Corporate governance and compliance with IFRS 7

Abstract

Purpose This paper aims to investigate the impact of the characteristics of two corporate governance mechanisms, namely, board of directors and audit committee (hereafter AC), on the level of compliance with International Financial Reporting Standard [hereafter International Financial Reporting Standards (IFRS)] 7 “Financial instruments: Disclosures” (hereafter FID). Design/methodology/approach Using a self-constructed checklist of 128 items, this research measures the compliance with IFRS 7 of 63 Canadian financial institutions listed on the Toronto Stock Exchange during a period of three years (2014-2016). Fixed effect panel regressions have been used to capture the individual effect present in authors’ data. Findings Empirical results show that the mean compliance level with IFRS 7 requirements is about 77 per cent and identify various areas of non-compliance. This level of compliance has a positive linkage with the board size and independence. Similarly, the AC independence and financial accounting expertise are shown to positively affect authors’ dependent variable. Nevertheless, CEO/chairman duality, AC size and meeting frequency are not significantly correlated with the level of compliance with IFRS 7. Originality/value This study expands prior compliance literature in the Canadian setting by examining the determinants of compliance with IFRS mandatory disclosures. Also, and to the best of the authors’ knowledge, this paper is among the first studies that have investigated the effect of corporate governance characteristics (hereafter CGC) on compliance with all IFRS 7 requirements in general.

Does Governance Affect Compliance with IFRS 7?

“…Abdullah (2011), Bagudo et al (2018), Almaqtari (2019), and Krismiaji (2019) found a positive relationship between the size of the audit committee and the degree of compliance with IFRS. Conversely, Affes and Makni-Fourati (2019), Juhmani (2017), Agyei-Mensah (2019b), and Mnif and Znazen (2020) did not find any significant relationship between this variable and compliance with IFRS. Based on these discussions, we hypothesize that:…”

“…Although few studies have addressed this determinant, it has been shown to be a good determinant that helps to raise the level of disclosure and to increase compliance with IFRS (Ettredge et al 2011;Alkurdi et al 2019;Zango 2019). Conversely, several studies could not identify any significant association between the degree of compliance with IFRS and frequent audit committee meetings (Agyei-Mensah 2019a; Almaqtari 2019; Bagudo et al 2018;Ernawati and Aryani 2019;Mnif and Znazen 2020;Sellami and Fendri 2017). Based on these discussions, we hypothesize that:…”

“…Some studies have shown that there is indeed a significant positive relationship between audit committee independence and the level of compliance with IFRS (Adznan and Nelson 2014;Agyei-Mensah 2019a;Juhmani 2017;Krismiaji 2019;Sellami and Fendri 2017;Mnif and Znazen 2020). However, there are also other studies that do not find any effect of this determinant over the degree of compliance, such as Abdul Abdul Rahman and Hamdan (2017), Agyei-Mensah (2017), Bagudo et al (2018), andAlmaqtari (2019).…”

“…The results of studies related to this factor are varied-some of which show a positive impact of board size on the degree of compliance with IFRS (Al-Akra et al 2010;Alfraih 2016;Bagudo et al 2018;Mnif and Znazen 2020), a negative impact (Alfraih and Almutawa 2017), while others show no significant impact on the degree of compliance with IFRS (Agyei-Mensah 2017;Almaqtari 2019;Ebrahim and Fattah 2015;Juhmani 2017;Zango et al 2015). Based on the above discussion, we hypothesize that:…”

“…In addition, the independence of directors can enhance, to some extent, the shareholders' confidence by increasing the transparency in corporate outputs (annual reports) and integrity in the preparation of such reports. This, in turn, enhances the quality of disclosure and the level of compliance with mandatory applicable standards requirements (Ebrahim and Fattah 2015;Mnif and Znazen 2020;Tahat et al 2017;Tauringana and Chithambo 2016). Several studies provided a significant positive correlation between both the degree of compliance with IFRS and the independence of the board (Agyei-Mensah 2017; Almaqtari 2019; Bagudo et al 2018;Juhmani 2017;Mnif and Znazen 2020;Tahat et al 2017;Tauringana and Chithambo 2016).…”