Research Insights: Board Reforms Improve Financial Reporting

In response to this divergence of conclusions, Rong Yang, professor in the department of finance and accounting, coauthored an article, “The Impact of Board Reforms on Audit Fees: International Evidence,” in the Journal of Business Finance & Accounting. Yang and her collaborators hypothesized that board reforms are positively associated with audit fees, that those fees are more significant for firms switching from non-Big N to Big N auditors, that board reforms are negatively associated with the likelihood of restatements, and that board reforms are positively associated with analyst forecast accuracy and management forecast frequency.

To test their hypotheses, Yang and her coauthors collected board reform data covering the years 1990 to 2013 for 31 countries. They constructed a set of variables including audit fees and client-, auditor-, analyst-, and country-level characteristics. In total, the final sample included 87,504 firm-year observations. The primary comparison of interest was audit fees in the pre-and post-reform periods.

The results supported all hypotheses, including the view that following board reforms, audit fees increase upon demand for improved audit quality and information transparency. The study confirms that board reforms—having a separate audit committee and independent directors—do in fact improve audit reporting quality. Although some might argue that high-quality auditing is too costly, companies need and benefit from improved audit quality and information transparency in the post-reform period.

View paper in Journal of Business Finance & Accounting (2023), The Impact of Board Reforms on Audit Fees: International Evidence.