Corporate Governance, Financial Leverage, External Audit Quality, and Financial Reporting Quality in Ghanaian Companies

Abstract

Good corporate governance influences the capital structure adopted by a firm. Higher financial leverage increases a firm’s risk. This might result in a window-dressing of financial statements to maintain the value of the firm. The study examined the interaction between corporate governance, financial leverage, external audit quality, and their combined influence on the quality of financial reporting inside enterprises in Ghana. The extensive inquiry was conducted using a dataset consisting of 650 observations and encompassing the timeframe from 2009 to 2021 using SPSS Process version 4.2. The findings of this study revealed a significant inverse correlation between the size of the board and the level of compliance with International Financial Reporting Standards with a correlation coefficient of -0.056. With a correlation coefficient of 0.003, the analysis revealed that there is no linear association between Board Gender Diversity (BGD) and International Financial Reporting Standards. With regards to Independent Audit Committee with a correlation coefficient of around 0.068, the findings of the study indicated a statistically significant positive relationship between the presence of an Independent Audit Committee and the level of compliance with International Financial Reporting Standards. The study showed a negative correlation of -0.024 between Financial Leverage and International Financial Reporting Standards Compliance. The observed data suggests a notable and favourable correlation between Audit Fee and International Financial Reporting Standards Compliance with a significant positive correlation of around 0.157. The model employed in the study exhibited multiple R (R) of about 0.191, indicating a modest positive association between the predictor variables and International Financial Reporting Standards Compliance. The coefficient of determination (R Square) was 0.037, indicating that 3.7% of the variation in International Financial Reporting Standards Compliance can be attributed to the predictor variables in the model used for the study. Furthermore, the study revealed an unstandardized coefficient of -0.003 and a standardized coefficient of -0.078 for Board Size, 0.023 and 0.016 for Board Gender Diversity, 0.028 and 0.109 for the Independent Audit Committee, -2.152E-05 and -0.031 for Financial Leverage and 2.809E-08 and 0.156 for Audit Fee. The study again revealed a significant indirect effect through Financial Leverage (FL) on Board Size and International Financial Reporting Standards Compliance with bootstrapped results of 0.0001. On the contrary, the study revealed that Financial Leverage does not mediate Board Gender Diversity and International Financial Reporting Standards Compliance, Independent Audit Committee, and International Financial Reporting Standards Compliance with, an indirect effect of -0.0021 and -0.0009 respectively. With mediation through Audit Fee, the study showed significant indirect effects for all three independent variables. Board Size at 0.0000, Board Gender Diversity at -0.0016, and Independent Audit Committee at -0.0027. The findings from the direct effects study indicate that Board Size and Audit Fee have a notable influence on IFRS Compliance, hence affecting the quality of financial reporting. However, no concrete evidence was found to establish a link between Board Gender Diversity and Independent Audit Committee and IFRS Compliance. For the mediation effects, it was discovered that Financial Leverage played a role as a mediator in elucidating the connection between Board Size and IFRS Compliance. Furthermore, the Audit Fee variable served as an intermediary in clarifying the associations between Board Size, Board Gender Diversity, Independent Audit Committee, and IFRS Compliance. It is recommended for companies to give utmost importance to the principles of openness, accountability, and consistent monitoring of financial leverage. Moreover, the study recommends the allocation of resources towards high-caliber external audits as it plays a pivotal role in bolstering the precision and dependability of financial reporting.