LOS ANGELES — Investors looking for a positive trend in the global markets have some good news: widespread adoption of International Financial Reporting Standards has increased financial transparency and lowered risk for investors, as measured by the 2008 Opacity Index, released today by the Milken Institute. According to the Opacity Index, opacity works like a hidden tax on business, costing countries growth, companies profits and investors higher returns.
Additional improvements in corporate governance and compliance with voluntary codes of conduct have helped raise the scores of most of the 48 countries ranked by risk in the index. The United States, however, has seen some deterioration in its standing due in part to delayed effects of the Sarbanes-Oxley Act of 2002.
According to the report, opacity is measured by small-scale but frequent risks, such as corruption and opacity in financial markets that work as deterrents to economic growth. A single-point increase in an Opacity score means foreign direct investment as a percent of GDP can decrease by 0.18 percentage point.
In the latest rankings, Finland scores best, reflecting the country′s solid regulatory environment, low levels of corruption and compliance with international standards for accounting rules and practices. "Companies in Finland are more transparent to foreign investors and partners, whose due diligence, legal, and accounting costs are reduced," the report states. Lower overall business costs allow higher-wage countries like Finland to compete for investment capital with lower-wage countries.
In the 2008 rankings, the United States fell to 13th place from 4th place because of turbulence in the markets and over-regulation due to Sarbanes-Oxley, the report states.
The top 10 markets (with 2007 ranking):
- 1. Finland (2)
2. Hong Kong (3)
3. Singapore (16)
4. Sweden (9)
5. Australia (7)
6. Denmark (5)
7. Austria (9)
8. Ireland (9)
9. United Kingdom (1)
10. Germany (13)
The Opacity Index measures five factors: corruption, legal system efficiency, economic and enforcement policies, accounting standards and regulatory effectiveness. Together, these factors form the acronym CLEAR. Higher levels of opacity in each of the CLEAR factors indicate poorly functioning governments, which increases the cost of doing business, as well as the risk.
Whereas most measures of risk look at low-frequency, high-impact events, such as coups d′etat, nationalization of industries and earthquakes, the Opacity Index measures high-frequency, low-impact risks, which include corruption and unenforced laws and policies. It also measures the rights of debt- and equity holders around the world, the adequacy of corporate governance and the quality of accounting standards.
This kind of risk has a direct impact on the economic health of the country. Poorly working governmental functions result in economic penalties. An additional point of opacity deducts $1,265 from the per capita GDP of each country studied.
It should be noted that while most countries improved their accounting standards, global financial transactions are becoming increasingly complex. This trend toward complexity will require still greater transparency in accounting systems. Accurate and timely transaction valuations are required by investors to form unbiased expectations of the risk/reward trade-offs.
The countries covered in the index account 77 percent of the world′s population (in 2007), 94 percent of 2007 world GDP, 93 percent of world financial assets and 99 percent of world equity trading volume.