TY - JOUR
T1 - On the Interrelation between Corporate Governance, Audit and Earnings Quality: A Review of the Underpinning Theories
AU - Mohd Kharuddin, Khairul Ayuni
AU - Basioudis, Ilias
N1 - Copyright © 2022 The Author(s). Published by Human Resource Management Academic Research Society (www.hrmars.com). This article is published under the Creative Commons Attribution (CC BY 4.0) license. Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. The full terms of this license may be seen at: https://creativecommons.org/licences/by/4.0/legalcode
PY - 2022/9/26
Y1 - 2022/9/26
N2 - The quality of reported earnings is important to investors in the financial market, as investors and analysts heavily rely on the company’s reported earnings in making investment decisions. The board of directors, the audit committee, and the internal audit function represent the internal monitoring mechanism within a company, whereas the external auditors serve as an external monitoring mechanism providing independent verification of the quality of a company’s financial reporting. Besides that, interdependencies exist between a firm’s internal corporate governance structure and its external audit function. Given the important effect of these monitoring mechanisms on a company’s financial reporting process, this paper aims to to discuss the relevance of various theories used in academic research in explaining the role of corporate governance and auditors in promoting higher earnings quality. Through the review of literature, we have found that the agency theory, stewardship theory, institutional theory, and managerial hegemony theory as the main theories that provide significant insights into the efficiency and effectiveness of corporate governance and audit functions from various perspectives. Hence, this suggests that future research could consider the use of multiple theories together in the explanaining the interrelation between corporate governance, audit, and earnings quality. Our paper would be of interest to academicians, practitioners, regulators, and policymakers in trying to understand how a company’s internal corporate governance characteristics such as the board, audit committee, and internal audit function, as well as how the external auditors affect the quality of financial reports produced by companies. Our paper also contributes to the literature as this paper comprehensively provides a synthesis and a holistic view of how these four theories complement each other in explaining the interrelation between the different governance mechanisms and financial reporting.
AB - The quality of reported earnings is important to investors in the financial market, as investors and analysts heavily rely on the company’s reported earnings in making investment decisions. The board of directors, the audit committee, and the internal audit function represent the internal monitoring mechanism within a company, whereas the external auditors serve as an external monitoring mechanism providing independent verification of the quality of a company’s financial reporting. Besides that, interdependencies exist between a firm’s internal corporate governance structure and its external audit function. Given the important effect of these monitoring mechanisms on a company’s financial reporting process, this paper aims to to discuss the relevance of various theories used in academic research in explaining the role of corporate governance and auditors in promoting higher earnings quality. Through the review of literature, we have found that the agency theory, stewardship theory, institutional theory, and managerial hegemony theory as the main theories that provide significant insights into the efficiency and effectiveness of corporate governance and audit functions from various perspectives. Hence, this suggests that future research could consider the use of multiple theories together in the explanaining the interrelation between corporate governance, audit, and earnings quality. Our paper would be of interest to academicians, practitioners, regulators, and policymakers in trying to understand how a company’s internal corporate governance characteristics such as the board, audit committee, and internal audit function, as well as how the external auditors affect the quality of financial reports produced by companies. Our paper also contributes to the literature as this paper comprehensively provides a synthesis and a holistic view of how these four theories complement each other in explaining the interrelation between the different governance mechanisms and financial reporting.
UR - https://hrmars.com/index.php/IJARAFMS/article/view/15235/On-the-Interrelation-between-Corporate-Governance-Audit-and-Earnings-Quality-A-Review-of-the-Underpinning-Theories
U2 - 10.6007/IJARAFMS/v12-i3/15235
DO - 10.6007/IJARAFMS/v12-i3/15235
M3 - Article
SN - 2225-8329
VL - 12
SP - 626
EP - 640
JO - International Journal of Academic Research in Accounting Finance and Management Sciences
JF - International Journal of Academic Research in Accounting Finance and Management Sciences
IS - 3
ER -