Corporate governance and quality of accounting information

Abstract

This study examines the effect of corporate governance represented by board of directors and audit committee on achieving a high quality accounting information characterized by relevance, reliability, comparability and consistency. Data for testing the hypotheses are collected from respondents who are users of financial information from different fields of Accounting such as financial institutions, brokerage firms, auditing firms. Overall, the results of tests performed show that the characteristics of board of directors and audit committee can help in achieving a high quality accounting information. After the fall down of big companies such as Enron and WorldCom, corporate governance became an important issue that should be applied in every corporation especially those that are publicly held. However, corporate governance imposed a set of rules guiding institutions towards the right, ethical path. One of the most important policies is ensuring transparency throughout the preparation of the financial statements. This could be ensured by achieving high accounting information quality. It is the responsibility of the audit committee and the board of directors to guarantee an acceptable quality of accounting information. Throughout this paper, we examine four characteristics of both the audit committee and the board of directors and we try to test whether these characteristics help in increasing the quality of accounting information. A study performed by Cheung and Chan (2004) addressed different issues regarding corporate governance in Asia. After studying several global models of governance taking into consideration the laws of corporate governance in some Asia countries, the authors concluded that the same criteria cannot be applied to all countries present in Asia. Each country has its own funding environment related to corporate, economic, social, cultural, legal and regulatory factors that differ greatly across these countries. Thus, each country should individually and independently improve the standards of practicing corporate governance. Mariam, Subramaniam, and Johnson (2006) discussed corporate governance across the United States. They argued that the financial crises is due to one of the following reasons; either because firms are focusing on the short run revenues rather than those in the long run or as a result of the weak efforts of stakeholders present in the United States that do not have an effective influence on these companies. As a result, the authors tried proposing solutions such as CEO and the President should be taken as a separate group with different responsibilities, increase the size of the board that can be an effective support, and the need for internal audit committee that will assess risk and ensure that a sufficient degree of transparency is available. Moreover, a study was done in America by Eugene and Imhaff (2003) studying the relationship between the quality of auditing and corporate governance taking past and present data. The authors concluded that major changes should be done to improve corporate governance in order to ensure the integrity of the financial reports. As a result, the authors proposed two recommendations; one is to increase the independency of the board of directors by preventing CEOs and CFOs to act as chairmen for the board in addition to preventing the members of the board from owning companies’ shares. The second recommendation shed light on the importance of supporting the independency of the auditor by preventing previous managers or members of the board to act as an account observer, by changing the audit team every three years, and by ethically engaging in applying GAAP principles for high transparency in financial reporting.