“Impact of corporate governance mechanisms on financial reporting quality: a study of Indian GAAP and Indian Accounting Standards”

ARTICLE INFO Faozi A. Almaqtari, Abdulwahid Abdullah Hashed, Mohd Shamim and Waleed M. Al-ahdal (2020). Impact of corporate governance mechanisms on financial reporting quality: a study of Indian GAAP and Indian Accounting Standards. Problems and Perspectives in Management, 18(4), 1-13. doi:10.21511/ppm.18(4).2020.01 DOI http://dx.doi.org/10.21511/ppm.18(4).2020.01 RELEASED ON Tuesday, 13 October 2020 RECEIVED ON Thursday, 09 July 2020 ACCEPTED ON Thursday, 01 October 2020


INTRODUCTION
India represents a distinctive environment to tackle corporate governance (CG) issues and comply with the latest converged IFRS requirements. It represents an interesting and important context to assess the influence of CG on IFRS converged standards, Ind. AS . To ensure a smooth transition to IFRS in India from 1 st April 2016, the Institute of Chartered Accountants of India (ICAI) announced a road map for the adoption of Indian Accounting Standards (Ind. AS) (Deloitte, 2017). The convergence of the Indian GAAP to Ind. AS is considered as an extraordinary and essential event in India. This convergence aims to align the local GAAP (Indian GAAP) with international standards (IFRS) and enhance financial reporting quality (FRQ) (Almaqtari, Farhan, et al., 2020). On 16 th February 2015, the Ministry of Corporate Affairs (MCA) notified the adoption of Ind. AS in the Gazette effective from 1 st April 2015. Accordingly, 35 Indian GAAP standards are notified by the MCA as Ind. AS (KPMG, 2015). Ind. AS are named and numbered in the same manner as IFRS standards. A road map was released by the MCA to require companies that have a net worth of Rs. 500 crore or more to prepare their financial statements based on Ind. AS from 1 st April 2016. Further, another class of companies listed or in the process of listing with a net worth of less than Rs. 500 or Rs. 250 crore or more will have to mandatorily implement Ind. AS from 1 st April 2017 (Deloitte, 2017). Recent studies (e.g., Almaqtari, Farhan, et al., 2020;Almaqtari, Shamim, et al., 2020) state that there is a dearth of studies that examine the impact of corporate governance on accounting standards issues, especially after IFRS convergence in India. Accordingly, the present study investigates the influence of CG on FRQ pre-and post-convergence to Ind. AS.

Board effectiveness
Prior studies have documented evidence of the effect of board size on FRQ. For example, Onuorah et al. (2016) state that a small board size will promote the level of cohesion and coordination among them and managers, which is expected to enhance FRQ. Similarly, Ditropoulos and Asteriou (2010) report a relationship between FRQ and CG attributes, including board size. Contradictory, some other studies report no correlation between board size and FRQ (Xie et al., 2003;Chalaki et al., 2012;Ahmed & Duellman, 2006). Concerning board independence, Ahmed and Duellman (2006) advocate a definite relationship between CG characteristics, including board independence, and FRQ. Further, Koh et al. (2007) argue that a higher portion of independent members of the board contributes to enhancing FRQ. However, Onuorah et al. (2016) state that board independence is negatively associated with FRQ. Petra (2007) found that independent board members are not sufficiently qualified to control the managers. Further, independent members' presence makes no effort to guarantee FRQ ). Concerning board meetings, Sarkar et al. (2008) report that board meetings' higher attendance contributes to information quality. Similarly, Chou et al. (2010) found that higher board diligence represented by regular attendance of board meetings is an essential vehicle for the supervising role. In the same line, Xie et al. (2003) and Sarkar et al. (2008) report an association between meeting frequency of boards and lower levels of earnings management. This is also similar to Cho and Rui (2009) and Firth et al. (2007), who stated that earnings responsive coefficient increases with a high meeting frequen-cy level. As far as board expertise is concerned, the evidence of the effect of board expertise on FRQ is established by different studies. Xie et al. (2003) find that earnings management is unlikely to happen in firms that maintain a higher portion of independent and finally literate members. Consistently, García-Meca and Garcia-Sanchez (2018) confirmed that management expertise plays a vital role in FRQ and that capable managers are less possibly to commit opportunistic earnings management to meet bank short-term earnings benchmarks. Similarly, Onuorah et al. (2016) reported that board experience positively affects FRQ proxied by the discretionary accruals. Further, Krishnan and Visvanathan (2008) indicate that board financial expertise enhances board members' efficiency in carrying their monitoring role and accordingly enhances the level of FRQ. Felo et al. (2003) report that the large size of AC positively influences FRQ. In the same context, Bedard et al. (2004) conclude that the likelihood of aggressive earnings management has no significant relationship with AC size. In the same line, Yang and Krishnan (2005) indicate that a larger AC is less possibly to manipulate earnings. Likewise, Choi et al. (2004) indicate that a large size of AC is more likely to comprise different qualified and varied expertise members, which could be an efficient driver to enhance FRQ. Contradictory to the evidence mentioned above, Davidson et al. (2005) concluded insignificant evidence of the positive association between FRQ and AC size. Concerning AC independence, Bedard et al. (2004) and Abbott et al. (2000) report a significant relationship between low levels of earnings management and fraudulent financial reporting, on the one hand, and a higher propor-tion of independent members in AC. However, Yang and Krishnan (2005) and Rahman and Ali (2006) demonstrate the insignificant association between the level of earnings management and the existence of independent members in the AC. In the same context, Beasley et al. (1996) and Abbott et al. (2004) agree that financial statement fraud or earning restatements is linked with the independence of the AC. Regarding AC meetings, Bedard et al. (2004) conclude that there is no significant association between AC meetings' frequency with the likelihood of aggressive earnings management. Consistently, Xie et al. (2003) report a significant association between the AC's activities and the quality of earnings. Further, Van der Zahn and Tower (2004) indicate that earnings management is less likely to occur with the existence of more efficient AC. Likewise, Beasley et al. (1996) indicated that fraud companies in specific industries had fewer AC meetings. In the context of AC expertise, numerous literature is in favor of a higher number of AC expert members for better FRQ. Beasley et al. (2009) and Chen et al. (2006) found that expertise in the face of increasingly complex information assures FRQ. In the same vein, Cohen et al. (2013) advocate that AC expertise positively influences FRQ. Alike, Cohen et al. (2013) stated that investors should appoint an accounting and financial expert director on the AC for positive FRQ and AC effectiveness. In the same way, Cohen et al. (2013) argued that industry experts' attendance on AC enhances FRQ. Further, Carcello and Neal (2003) state that apart from AC members' independence, their financial expertise is another determinant of FRQ. Lee et al. (2013) reveal that listed firms in China have a greater percentage of foreign ownership, expected to enhance their FRQ more under IFRS-converged CAS. Similarly, subsequent research indicates a positive correlation between the increase in foreign ownership, governance transparency, and earning a responsive coefficient (Dong & Xue, 2010). Some other studies suggest that foreign ownership is related to greater corporate accountability and less to information asymmetry (Aggarwal et al., 2011). In contrast, Chalaki et al. (2012) indicated no relationship between CG attributes, including ownership concentration, institutional ownership, and FRQ. Onuorah et al. (2016) revealed that external audit quality has a positive effect on the FRQ proxied by the discretionary accruals of a firm. Further, Davidson et al. (2005) state that there is no relationship between the presence of Big 5 auditor and earnings management. It was also found that the external audit plays a vital role in monitoring management and enhancing FRQ (Watts & Zimmerman, 1983). In the same vein, financial information is more reliable for Big 4 firms than other companies (Becker et al., 1998).

AIM OF THE STUDY
The present study investigates the impact of corporate governance mechanisms on financial reporting quality under Indian GAAP and Ind. AS.

Hypotheses of the study
Based on the arguments presented in the literature review and the aim of the study, the hypotheses of the study are as follows: H 0 7: There is no significant difference in the impact of AC diligence on financial reporting quality between Ind. AS and Indian GAAP.
H 0 8: There is no significant difference in the impact of AC expertise on financial reporting quality between Ind. AS and Indian GAAP.
H 0 9: There is no significant difference in the impact of foreign ownership on financial reporting quality between Ind. AS and Indian GAAP.
H 0 10: There is no significant difference in the impact of audit quality on financial reporting quality between Ind. AS and Indian GAAP.

Sample selection
The sample for the present study includes 97 listed firms listed in the BSE based on using Ind. AS, availability of data, and higher capitalization. The study covers the period from 2014 to 2018 as it is the most recent years in which companies started shifting to Ind. AS. The data required for CG, Ind. AS, and firm-specific variables are manually collected from firms' published annual reports using content analysis. Data for firms' specific and some other financial variables were also extracted from audited firms' financial statements, which are available in the stock market database or the websites of the respected companies.

Independent variables of corporate governance mechanisms
The present study covers four categories of independent variables: board of directors' effectiveness, AC effectiveness, foreign ownership, and audit quality as a measurement of CG mechanism. Appendix A illustrates the variables, definitions, and measurements.

Dependent variable
where TCA j,t of a firm j is aggregate current accruals in year t, CFO j,t is the operating cash flows (OCF) of the current period, CFO j,t−1 is the OCF of the prior period, CFO j,t+1 is the OCF of the coming period, ΔREV is the change in revenues, and PPE j,t is the level of property, plant, and equipment. All the variables in the equation are scaled by lagged by assets. The variables of the study measure the impact of CG on FRQ under Ind. AS (see Figure 1).

Model specification
Following is the research model that examines the impact of CG mechanisms on FRQ:  show that the range of board size (BSIZE) is between a minimum of 5 and 21 members setting in the board with a mean of 11 and standard deviation (SD) of 2.38. This indicates that the minimum number of board sizes is five members on the board, and the largest or maximum board size is 21, with an average of 11 board members. Further, the portion of independent members (BIND) in the board ranges between a minimum of 13% and a maximum of 83% of the total number of board members with a mean of 51% and SD of 13%. This demonstrates that at least 13% of the listed companies' board members are independent members with an average of 51%. Concerning board diligence (BDEL), the results demonstrate that board diligence is at least 66%, with a maximum of 100% and a mean of 87%. This indicates that the attendance of board meetings by board members has a minimum of 66%. Likewise, board financial expertise (BEXP) is between a minimum of 50% and a maximum of 90% of board members who are financially literate in the field of accounting, management, and finance or related areas with a mean of 57% and SD of 15% (see Table 1 and Figure 2). Concerning AC attributes, the results illustrate that ACSIZE ranges between a minimum of 3 members and a maximum of 7 members in the committee with an average of 4 members. Further, AC independence (ACIND), which is one of the most important mechanisms of CG, has a minimum of 33% members as independent members in the AC and a maximum of 100% with an average of 83%. This means that AC in listed companies have at least two independent members out of three members setting in the AC with an average of 4 independent members out of 5 members of the total number of AC members. The results also indicate that the attendance of AC members (ACDEL) in the meeting of the committee conducted is scoring a minimum of 72% attendance and a maximum of 100% with an average of 90%. AC expertise (ACEXP) is also between a minimum of 33% and a maximum of 100 %, with an average of 76% of the AC members who are financially literate. This suggests that the AC members' financial expertise in the listed companies from India in the field of accounting, finance, CG, and other related areas is at least onefourth of the total number of AC members or they are fully financially literate.

Descriptive analysis
In terms of foreign ownership, the results indicate that the minimum percentage of foreign shares is 2.3%, with an average of 39%. Regarding audit quality measured by Big 4 international auditors, the results show that about 31% of the selected companies from India are audited by Big 4 against 69% audited by non-Big 4.

Correlation analysis
The correlation results show a positive correlation of FRQ with BSIZE, BIND, BEXP, and ACEXP but a negative correlation with other variables. Besides, positive and negative relationships are observed between the independent variables. Further, the correlation coefficients indicate that FRQ has a positive association with all variables, except for BDEL, ACSIZE, FOWN, and BIG4. In contrast, in the case of Indian GAAP, the results show a negative correlation between FRQ and other variables except for BSIZE and BEXP. This indicates an improvement in the relationship between CG mechanisms and FRQ under Ind. AS, which is better than Indian GAAP. Overall, the correlation among the independent variables does not exceed 0.70, which means that multicollinearity issues do not exist among the independent variables. The results of the correlation are available on request.  Considering board independence (BIND), the results in Table 3 show that BIND has a statistically significant impact on FRQ at the level of 5% (p-value = 0.03 < 0.02 The results in Table 3 show a statistically significant impact of BEXP on FRQ. It has a positive significant effect on FRQ at the level of 1% (p = 0.00 < 0.01). However, the impact of BEXP on RFQ under the two sets of accounting standards remained unchanged. While it has a statistically significant effect at the level of 1% (p = 0.00 < 0.1) in the case of Ind. AS, it has the same impact in the case of the Indian GAAP. Accordingly, H 0 4 is supported. Consistently, García-Meca and Garcia-Sanchez (2018) confirmed that management skills play a crucial role in enhancing FRQ and that capable managers are less possibly to manipulate earnings on time to meet the bank's short-term earnings benchmarks.

Results and discussion
AC size (ACSIZE) exhibits a significant but negative impact on FRQ at the level of 1%. The significant impact of AC size on FRQ could be attributed to the range of AC size, ranging between a minimum of 3 and a maximum of 7 members in the committee with an average of 4 members. Concerning the impact of AC size on FRQ under the different sets of accounting standards, the results depict no change of this influence from the old accounting standards to the new accounting standards. It can also be concluded that the impact of ACSIZE on FRQ has not changed from Indian GAAP to Ind. AS. Thus, this leads to accepting H 0 5. Consistently, Pucheta-Martinez and De Fuentez (2007) found that the size of AC significantly influences the receipt of audit reports, including non-compliance or error qualifications.
AC structure indicated by the percentage of independent members of AC (ACIND) has a significant negative impact on FRQ at the level of 1% (p = 0.00 < 0.01). This means that AC independence is significantly but negatively linked with FRQ. As far as the different sets of accounting standards are considered, the significant impact of ACIND on FRQ has not changed. However, the effect of BIND under Indian GAAP (p = 0.00 0.01 <) is better than the new accounting standards; Ind. AS (p = 0.04 0.5 <). Accordingly, H 0 6 is accepted. The same results were also confirmed by Kamarudin et al. (2012) who reported that the independence of an AC was related to a higher quality of earnings. However, Choi et al. (2004) provided evidence of a negative association between AC members' independence and the management of earnings.
The results in Tables 2 and 3 Foreign ownership statistically exhibits insignificant effect on FRQ at any level of significance (1%, 5% and 10%) (p = 0.73 > 0.10). This could be as a result that India has its accounting standards and has shifted to Ind. AS, which is equivalent to IFRS, rather than shifting to the global version of IFRS, may not attract foreign investors. Further, the effect of foreign ownership on FRQ has changed from a significant effect under the Indian GAAP to be insignificant under Ind. AS. This indicates that foreign ownership may think that the new accounting standards will not contribute to FRQ. Thus, this leads to rejecting H 0 9. In contrast, Chalaki et al. (2012) found no connection between CG attributes like the concentration of ownership, institutional ownership, and FRQ. Further, some studies such as Y. Bozec and R. Bozec (2007) found that ownership concentration insignificantly affects FRQ.
The results in Table 2

CONCLUSION
The present research attempts to assess the influence of CG mechanisms on FRQ. CG mechanisms have been considered as independent variables, and FRQ is the dependent variable. CG mechanisms included in the model are board effectiveness (size, independence, diligence, and expertise), AC attributes (size, independence, diligence, and expertise), foreign ownership, and audit quality. Descriptive analysis was firstly provided for all independent, dependent, and control variables. Then, correlation analysis was conducted and discussed to diagnose the correlations among variables and explore multicollinearity problems. Finally, an estimation of the impact of CG mechanisms on FRQ was introduced by conducting OLS regression models. A sample of 97 firms listed on the Bombay Stock Exchange from 2014 to 2018 was used.
The results found that the size of the board has a statistically significant positive impact on the FRQ. Further, the impact of BSIZE on FRQ under the two sets of accounting standards demonstrated that BSIZE has a statistically significant impact on FRQ under both sets of accounting standards. Considering board independence (BIND), the results showed that BIND has a statistically significant impact on FRQ. Further, the impact of BIND under the different sets of accounting standards showed no statistical evidence to support the difference between both accounting standards (Ind. AS and Indian GAAP). Board diligence (BDEL) indicated a statistically significant negative effect on FRQ. However, the impact of BDEL on FRQ has changed from a significant effect under Indian GAAP to an insignificant effect under Ind. AS. In the same context, BEXP exhibited a significant positive effect on FRQ, but this effect under the two sets of accounting standards remained unchanged. AC size (ACSIZE) exhibited a significant but negative impact on FRQ. This effect, under the different sets of accounting standards, was found to be the same. Further, AC independence was found to have a significant negative impact on FRQ and remained unchanged under the different sets of accounting standards. The results revealed that BDEL has no impact on FRQ and remained unchanged under different accounting standards. ACEXP showed a statistically significant effect on FRQ, and it has changed from insignificant under Indian GAAP to be significant under Ind. AS. Foreign ownership exhibited an insignificant effect on FRQ; however, the effect of foreign ownership on FRQ has changed from a significant effect under the Indian GAAP to be insignificant under Ind. AS. Finally, the results reported that Big-Four has a significant impact on FRQ; however, it was found to have an insignificant impact under both Indian GAAP and Ind. AS.