Enforcement of Accounting Standards and Changes in Corporate Governance

Abstract:     

This paper investigates (1) whether the corporate governance of firms with erroneous financial reporting differs systematically from that of non-error firms and (2) whether error detection is followed by improvements in the corporate governance of error firms. I apply a difference-in-differences approach on a matched sample from Germany. In contrast to the U.S., firms are selected randomly and repeatedly for examination under the German financial reporting enforcement regime. For the error year, I find error firms less likely to be audited by a big-four firm, to have an unqualified auditor’s opinion, and to have an audit committee. They are subject to a more time-consuming auditing process and their supervisory boards have fewer members and committees. In the first full fiscal year after error disclosure, differences between error and control firms are insignificant for the structure of the supervisory board but partly persist with respect to the auditor-client relationship. This may be interpreted as financial reporting enforcement being effective to some extent in preventing potential future errors by triggering improvements in firm-level accounting oversight.

Number of Pages in PDF File: 50

Keywords: Enforcement, Accounting Errors, Error Announcements, Financial Reporting, Corporate Governance, Supervisory Board, Auditor-client Relationship

JEL Classification: G34, K42, M40, M41, M48