Academic journal article Journal of Economic and Social Development

Audit Quality and Corporate Governance: Evidence from the Bucharest Stock Exchange

Academic journal article Journal of Economic and Social Development

Audit Quality and Corporate Governance: Evidence from the Bucharest Stock Exchange

Article excerpt

1. Introduction

Corporate governance is perceived as being a key-element in the capital market`s development. According to World Bank Report - Improving Corporate Governance in Emerging Markets (2011), good corporate governance reduces the emerging markets` vulnerability associated to financial crisis, reduces the capital and transactions cost and, moreover, conducts to the development of capital markets, due to the fact that the capital markets represent a transparency conductor.

Corporate governance has been perceived as a vital tool in assessing the company`s health, especially under conditions of financial distress, such as the financial crisis. According to Adeyemi and Temitope (2010), the weakness of corporate governance is perhaps the most important factor blamed for the corporate failure, reason why the issue of good corporate governance practices gains a vivid importance, especially after the economic and financial crisis.

The company`s decision of adopting a specific corporate governance mechanism is influenced by a series of endogenous factors, such as the fundamental characteristics of that entity, managerial attributes and other corporative variables. Still, one of the most important functions that the corporate governance can fulfil is the one of assuring the quality of financial reporting (Cohen, Wright and Krishnamoorthy, 2004). In order to achieve its goal, out of the corporate governance mosaic, the audit committee plays a critical role by its main attribute of overseeing the financial reporting process under its major duty of certifying the integrity and credibility of financial reports.

This research aims to investigate the association between audit quality and corporate governance attributes in the case of Romanian`s listed entities. In Romania, one of the European Union`s emerging economies, the Bucharest Stock Exchange has proven its interest in the importance of corporate governance area by implementing a Code of Corporate Governance and specific Guidelines applicable to the listed companies since 2008.

The Bucharest Stock Exchange Code of Corporate Governance addresses a series of specific aspects related to corporate governance, such as corporate governance structures, shareholders` rights, the Board composition, transparency, financial reporting, internal control and risk management. Although the Code embraces a wide area of corporate governance aspects, its adoption by the listed companies is made on a voluntary basis, fact that leads to the assertion that the corporate governance rules elaborated by the Bucharest Stock Exchange are neither legally binding, nor mandatory.

Taking the previous aspects into consideration, it can be stated that the Romanian`s Code of Corporate Governance role is to promote a transparent and responsible managerial behaviour in accordance with international best practices, without enforcing these rules applicable for the listed companies. Based on this aspect, it is very difficult to capture the way the external auditors interact with the corporate governance practices adopted on a voluntary basis by the client.

The reminder of this paper is organized as it follows: Section 2 provides the relevant literature review, being centred on the researches conducted in the area of corporate governance and external auditor, Section 3 is dedicated to the research design and the methodology used in order to test the regression, while the last part of this article concerns the interpretations of the research`s results. Finally, Section 5 presents the limitations of this research and Section 6 reveals the main conclusions arising from the findings of this study.

2. Literature review

According to Deloitte (2013), the audit committee is seen as a ``key fulcrum of any company``, thus the responsibility for assessing effectiveness of the audit committee is assuming more and more importance.

The Chief Executive Officer duality signals the separation between decision control and decision management (Fama and Jensen, 1983; Finkelstein and D'Aveni, 1994), fact that leads to a concentration of power that reduces board monitoring effectiveness (Finkelstein and D'Aveni, 1994) which resides into lack of transparency and high information asymmetry. …

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