Corporate governance: association the spots between institutional enhancement, organisational modification and earnings quality
| DOI | https://doi.org/10.1108/JFRC-04-2021-0027 |
| Published date | 14 January 2022 |
| Date | 14 January 2022 |
| Pages | 240-262 |
| Subject Matter | Accounting & finance,Financial risk/company failure,Financial compliance/regulation |
| Author | Adel Almasarwah,Wasfi Alrawabdeh,Walid Masadeh,Munther Al-Nimer |
Corporate governance: association
the spots between institutional
enhancement, organisational
modification and earnings quality
Adel Almasarwah
Accounting Department, The College of Business and Leadership, Lourdes
University, Sylvania, Ohio, USA and Accounting Department Business School,
The Hashemite University, Zarqa, Jordan
Wasfi Alrawabdeh
Department of Management, Business School,
The Hashemite University, Zarqa, Jordan, and
Walid Masadeh and Munther Al-Nimer
Accounting Department, Business School,
The Hashemite University, Zarqa, Jordan
Abstract
Purpose –The purpose ofthis paper is to explore the link between earningsquality, Audit Committees and
the Board of companieslocated in Jordan through the lens of enhancing corporate governance.
Design/methodology/approach –The real earnings management (REM) and accruals earnings
managementmodels were notably used within the panel data robust regressionanalysis approach; these were
used againstcertain Audit Committee characteristics (i.e. meetingfrequency, amount of Board and Committee
participants[both internal and external], size) and Board of Directors.
Findings –The former characteristicswere found to have a positive relationship withREM, while the latter
yielded mixed results: while there wasno significant identifiable relationship between Board outsiders and
REM, there was a positiverelationship identified between Board meetings, Boardinsiders and Board size and
REM. In regard to thisstudy’s limitations, the qualitative data gathered for the Boardof Directorsthrough the
lens of corporate governanceenhancement should have been documented with more detail;furthermore, the
study was limitedto the study of just one nation.
Research limitations/implications –The data is limited to only a single country. More explanationfor
Board of Directors need qualitative understandings into corporate governance improvement. The control
variablesare essentially partial in a developing market context.
Practical implications –The different corporate governance code and guidelines improvements have
varied influence on earnings quality. As predictable, boards of directors most effect on earnings quality.
Improvements haveincluded most modification to audit committees but through them slight measuredeffect
on earningsquality.
Social implications –Jordan’s corporate governance improvements expected organised corporate
governance practices generallyin place amongst its boards, and though invoking considerable modification
to audit committees, eventually included slight modification to earnings quality. However, both improved
earningsquality.
JEL classification –M41, C33, L1
JFRC
30,2
240
Received13 April 2021
Revised1 November 2021
Accepted2 December 2021
Journalof Financial Regulation
andCompliance
Vol.30 No. 2, 2022
pp. 240-262
© Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-04-2021-0027
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1358-1988.htm
Originality/value –This particularresearch appears to be the first to consider both Audit Committee and
Board of Directorscharacteristics in one model; indeed, in this vein, this research is also thefirst to explore the
corporate governanceenhancements that initially stemmed from there beingzero code or guideline regarding
its use, despiteit becoming required recently. Hence,the authors can say this study has high originality.
Keywords Corporate governance, Organisational modification, Earnings quality measures,
Regulation
Paper type Research paper
1. Introduction
Due to the fact that it is difficult to establish and document any monetary exchanges/
transactions due to the risks associated with doing so, the majority of financial reports are
prone to faults –which, naturally,means reduced accuracy within such reports. It is in light
of this fact that corporate governance was initially introduced: to ensure financial reports
remain accurate and error-free.In a similar vein, taking down companies’shares listings on
the stock market and transferral of the companyfrom a first market to a second market are
some of the commonly issued penalties to companies that fail to adhere to the rules and
regulations imposed by corporate governance.One such rule is the overseeing of the Audit
Committee and the Board of Directors. On the other hand,companies that do adhere to these
rules are likely to see enhanced business community operations and nationwide financial
performance.
As stated by Okpala (2012), it is as a result of the multiple in-company issues by large
companies that have been made public that corporate governance has attracted so much
academic attention and attraction over recent years. Indeed, according to Kim (2006), Audit
Committee characteristics, external Auditor characteristics and Board of Directors’
responsibilities arejust some of the key factors of corporate governance that have been used
to clarify the nature of the relationship between company management and shareholders.
What is very telling is that in 1999, the World Bank partitioned corporate governance
operations into external corporate governance (i.e. investment rules and regulations;
reviewing the rules that most impact the company; procedures for being able to see clients’
credit risk; monitoring Non-Executive Directors’operations) and internal corporate
governance (i.e. overseeingtop managers in the company; protecting shareholders’interests)
(The World Bank, 2013).
According to Yasa et al. (2020) and Barkerand Imam (2008), there is a wealth of research
investigating earnings quality(i.e. an unconventionality in documented earnings compared
to the earnings expected [Porterand Kraut, 2013]). It has been noted that earnings attributes
impact earnings quality more than the discretionary elements do, as well as the fact that
more correct estimates are made in companies that have easily forecastable income (Goeij
et al.,2013).
It was advised in one study in this field that whileAudit high earnings quality in and of
itself does not necessarily improve the accuracy seen in earnings forecasts, Audit
Committees can certainlyaid managers in creating an approach to adopt later (Bedardet al.,
2008). On the other hand, another studymaintains that high earnings quality is, conversely,
highly indicativeof what the imminent earnings will looklike (Dechow et al.,2010).
Notably, the main driver for wanting to explore this matter concerns the fact that it has
the potential to yield a deeper and better comprehension into problems that are essentially
contributing to the link between earnings quality and corporate governance. One such
matter that is also particularly prevalent in Jordan (since the country is highlyinterested in
coming across as attractive to investin) is that of the differing legal and cultural procedures
Corporate
governance
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