Signaling Public Private Partnership activities: reporting behavior within annual reports.(ORIGINAL PAPER)

Abstract This empirical study examines whether, and if so, to what extent, firms report on Public Private Partnership (PPP) projects to signal PPP engagement even beyond legal obligations. The annual reports of the sample's firms listed on the VSE in 2005 have been investigated in a qualitative and quantitative way to reveal information policy. Annual reports confirming PPP activities are examined qualitatively by an in-depth content analysis to answer the question in which way information about the revealed PPP projects is published. Further, predetermined keywords that at least indicate a PPP participation are statistically evaluated. The results outline that annual reports only give little and predominantly unspecific information on PPP which emphasizes the absence of corresponding reporting obligations and of a standardized PPP definition.

Keywords Annual reports * Content analysis * Public Private Partnership (PPP) * Reporting behavior. Signaling

Introduction

Regulatory bodies as well as market participants form the actual design of reporting instruments (Inchausti 1997). Analogously, the extensive accounting literature discusses both compulsory (e.g., Cooke 1989) and voluntary disclosures of private firms (e.g., Wagenhofer 1990) as well as of public financial reporting (e.g., Sanders and Allen 1993). Nonetheless, neither obligatory nor voluntary reporting on Public Private Partnership (PPP) in accounting-related reports have been addressed so far in spite of the growing importance and volume of PPP investment and research. Considering the fact that the term PPP itself is not defined at the European Community (EC) level, the Green Paper of the EC (2004, p. 3; a modification was released in 2008) describes the characteristics of PPP superficially as 'forms of cooperation between public authorities and the world of business which aim to ensure the funding, construction, renovation, management or maintenance of an infrastructure or the provision of a service.'

The absence of specific accounting regulations on PPP as well as of voluntary publication as discussed in sections two and four is all the more astonishing as private information indeed signals a firm's quality. Comprehensive reporting on the--informed--firms' activities increases transparency of the existing asymmetric information in such a way that it contains high potential to increase the benefits of the--non-informed--stakeholders or society and enables to introduce or change their actions (Cooper 1992). PPP stakeholders as discussed in detail by Chinyio and Olomalaiye (2009) shall not only rely on the limited quality of governmental information (Holland 1999); but preferably, consult public media or firms' spontaneous and voluntary press which albeit also limit the quality of the information due to biased individual interests. Reliance on accounting disclosures in the annual reports avoids such deterrence as information published in annual accounts has to follow obligatory standards and most of all, undergoes an in-depth auditing process, hereby increasing information's creditability (Mercer 2004). An overview subsuming the disclosure literature can be found in Healy and Palepu (2001).

This empirical survey adds to both the disclosure and PPP studies by analyzing which information on PPP is included in audited annual reports of the sample's firms listed on the Vienna Stock Exchange in 2005. It is convenient to clarify that the study does not try to evaluate the accounting regulations, the degree of their fulfillment, and the number of existing PPP projects, but observes and describes possible signals of firms in regard to their PPP engagement. The findings indicate that those firms reporting on PPP might use such information for public relation concerns, especially showing their seriousness, responsibility for the region, social responsibility, and political and economical influence. However, it is most interesting to notice that only few of the sample's firms report on PPP at all.

The following section reviews the key reporting regulations for listed enterprises in Austria that apply International Accounting Standards/International Financial Reporting Standards (IAS/IFRS) to embed and interpret the findings of the empirical study. Then, the sample and research methods are defined. The next section presents the results from the quantitative and qualitative research, hereby concentrating on the statistical evaluation and the content analysis. The final section concludes.

Legal Framework

If not specified otherwise, the following overview refers to the legal status of the sample period 2005. The Austrian Commercial Code (HGB 2005) has been amended and renamed in Austrian Entrepreneurial Code (UGB 2007) in 2007, the IAS/IFRS are subject to ongoing revisions. For example, IAS 14 will be replaced by IFRS 8: Operating Segments effective for annual periods beginning on January 1st 2009, which, however, does not influence the study's implications.

Contrary to other countries like the United Kingdom (2000), Austria did not enact any specific regulations on financing, realizing, or maintaining PPP or corresponding approaches. In regard to accounting information in annual reports, Austrian listed enterprises were generally obliged to report according to the HGB during the sample period 2005. However, section 245a HGB enforced groups to apply International Accounting Standards/International Financial Reporting Standards (IAS/IFRS). The admission of United States Generally Accepted Accounting Principles (US-GAAP) instead of IAS/IFRS was suspended by Art. 4 (EG) No 1606/2002, but allowed until 2006 by section 906 subsection 12 HGB. Consequently, in 2005 Austrian listed single firms were able to choose the application of either HGB, IAS/IFRS or US-GAAP, groups among the latter. If not, reporting according to HGB firms additionally had to publish a management report as demanded by section 267 HGB due to the fact that the International Accounting Standards Board's (2008) draft of Management Commentary (MC) is still under discussion. Consequently following the exclusive consideration of firms applying IAS/IFRS in the study's sample, only IAS/IFRS is discussed further.

IAS/IFRS do not provide one single standard which information has to be published in the notes. However, specified standards like 1FRS 7 include reporting obligations about financial instruments in the notes and each relevant standard includes subsections that specify regarded information. Further, the 'Framework for the Preparation and Presentation of Financial Statements' (F) sets out concepts how to prepare financial statements for external users in F 1, F 9-10.

IAS/IFRS do not contain direct PPP-related prescriptions in any of their standards. Notwithstanding, a broad interpretation might actually demand specific reporting. First and most of all, the main qualitative characteristics of IAS/IFRS accounting, i.e., comprehensibility, relevance, reliability, and comparability (F 24), and the valuation according to the true and fair view of an enterprise (F 46) in the financial statements alone strongly indicate reporting on--mostly high-voluminous--PPP projects. Second, referring to the main PPP characteristics, 'financial partnerships and group relationships with syndicate agreements containing partially high risks and off-balance sheet transactions and a relevant scale in specific industrial segments' in the Green Paper's definition of PPP (2004) may derive reporting duties. For example, the notes may include disclosures about such high risks and uncertainties affecting the entity and any resources and obligations not recognized in the balance sheet. High risks and off-balance sheet risks of financial instruments as well as contractual obligations being standard for PPP are to be disclosed according to IAS 39 Financial Instruments: Recognition and Measurement as well as according to F 21. Geographical and industry segments are to be disclosed in the notes in a rather expansive way under revised IAS 14: Segment Reporting (Epstein and Mirza 2004) and again according to F 21. In more detail, IAS 27.40-42, 28.37-40, 31.54-57 and IFRS 3.66-77 include obligatory disclosures about relationships between parents and subsidiaries; IAS 24.12-22 demands even more precise information, among others, on their transactions, outstanding balances, guarantees, agreements, collaterals, or provisions.

Lessons learnt from that legal overview are first, that European legislation addresses to PPP in different, even divergent ways although this form of cooperation is enforced by the EC in a comprehensive way. Second, as we proved in section four, at least the Austrian listed firms interpret the obligatory accounting rules in a very narrow way, although it is easy to derive from the IAS/IFRS reporting regulations that information on PPP actually has to be included into the annual reports.

Sample and Methodology

The investigation period covers the business year 2005 due to the legal amendments about new and more comprehensive reporting requirements coming into force. To assure comparability of the results, the preliminary sample of 101 enterprises that were listed on the Vienna Stock Exchange was adjusted by 27 firms because of Initial Public Offerings and delistings; eight firms, due to their annual reports, were available only in German language and further eight firms were applying HGB or US-GAAP instead of IAS/IFRS.

The empirical study comprises a two-step flow of research. First, the electronic version of each annual report was searched by 20 so-called direct keywords 'Public Private Partnership,' its short forms, and synonyms that proof the existence of a PPP involvement. To answer the question in which way firms with at least one hit reported on PPP their annual reports were explored qualitatively according to Srnka and Koeszegi (2007). Those reports that did not contain any of the direct keywords were additionally scoured for 14 so-called keywords to find hidden hints or descriptions on PPP projects that were not referred to as such according to Michalski-Karl et al. (2008). The hits per keyword were statistically analyzed, among others by frequency distributions and Pearson correlation to find any patterns of keyword use. The level of significance was chosen 0.01 and 0.05, respectively. Only keywords as well as only firms with at least one hit were further considered.

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