On the relationship between compliance with recommendations on the audit committee of codes of good practices and financ
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On the relationship between compliance with recommendations on the audit committee of codes of good practices and financial reporting quality Josep Garcia‑Blandon1 · Josep Maria Argilés‑Bosch2 · Monica Martinez‑Blasco1 · David Castillo Merino1
© Springer Science+Business Media, LLC, part of Springer Nature 2018
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 Spanish 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.
* Josep Garcia‑Blandon [email protected] Josep Maria Argilés‑Bosch [email protected] Monica Martinez‑Blasco [email protected] David Castillo Merino [email protected] 1
IQS School of Management (Universitat Ramon Llull), Via Augusta, 390, 08017 Barcelona, Spain
2
Department of Accounting (Universitat de Barcelona), Barcelona, Spain
13
J. Garcia‑Blandon et al.
Keywords Codes of good practices · Recommendations · Audit committee · Financial reporting quality
1 Introduction The Enron case and other financial scandals at the beginning of this century caused a great concern among regulators and policy-makers about the necessity of new regulations to prevent, or at least to make it difficult, such cases to repeat. A common feature of these scandals was that the accounting information released by the companies did not reflect the current economic and financial situation. Thus, market participants who made investment decisions on the basis of this information were being tricked by managers, the ultimate responsible of the accounting information produced and released by the company. As posed by Aguilera & Cuervo-Cazurra (2009), loss of confidence in accounting information, caused by these corporate scandals, favoured an increasing demand for sounder corporate governance structures and practices. They argued that the reaction of regulators to these demands has been twofold. On the one hand, through the approval of “hard legislation”, such as the Sarbanes–Oxley Act (hereinafter SOX Act1) aiming to improve governance practices which should ultimately lead to h
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