Corporate Transparency and Internal Audit/Control as Investor Protection Tools in the Opaque Russian Market

The chapter looks into the problem of enhancing financial performance and efficiency of business processes of Russian companies through improved corporate transparency and efficient internal audit function. It also contains an overview of empirical studies carried out by the author and his research associates in the field of specific determinants of shareholder value creation. The latter include, among others, corporate transparency rating as well as existence of internal audit service in company organizational structure. For the purpose of empirical analysis of relation between standards of corporate governance and financial efficiency we suggest an original corporate transparency rating tailored specifically for the Russian market. The rating is comprised of 39 indicators reflecting the degree of disclosure of information, relevant for all major stakeholder groups. Alongside the obtained aggregate index some other indicators of corporate governance quality were included into the model, such as the board membership and the number of independent directors. Econometric modeling reveals positive relation between the level of corporate transparency and the market-to-book ratio for the publicly traded Russian companies. In addition we assess the role of internal audit in proper investor protection and shareholder value creation and investigate the determinants of existence of internal audit departments in companies’ organizational structure. The research results reveal that the existence of internal audit service in the company structure is positively related to shareholder value creation. However well do our empirical results fit into the line with the popular discourse, they are of preliminary nature and should be viewed with certain caution.