Accounting Quality and the Law

Abstract

Financial transparency is a critical factor in global financial markets. Recently, international studies of accounting quality have flourished. Guided by the conclusion in La Porta et al. (1998) that there is a fundamental difference in investor protections that that are afforded by civil vs. common law systems, accounting researchers always include the country's legal system as an explanatory variable. Usually they conclude that legal systems matter for the quality of financial disclosure.

Because this research is new and institutional details of legal systems' effect on accounting have not been studied, we evaluate the conclusion that legal family is an important determinant of quality. We review the legal scholarship about the two families, the work on the reliability of the pivotal analysis of La Porta et al. (1998), and finally the accounting research studies themselves.

We conclude that the importance of legal family on accounting quality is very weakly supported.

Keywords: Common law, civil law, international accounting, accounting quality

JEL Classification: K33, M41, M43, M47