Is audit committee expertise connected with increased readability of integrated reports: Evidence from EU companies

  • Received January 23, 2018;
    Accepted March 29, 2018;
    Published April 20, 2018
  • Author(s)
    Patrick Velte
    ORCID Researcher ID
  • DOI
    http://dx.doi.org/10.21511/ppm.16(2).2018.03
  • Article Info
    Volume 16 2018, Issue #2, pp. 23-41
  • TO CITE АНОТАЦІЯ
  • Cited by
    33 articles
  • 1798 Views
  • 457 Downloads

Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License

This study contributes to the recent “managerial ability” literature and analyses the impact of audit committees’ financial and sustainability expertise (i.e. combined and separately as individuals) on the readability of integrated reports. Analyses were conducted with data on a sample of European Union (EU) public interest entities (PIE) from the Examples Database of the International Integrated Reporting Council (IIRC) for the fiscal years 2014–2016 (i.e. 215 firm-year observations). Correlation and regression analyses were conducted to evaluate possible links between either financial or sustainability expertise and combined financial and sustainability expertise in audit committees and the readability of integrated reports, as measured by the Flesch Reading Ease and Gunning Fog indices. While audit committees’ financial and sustainability expertise has a positive impact on the readability of integrated reports, combined expertise has a stronger effect compared with either financial or sustainability expertise. This finding is in line with the idea that, to combine financial and sustainability information in integrated reports, audit committees need to have more diverse expertise. Companies, regulators and researchers could be significantly affected by the finding that managerial ability variables such as audit committee expertise can have a considerable impact on integrated reporting.

view full abstract hide full abstract
    • Table 1. Survey sample
    • Table 2. Financial and sustainability expertise on the audit committee
    • Table 3. Flesch reading ease score
    • Table 4. Variables of the study
    • Table 5. Development of the integrated reporting readability (IR)
    • Table 6. Descriptive statistics
    • Table 7. Pearson correlation matrix
    • Table 8. Regression analysis (Flesch Reading Ease index)
    • Table 9. Robustness checks (Fog index)
    • Aldamen, H., Hollindale, J., & Ziegelmayer, J. L. (2016). Female audit committee members and their influence on audit fees. Accounting and Finance (online first).
    • Barth, M. E., Cahan, S. F., Chen, L., & Venter, E. R. (2017). The economic consequences associated with integrated reporting quality: capital markets and real effects (Working paper). Pretoria.
    • Beasley, M. S., Carcello, J. V., Hermanson, D. R., & Neal, T. L. (2009). The audit committee oversight process. Contemporary Accounting Research, 26, 65-122.
    • Bloomfield, R. (2008). Discussion of Annual report readability, current earnings, and earnings persistence. Journal of Accounting and Economics, 45, 248-252.
    • Chapple, E., Chen, Z., & Zhang, Y. (2017). Sustainability Committee Effectiveness and CSR Assurance (Working Paper). Queensland.
    • Cheng, M., Green, W., Conradie, P., Konishi, N., & Romi, A. (2014). The International Integrated Reporting Framework: Key Issues and Future Research Opportunities. Journal of International Financial Management and Accounting, 25, 90-119.
    • Cohen, J. R., Hoitash, U., Krishnamoorthy, & Wright, A. M. (2014). The Effect of Audit Committee Industry Expertise on Monitoring the Financial Reporting Process. The Accounting Review, 89, 243-273.
    • De Villiers, C., Rinaldi, L., & Unerman, J. (2014). Integrated Reporting: Insights, gaps and an agenda for future research. Accounting, Auditing and Accountability Journal, 27, 1042-1067.
    • De Villiers, C., Venter, E.R., & Hsiao, P. C. K. (2016). Integrated reporting: background, measurement issues, approaches and an agenda for future research. Accounting and Finance (online first).
    • Dienes, D., & Velte, P. (2016). The impact of supervisory board composition on CSR reporting. Evidence from the German two-tier system. Sustainability, 8, 63.
    • Dienes, D., Sassen, R., & Fischer, J. (2016). What are the drivers of sustainability reporting? A systematic review? Sustainability Accounting, Management and Policy Journal, 7, 154-189.
    • Dowling, J., & Pfeffer, J. (1975). Organizational legitimacy: social values and organizational behaviour. The Pacific Sociological Review, 18, 122-136.
    • EU Commission (2014a). Directive 2014/95/EU of the European Parliament and the Council of 22 October 2014 amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information by certain large undertakings and groups.
    • EU Commission (2014b). Regulation (EU) No 537/2014 of the European Parliament and of the Council of 16 April 2014 on specific requirements regarding statutory audit of public-interest entities and repealing Commission Decision 2005/909/EC. Official Journal of the European Union L, 158, 77-112.
    • EU Commission (2014c). Directive 2014/56/EU of the European Parliament and of the Council of 16 April 2014 amending Directive 2006/43/EC on statutory audits of annual accounts and consolidated accounts. Official Journal of the European Union L, 158, 196-226.
    • Eccles, R. G., & Krzus, M. P. (2010). One report. Integrated reporting for a sustainable strategy. Hoboken: Wiley.
    • Eccles, R. G., & Krzus, M. P. (2015). The integrated reporting movement - meaning, momentum motives, and materiality. Hoboken: Wiley.
    • Eccles, R. G., & Serafeim, G. (2011). Accelarating the Adoption of Integrated Reporting (Working Paper). Havard.
    • Eccles, R. G., & Serafeim, G. (2015). Corporate and integrated reporting. A Functional Perspective. S. A. Mohrmann, J. O’Toole, & E. Lawler (Eds.), Corporate stewardship. Achieving sustainable effectiveness (pp. 156-171). Sheffield, Greenleaf Publishing.
    • Eccles, R. G., & Spiesshofer, B. (2015). Integrated reporting for a re-imagined capitalism (Working paper). Harvard.
    • Fasan, M., & Mio, C. (2017). Fostering Stakeholder Engagement. The Role of Materiality Disclosure in Integrated Reporting. Business Strategy and the Enviroment, 26, 288-305.
    • Fischer, T. M., & Sawczyn, A. A. (2013). The relationship between corporate social performance and corporate financial performance and the role of innovation. Evidence from German listed firms. Journal of Management Control, 24, 27-52.
    • Flower, J. (2015). The International Integrated Reporting Council: a story of failure. Critical Perspectives on Accounting, 27, 1-17.
    • Frias-Aceituno, J. V., Rodriguez-Ariza, L., & Garica-Sanchez, I. M. (2013). Is integrated reporting determined by a country’s legal system? An exploratory study. Journal of Cleaner Production, 44, 45-55.
    • German Corporate Governance Code (GCGC) (2017). German Corporate Governance Code.
    • Godfrey, P. C., Merrill, C. B., & Hansen, J. M. (2009). The relationship between corporate social responsibility and shareholder value: An empirical test of the risk management hypothesis. Strategic Management Journal, 30, 425-455.
    • Gray, R., Kouhy, R., & Lavers, S. (1995). Corporate social and environmental reporting – A review of the literature and a longitudinal study of UK disclosure. Accounting, Auditing and Accountability Journal, 8, 47-77.
    • Habbash, M. (2016). Corporate governance and corporate social responsibility disclosure: evidence from Saudi Arabia. Social Responsibility Journal, 12, 740-754.
    • Hair, J. F., Black, W. C., Babin, B. J., & Anderson, R. E. (2009). Multivariate Data Analysis (7 ed.). Prentice Hall.
    • Haji, A. A., & Anifowose, M. (2016). Audit Committee and Integrated Reporting Practice. Does Internal Assurance Matter? Managerial Auditing Journal, 31, 915-948.
    • Haller, A., & Staden, C. V. (2014). The value added statement – an appropriate instrument for integrated reporting. Accounting, Auditing and Accountability Journal, 27, 1190-1216.
    • Haniffa, R. M., & Cooke, T. E. (2002). Culture, corporate governance, and disclosure in Malaysian corporation. Abacus, 38, 317-349.
    • Hasan, M. M. (2017). Managerial ability, annual report readability and disclosure tone (Working paper).
    • Hill, C. W. L., & Jones, T. M. (1992). Stakeholder-Agency Theory. Journal of Management Studies, 29, 131-154.
    • Holzman, E. R., & Miller, B. P. (2017). The Role of Management Talent in the Production of Informative Regulatory Filings (Working Paper).
    • IIRC (2013a). The International Framework, International Integrated Reporting Council.
    • IIRC (2013b). Capitals Background Paper for
    • Jensen, M. C., & Meckling, W. H. (1976). Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure. Journal of Financial Economics, 3, 305-360.
    • Johansen, T. R. (2016). EU Regulation of Corporate Social and Environmental Reporting. Social and Environmental Accountability Journal, 36, 1-9.
    • Kang, W. S., Kilgore, A., & Wright, S. (2011). The effectiveness of audit committees for low- and mid-cap firms. Managerial Auditing Journal, 26, 623-650.
    • Kaya, C. T., Ergüden, A. E., & Sayar, A .R. Z. (2016). Essence of Integrated Reporting: A Holistic Framework for Sustainability and Value Creation. International Journal of Academic Research in Accounting, Finance and Management Sciences, 6, 29-34.
    • Krishnan, J., Wen, Y., & Zhao, W. (2011). Legal expertise on Corporate Audit Committees and Financial Reporting Quality. The Accounting Review, 86, 2099-2130.
    • Kusnadi, Y., Leong, K. S., Suwardy, T., & Wang, J. (2016). Audit Committees and Financial Reporting Quality in Singapore. Journal of Business Ethics, 139, 197-214.
    • Lee, K. W., Yeo, G. H. H. (2016). The association between integrated reporting and firm evaluation. Review of Quantitative Finance and Accounting, 47, 1221-1250.
    • Leuz, C., & Wysocki, P. D. (2016). The Economics of Disclosure and Financial Reporting Regulation: Evidence and Suggestions for Future Research. Journal of Accounting Research, 54, 525-622.
    • Li, F. (2008). Annual report readability, current earnings, and earnings persistence. Journal of Accounting and Economics, 45, 221-247.
    • Loughran, T., McDonald, B. (2014). Measuring Readability in Financial Disclosures. The Journal of Finance, 69, 1643-1671.
    • Loughran, T., McDonald, B. (2016). Textual Analysis in Accounting and Finance: A Survey. Journal of Accounting Research, 54, 1187-1230.
    • Mahoney, L. S., Thorne, L., Cecil, L., & LaGore, W. (2013). A research note on standalone corporate social responsibility reports: Signaling or greenwashing? Critical perspectives on Accounting, 24, 350-359.
    • Melloni, G., Caglio, A., & Perego, P. (2017). Saying more with less? Disclosure conciseness, completeness and balance in integrated reports. Journal of Accounting and Public Policy (online first).
    • Michelon, G., & Parbonetti, A. (2012). The effect of corporate governance on sustainability disclosure. Journal of Management and Governance, 16, 477-509.
    • Monciardini, D. (2016). The ‘Coalition of the Unlikely’ Driving the EU Regulatory Process of Non-Financial Reporting. Social and Environmental Accountability Journal, 36, 76-89.
    • Morros, J. (2016). The integrated reporting: A presentation of the current state of art and aspects of integrated reporting that need further development. Intangible Capital, 12, 336-356.
    • Müller, S., Stawinoga, M., & Velte, P. (2015). Stakeholder expectations on CSR management and current regulatory developments in Europe and Germany. Corporate Ownership and Control, 12, 505-512.
    • O’Donovan, G. (1999). Managing legitimacy through increased corporate environmental reporting: an exploratory study. Interdisciplinary Environmental Review, 1, 63-99.
    • Peters, G. F., & Romi, A. M. (2015). The Association between Sustainability Governance Characteristics and the Assurance of Corporate Sustainability Reports. Auditing, 34, 163-198.
    • Oliver, J., Vesty, G., & Brooks, A. (2016). Conceptualising integrated thinking in practice. Managerial Auditing Journal, 31, 228-248.
    • Plessis, J. J. D., & Rühmkorf, A. (2015). New trends regarding sustainability and integrated reporting for companies: what protections do investors have? The Company Lawyer, 36, 49-62.
    • Roberts, P. W., & Dowling, G. R. (2002). Corporate reputation and sustained superior financial performance. Strategic management journal, 23, 1077-1093.
    • Rossi, A., & Tarquinio, L. (2017). An Analysis of Sustainability Report Assurance Statements. Evidence from Italian Listed Companies. Managerial Auditing Journal (online first).
    • Schaltegger, S., & Burritt, R. (2015). Business Cases and Corporate Engagement with Sustainability: Differentiating Ethical Motivations. Journal of Business Ethics (online first).
    • Serafeim, G. (2015). Integrated Reporting and Investor Clientele. Journal of Applied Corporate Finance, 27, 34-51.
    • Shocker, A., & Sethi, P. (1973). An approach to incorporating societal preferences in developing corporate action strategies. California management review, 15, 97-105.
    • Soh, D. S. B., Leung, P., & Leong, S. (2015). The development of integrated reporting and the role of the accounting and auditing profession. In M. M. Rahim, & S. O. Idowu (Eds.), Social audit regulation – development, challenges and opportunities (pp. 33-57). Springer: Cham.
    • Stent, W., & Dowler, T. (2015). Early assessments of the gap between integrated reporting and current corporate reporting. Meditari Accountancy Research, 23, 92-117.
    • Uygur, O. (2017). CEO ability and corporate opacity. Global Finance Journal (online first).
    • Velte, P. (2017). The link between audit committees, corporate governance quality and firm performance: a literature review. Corporate Ownership and Control, 14, 15-31.
    • Velte, P., & Stawinoga, M. (2017a). Empirical research on corporate social responsibility assurance (CSRA): A literature review. Journal of Business Economics, 87, 1017-1066.
    • Velte, P., & Stawinoga, M. (2017b). Integrated reporting: The current state of empirical research, limitations and future research implications. Journal of Management Control, 28, 275-320.
    • Velte, P., & Stiglbauer, M. (2011). Impact of audit committees with independent financial experts on accounting quality. Problems and Perspectives in Management, 9, 17-33.
    • Waddock, S. A., & Graves, S. B. (1997). The corporate social performance–financial performance link. Strategic Management Journal, 18, 303-319.
    • Wintoki, M. B., Linck, J. S., & Netter, J. M. (2012). Endogeneity and the dynamics of internal corporate governance. Journal of Financial Economics, 105, 581-606.
Related Articles

  • The relationship between corporate social responsibility and earnings management: accounting for endogeneity

    Hyunjung Choi , Byungchul ChoiORCID , Jungyoon ByunORCID doi: http://dx.doi.org/10.21511/imfi.15(4).2018.06
    Investment Management and Financial Innovations Volume 15, 2018         Issue #4         pp. 69-84 Views: 4329 Downloads: 493 TO CITE АНОТАЦІЯ

    This study examines the relationship between corporate social responsibility (CSR) and earnings management after controlling for endogeneity of CSR. Using a sample of non-financial firms listed on Korean Securities Market between 2002 and 2010, this study finds that ignoring endogeneity biases the estimated relation between CSR and earnings management. Specifically, the results show that the negative and significant relation between CSR commitment and discretionary accruals reported in the previous studies becomes insignificant. However, the negative and significant relation between CSR commitment and real activities manipulation remains significant even when the endogeneity of CSR commitment is taken into account. Therefore, this study provides evidence that proactive CSR engagement significantly affects firm’s practice of real activities manipulation, while it does not affect its practice of discretionary accruals. These results indicate that CSR commitment leads managers to be more responsible in management of operational activities than in accruals management.

  • Does board composition have an impact on CSR reporting?

    Patrick VelteORCID Researcher ID doi: http://dx.doi.org/10.21511/ppm.15(2).2017.02
    Problems and Perspectives in Management Volume 15, 2017         Issue #2         pp. 19-35 Views: 4178 Downloads: 1609 TO CITE АНОТАЦІЯ

    Corporate social responsibility (CSR) reporting plays a key role in management control, particularly in light of the increased demand for non-financial reporting after the financial crisis of 2008–2009. This literature review evaluates 47 empirical studies that concentrate on the influence of several board composition variables on the quantity and quality of CSR reporting. The author briefly introduces the research framework that underpins current empirical studies in this field. This is followed by a discussion of the main variables of board composition: (1) committees (audit and CSR committees), (2) board independence, (3) board expertise, (4) CEO duality, (5) board diversity (gender and foreign diversity), (6) board activity, and (7) board size. The author, then, summarizes the key findings, discusses the limitations of the existing research and offers useful recommendations for researchers, firm practice and regulators.

  • Corporate governance and financial performance: an empirical analysis of selected multinational firms in Nigeria

    Gideon Tayo Akinleye , Odunayo OlarewajuORCID Researcher ID, Bamikole Samson Fajuyagbe doi: http://dx.doi.org/10.21511/ppm.17(1).2019.02
    Problems and Perspectives in Management Volume 17, 2019         Issue #1         pp. 11-18 Views: 3123 Downloads: 516 TO CITE АНОТАЦІЯ

    This study focused on corporate governance and performance of selected Nigerian multinational firms from 2012 to 2016. Specifically, the study focused on the effect of board size, activism and committee activism on return on asset and firm growth rate. Secondary data collected from four multinational firms were analyzed via static panel estimation techniques. While board size and board activism exerted significant negative impact on return on asset, committee activism exerted insignificant impact. The results of the study further showed that board size and board activism exert insignificant negative impact on firm’s growth rate, while committee activism insignificantly spurs firm’s growth rate. Decisively, discoveries from this study reflect that corporate governance has significant negative impact on return on asset, but has insignificant influence on the growth rate of Nigerian multinational firms. Based on these findings, the authors recommended that corporate governance dynamics in firms world over should be reconsidered, such that it gives credence to more than just numbers of persons or meetings held, but the main reasons and deliberations in such meetings. It was also recommended that excessive increase in magnitude or frequency of meetings held by board of directors cum committee should be avoided.

Download Preview
Close
Problems and Perspectives in Management
Problems and Perspectives in Management