Does Corporate Governance Affect Financial Reporting Quality? Evidence from Listed Entities in Sri Lanka

Abstract

The purpose of this paper is to investigate the relationship between selected CG characteristics and the level of FRQ in Sri Lanka. The study was carried out using secondary data obtained through published annual reports from 209 companies listed in the Colombo Stock Exchange (CSE) from 2017 to 2020 including 836 firm-year observations. Six selected CG characteristics (Board Size, Board Independence, CEO Duality, Audit Committee Size, Audit Committee Independence, and Audit Committee Accounting Expertise) and the level of FRQ has been evaluated by the absolute value of discretionary accruals (ADA) using Panel linear regression analysis. It was found that a significant positive relationship between the audit committee accounting expertise and FRQ, while a significant negative relationship was found between Board Size and FRQ. However, the other remaining CG characteristics did not significantly influence the level of FRQ. Overall, this analysis highlights the importance of having a comparatively smaller board size and composition of the members in the audit committee with financial and accounting backgrounds to enhance FRQ and transparency. The findings of this study expect to have a significant policy implication for policymakers and regulators in terms of formulating strategies and policies on CG best practices in Sri Lanka. Similarly, the entities should promote smaller board size and recruiting, especially the majority of independent nonexecutive directors with sufficient accounting skills and financial experience to curtail the adverse earnings management practices to improve FRQ.