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Codes of good practices provide a soft alternative to the hard legislation approach to corporate governance. These codes include a set of recommendations that companies are expected to follow in order to enhance governance structures and practices. Some of these recommendations specifcally aim to improve the efectiveness of the audit committee. We investigate the relationship between the level of compliance with recommendations on the audit committee of the Spanish Unifed Code and fnancial reporting quality, as measured by discretionary accruals and by the opinion of the audit report. We use a sample of companies listed in the Spanish stock market for the years between 2007 and 2013. Results show a strong and positive relationship between the level of compliance with recommendations and the quality of fnancial reporting. We also report signifcant results for some specifc recommendations. These results are robust to various checks. Therefore, the level of compliance with recommendations on the audit committee might provide a feasible and reliable indicator of the quality of fnancial reports released by the company
6 Concluding remarks
With the aim of enhancing fnancial reporting quality, the SOX Act in the US and similar regulations in other countries mandated changes in the audit committee. Numerous studies since then have investigated whether these requirements have been efective. However, in addition to this “hard” legislation approach to corporate governance, regulators have also adopted a “soft” approach based on codes of good practices. Some of the recommendations of these codes refer to the audit committee. We extend the literature on the efectiveness of the audit committee by investigating the relationship between compliance with recommendations on the audit committee and fnancial reporting quality.
The main result of this research is that there exists a strong and positive relationship between the level of compliance with the recommendations on the audit committee of the Spanish Unifed Code and the quality of fnancial reporting. This result seems robust as it holds across various checks. Additionally, results observed at the level of individual recommendations support the main conclusion that compliance is associated with higher fnancial reporting quality. Therefore, while extant evidence for Spain does not consistently support the view that the audit committee plays a signifcant role in guaranteeing fnancial reporting quality, the results we report are more in line with international evidence. Given the generally high levels of compliance in our sample, the likelihood of reporting signifcant results for our variables of interest was relatively low. Thus, the fact that we report a strong and consistent relationship between compliance and fnancial reporting quality in such a context can be taken as another proof of the robustness of the results.