CORPORATE GOVERNANCE MOSAIC AND FINANCIAL REPORTING QUALITY, THE

INTRODUCTION

One of the greatest in quantity important functions that corporate governance can play is in ensuring the quality of the financial reporting proces Levitt ( 1999 2) stated in a articulate utterance to directors, "the link between a company's directors and its financial reporting a whole has never been more crucial." Further, the azure Ribbon Commission (1999) called for auditors to discuss with the audit committee the quality and not just the acceptability of the financial reporting alternatives.

Corporate governance has received increasing emphasis the one and the other in practice and in academic research (eg cerulean Ribbon Committee Report 1999; Ramsay Report 2001; Sarbanes-Oxley 2002; Bebchuk and Cohen 2004) This emphasis is to be paid in part, to the prevalence of highly publicized and egregious financial reporting frauds similar as Enron, WorldCom, Aldelphia, and Parmalat, an unprecedent number of earnings restatements (Loomis 1999; Wu 2002; Palmrose and Scholz 2002; Larcker et al. 2004) and claims of blatant earnings manipulation by the agency of corporate management (Krugman 2002). Further, academic research has base an association between weaknesses in governance and poor financial reporting quality, earnings manipulation, financial statement fraud, and weaker internal superintendences (e.g., Dechow et al. 1996; Beasley 1996; McMullen 1996; Beasley et al. 1999; Beasley et al. 2000; Carcello and Neal 2000; Krishnan 2001; Klein 2002b) Given these unfoldings there has been an emphasis upon the need to improve corporate governance above the financial reporting process (eg Levitt 1998 1999 2000) similar as enacting reforms to improve the effectiveness of the audit committee (Blue Ribbon Committee 1999; Sarbanes-Oxley Act 2002) and to make the board of directors and management more accountable for ensuring the integrity of the financial reports (SEC 2002 The Business Roundtable 2002) as well as a rapidly expanding of research upon corporate governance.

The purpose of this paper is to review research upon corporate governance and its impact upon financial reporting quality. This review will obey three objectives: (1) to allude to a corporate governance "mosaic"(i.e., the interactions among the actors and institutions that affect corporate governance) that encompasses a broader view of governance than has been considered in prior accounting research; (2) to provide an overview of the principal findings of prior research; and (3) to identify important gaps in the research that show promising avenues for future investigation Accordingly, the remainder of the paper is divided into the following three sections. The nearest section provides a general framework for understanding the corporate governance mosaic and its impact upon financial reporting quality. This section is followed by dint of a discussion of prior research, dealing respectively with the character of the following actors in the corporate governance mosaic: (1) the board of directors and the audit committee; (2) the external auditor; and (3) the internal auditors. The final section provides a summary of areas for subsequent time research.

THE CORPORATE GOVERNANCE MOSAIC

Figure 1 provides an overview of the corporate governance mosaic and its impact upon financial reporting quality. Prior accounting research and the accounting profession have focused primarily upon the board of directors and the audit committee. For instance, the Public Oversight Board (POB 1993) defined corporate governance as "those oversight activities undertaken by means of the board of directors and audit committee to render certain the integrity of the financial reporting process" However, a narrow view of corporate governance restricting it to sole monitoring activities may potentially undervalue the character that corporate governance can play.

Further, in a novel meta analysis of corporate governance research, Larcker et al. (2004 1) end that "the typical structural indicators used in academic research and institutional rating services have actual limited ability to explain managerial behavior and organizational performance." Thus, as depicted in Figure 1 a more comprehensive framework should consider all major stakeholders in the governance mosaic, including those inside and outside the firm. For instance, the external auditor plays a significant part in monitoring financial reporting quality and hence can be viewed as an important participant in the governance proces We do not glance at that extant research has not direct the eyeed at the role of the auditor on the contrary rather that the role of the auditor in the governance proces is actual complex as the auditor interacts with other stakeholders in the governance mosaic like as the audit committee and the management. In turn round the interplay among the stakeholders is affected by the agency of outside forces such as by the agency of regulators and stock exchanges as well as crushing to meet financial analysts. Further, the corporate governance mosaic glance ats we need to look beyond plenteous of the focus of general research in corporate governance that has concentrated upon documenting associations and not causal relationships (Larcker et al. 2004) and to tale the current research by also investigating the substance of the interactions in the corporate governance arena. For example, although the emphasis in corporate governance research has been upon looking at issues of independence, Cohen et al. (2002) document that unles management allows itself to be monitored the substance of governance activities will be subverted