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The objective of this study is to develop a mandatory disclosure index (MDI) of financial statements for local government in Malaysia. The method for developing the MDI is based on the legal and regulatory requirements and related literature. This study adopted the procedure suggested by Gore (2002), Hooks et al. (2003) and Coy and Dixon (2004) in developing the index. The MDI is a simple index using a list of items that has been identified. This study presents 63 items considered as mandatory disclosure requirements based on three main sources consisting of law which includes the Local Government Act (1976), the Statutory Bodies (1980) and Audit Act (1957); rules and guidelines outlined in TC No. 15/1994; and Malaysian Accounting Standards Board (MASB). The study is limited by the incomplete financial statements supplied which caused it to be removed from the sample. Further study could be done regarding the measurement of financial statements quality based on the method of disclosure index, the assessment on the level of quality of financial statements, the determination of the quality of published financial statements and factors that influence the quality of local governments’ financial statements in Malaysia.

Keywords: Mandatory disclosure index, information disclosure, voluntary disclosure, financial statement, Local Government, Malaysia.

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