Trust and Transparency in Financial Reporting: Evidence from Korean Central Government Agencies

In this study, we explore the impact of trust on government agencies’ disclosure transparency in financial statements. Using unique data of Korean central government agencies for the period of 2011-2015, we provide evidence that the level of trust enhances transparency of government financial reporting. Specifically, we document that high-trust government agencies are more likely to classify their accounting errors as material and disclose these errors (as a separate line item) in financial statements. This contrasts with the practices of low-trust government agencies that classify similar-magnitude accounting errors as immaterial and conceal these errors in undisclosed internal filings. We further find that high-trust government agencies tend to provide more disaggregated service cost information, whereas low-trust government agencies are more likely to bundle such information. We also find that the impact of trust on both disclosure of accounting errors and disaggregation of service cost information is more evident when parliamentary and governmental monitoring pressure increases. Taken together, our findings suggest that trust is significantly associated with government financial reporting quality.