On the relationship between compliance with recommendations on the audit committee of codes of good practices and financial reporting quality

Abstract

Codes of good practices provide a soft alternative to the hard legislation approach to corporate governance. These codes include a set of recommendations that companies are expected to follow in order to enhance governance structures and practices. Some of these recommendations specifically aim to improve the effectiveness of the audit committee. We investigate the relationship between the level of compliance with recommendations on the audit committee of the Spanish Unified Code and financial reporting quality, as measured by discretionary accruals and by the opinion of the audit report. We use a sample of companies listed in the Span-ish stock market for the years between 2007 and 2013. Results show a strong and positive relationship between the level of compliance with recommendations and the quality of financial reporting. We also report significant results for some specific recommendations. These results are robust to various checks. Therefore, the level of compliance with recommendations on the audit committee might provide a feasible and reliable indicator of the quality of financial reports released by the company.

What do audit committees do? Transparency and impression management

“…Our focus on AC reports is related to the literature on governance and voluntary disclosure. ACs play a key role in fulfilling investors' information needs (Garcia-Blandon et al, 2018). Leung et al (2015) note that voluntary narrative reporting may be part of a disclosure strategy used to provide useful incremental information or for impression management.…”

“…The UK provides a meaningful and useful context for our study of AC reports. Much of the previous research on ACs is carried out in the US setting (Garcia-Blandon et al, 2018). Compared to US regulations that are relatively rigid, the UK provides a softer, comply or explain regulative approach which should encourage transparency of governance practices (FRC, 2012).…”

The Influence of Audit Committee Characteristics on Modified Audit Opinion in Jordan

“…However, researches have exhibited that when the presence of members of the AC with proper experience is deemed a vital input to the efficacy of the AC, and thus, with an improved experience of the AC, can be more successful in monitoring the financial statement of the firm [55,20]. Hence, they appropriately monitor complex explicit accounting problems, can enhance the efficacy of the AC in supervising the practice of financial reporting [55,64,20,16,17], and as a result, reducing the prospect of getting a modified audit opinion.…”

“…Thus, the AC must work with management and the external independent auditor to obtain the knowledge needed to deliver appropriate supervision of the process of financial reporting. Moreover, the AC is responsible for supervising the whole process of financial reporting [4,16,17]. In order to successfully achieve this, the AC must familiarize with the practices and controls that management has instituted to ascertain whether they were planned efficiently.…”

“…The present study aims at filling these research gaps, and it is significant to explore this crucial issue employing a more current sample. Literature has shown that ACCs affect the quality of financial reporting, proxy through earning management [20,16,6,7,17].…”