, disclosure practices of other councils, and the

The weakness of this study is that being a case study, the results cannot be generalised to local authorities in different contexts. This notwithstanding, the study demonstrates that case study- based research can contribute useful insights into the complex and multi-dimensional phenomenon of financial disclosure. This study enhances our understanding of the disclosure management and practices in MLAs. The findings of this study have contributed to the existing literature by providing greater understanding of the financial disclosure processes in the public sector.

Specifically, the Malaysian context reveals there is an existence of coercive, normative and mimetic isomorphism in MLAs disclosure practice. The isomorphism comes from regulations and legislations, the pressure from state authority, professionalization, disclosure practices of other councils, and the influence of external auditor.

References

Adams, M., (1997), “Ritualism, opportunism and corporate disclosure in the New Zealand life insurance: field evidence”, Accounting, Auditing & Accountability Journal, 10 (5), 718-734.

Allen, A. and Sanders, G.D. (1994), “Financial disclosure in US municipalities: has the Governmental Standards Board made a difference?”, Financial Accountability and Management, Vol. 10 No. 3, pp. 175-193.

Amran, A. and Siti Nabiha, A. K. (2009), “Corporate social reporting in Malaysia: a case of mimicking the West or succumbing to local pressure”, Social Responsibility Journal, 5(3), 358-375.

Arifin J, Tower, G, & Poeter, S. (2012), “Mimetic pressures influencing mandatory disclosure of local government financial statements in Indonesia”, paper presented at the AFAANZ Conference 2012, Melbourne, Australia.

Ashworth, R., Boyne, G. & Delbridge, R. (2009), “Escape from the iron cage? Organizational change and isomorphic pressures in the public sector”, Journal of Public Administration Research and Theory, 19 (1), 165–187.

Baker, R. and Rennie, M. D. (2006), “Forces leading to the adoption of accrual accounting by the Canadian federal government: an institutional perspective”, Canadian Accounting Perspectives, 5 (1), 83-112.

Beck, A. (2018), “Opportunistic financial reporting around municipal bond issues. Review of Accounting Studies, 23: 785-826.

Brignall, S. and Modell, S. (2000), “An institutional perspective on performance measurement and management in the new public sector”, Management Accounting Research,11(3), 281– 306.

Carpenter, V., L. & Feroz, E., H. (2001), “Institutional theory and accounting rule choice: an analysis of four U.S. state governments ‘decisions to adopt generally accepted accounting principles”, Accounting, Organizations and Society, 26(7–8), 565–596.

Coombs, H.M., & Tayib, M. (1999), “Financial reporting practice: a comparative study of

local authority financial reports between the UK and Malaysia. In E. Caperchione and R. Mussari (Eds.)”, Comparative issues in local government accounting (pp. 53-68). London: Kluwer Academic Publishers.

Covaleski, M. A., & Dirsmith, M. W. (1988), “An Institutional perspective on the rise, social transformation, and fall of a University budget category”, Administrative Science Quarterly, 33, 562-587.

Collin, S., Tagesson, T., Andersson, A., Cato, J., & Hansson, K. (2009), “Explaining the choice of accounting standards in municipal corporations: Positive accounting theory and institutional theory as competitive or concurrent theories”, Critical Perspectives on Accounting, 20 (2), 141-174.

Craswell, A. T., & Taylor, S. (1992), “Discretionary disclosure of reserves by oil and gas companies: an economic analysis”, Journal of Business Finance and Accounting, 19 (2), 295- 308.

Cuny, C. (2016), “Voluntary disclosure incentives: Evidence from the municipal bond Market”, Journal of Accounting and Economics, 62 (1), 87-102.

DiMaggio, P. & Powell, W. (1983). The iron case revisited: Institutional isomorphism and collective rationality in organizational fields. American Sociological Review, 48 (2), 147–160.

DiMaggio, P. and Powell, W.W. (1991), “The iron cage revisited: institutional isomorphism and collective rationality in organizational fields, in Powell, W. and Dimaggio, P.J. (Eds), The New Institutionalism in Organizational Analysis”, Vol. 7, University of Chicago, Chicago, pp. 63-82.

Dyer, W. G., & Wilkins, A. L. (1991), “Better stories, not better constructs, to generate better theory: A rejoinder to Eisenhardt”, Academy of Management Review, 16 (3), 613–619.

Felix, R. (2014), “The use of inter-fund transfers to manage the “bottom line” in the municipal context”, Journal of Governmental & Non-profit Accounting, 4 (1): 17-31.

Frumkin, P. & Galaskiewicz, J. (2004), “Institutional isomorphism and public sector Organizations”, Journal of Public Administration Research and Theory, 14 (3), 283 307.

Gibbins M., Richardson A., & Waterhouse, J. (1990), “The management of corporate financial disclosure: opportunism, ritualism, policies and processes”, Journal of Accounting Research, 28 (1), 121-143.

Gibbins, M., Richardson, A.J., & Waterhouse, J. (1992), “The management of corporate financial disclosure: theory and perspectives”, Research Monograph No. 20, the Canadian Certified General Accountants. Research Foundation, Vancouver.

Giroux, G. (1989), “Political interests and governmental accounting disclosure”, Journal of Accounting and Public Policy, 8(3), 199-217.

Gordon, T., Fischer, M., Malone, D., & Tower, G. (2002), “A comparative empirical examination of extent of disclosure by private and public colleges and universities in the US”, Journal of Accounting and Public Policy, 21, 235-275.

Gore, A., K. (2004), “The effects of GAAP regulation and bond market interaction on local government disclosure”, Journal of Accounting and Public Policy, 23, 23-52.

Holland, J., & Stoner, G. (1996), “Dissemination of price-sensitive information and management of voluntary corporate disclosure”, Accounting and Business research, 26 (4), 295-313.

Holland, J. (2005), “A grounded theory of corporate disclosure”, Accounting and Business Research, 35 (3), 249-267.

Laswad, F., Fisher, R., & Oyelere, P. (2005), “Determinants of voluntary internet financial reporting by local government authorities”, Journal of Accounting and Public Policy, 24, 101- 121.

Meyer, J. W., & Rowan, B. (1977), “Institutionalized organizations: formal structure as myth and ceremony”, American Journal of Sociology, 83, 340–363.

Julius A. Nukpezah, J. A & Abutabenjeh, S. (2018), “Institutional isomorphism and cash management Practices in Mississippi”, Journal of Public Budgeting, Accounting & Financial Management, 30 (3), 315-334.

Parent, M. M., & Deephouse, D. L. (2007), “A case study of stakeholder identification and prioritization by managers”, Journal of Business Ethics, 75(1), 1-23.

Phang, S.N. (2008), “Transforming local government in Malaysia: implications for centralization and democratization”, Journal of Malaysian Chinese Studies, Vol. 11, pp. 97-110.

Pilcher, R. & Dean, G. (2009), “Consequences and costs of financial reporting compliance for local government”, European Accounting Review, 18 (4), 725-744.

Pilcher, R. (2011), “Implementing IFRS in local government: institutional isomorphism as a. NPM goes mad?”, Local Government Studies, 37 (4), 367-389.

Ryan, B., Scapens, R.W. and Theobald, M. (2002), “Research method and methodology in finance and accounting (2nd ed.)”, London: Thomson.

Ryan, C., & Purcell, B. (2004), “Corporate governance disclosures by local government Authorities”, Unpublished Working Paper. Queensland University of Technology.

Scapens, R. (2004), “Doing case study research”, In C. Humprey, and B. Lee (Eds.), The real life guide to accounting research: a behind-the-scenes view of using qualitative research methods (pp.257-279). Kidlington. Oxford: Elsevier.

Scapens, R., W. (1990), “Researching management accounting practice: the role of the case study methods”, British Accounting Review, 22, 259-281.

Siddiquee, N. A. (2010), “Combating Corruption and Managing Integrity in Malaysia: A Critical Overview of Recent Strategies and Initiatives,” Public Organization Review, 10 (2), 153-171.

Scott, W. R. (2008), “Institutions and Organisations: Ideas and Interest (3rd ed.)”, Thousand Oaks, USA: Sage Publications.

Scott, W. R. (1987), “The adolescence of institutional theory”, Administrative Science Quarterly, 32 (4), 493-511.

Tayib, M., Coombs, H. M., & Ameen, J. R. M. (1999), “Financial reporting by Malaysian local authorities – a study of the needs and requirements of the users of local authority financial accounts”, The International Journal of Public Sector Management, 12 (2), 103-120.

Tooley, S., Hooks, J., and Basnan, N. (2010a), “Shareholders' perceptions on the accountability of Malaysian local authorities‖”, Advances in Public Interest Accounting, Vol. 15, pp. 161-193.

Tooley, S., Hooks, J., & Basnan, N. (2010b), “Performance reporting by Malaysian local authorities: identifying stakeholder needs”, Financial Accountability and Management, 26 (2), 103-133.

The Star (2020), “Malaysia does not have a good record of transparency”, The Star, Web Edition, 15 January, available at: www. thestar.com.my

Yin, R. K. (2009), “Case Study Research: Design and Methods (4th edition)”, Thousand Oaks, CA: Sage Publications.