Corporate governance, female directors and quality of financial information

• Author: Gustau Olcina‐Sempere,María Consuelo Pucheta‐Martínez,Inmaculada Bel‐Oms
• Published date: 01 October 2016
• Date: 01 October 2016
• DOI: http://doi.org/10.1111/beer.12123

Corporate governance, female

directors and quality of

financial information

Mar

ıa Consuelo Pucheta-Mart

ınez

1

,

Inmaculada Bel-Oms

1

and

Gustau Olcina-Sempere

2

1. Department of Finance and Accounting, University Jaume I, Campus del Riu Sec S/n, 12071 Castell

on, Spain

2. Department of Education, University Jaume I, Campus del Riu Sec S/n, 12071 Castell

on, Spain

The aim of this study is to examine whether gender diversity on audit committees (hereinafter, ACs)

influences financial reporting quality by using panel data of Spanish listed firms. The financial reporting

quality of firms is measured by the type of opinion received in the audit report. We estimate various panel

data models of audit opinions and control for factors that are traditionally found to impact audit opinions.

This study provides evidence to support the hypotheses that the percentage of females on ACs reduces the

probability of qualifications due to errors, non-compliance or the omission of information. Furthermore, the

results also find that the percentage of female directors on ACs, the percentage of independent female

directors on ACs and ACs chaired by females increase the likelihood of further transparency by disclosing

audit reports with uncertainties and scope limitation qualifications.

Introduction

According to corporate governance literature (e.g.

Huse & Solberg 2006, Adams & Ferreira 2009,

Erhardt et al. 2003, Nielsen & Huse 2010), the effi-

ciency and functioning of corporate boards and

board subcommittees can be affected by gender

diversity. This can explain why one of the most rele-

vant issues currently facing the shareholders and

managers of modern firms, mass media, politicians

and policy-makers is the role of gender diversity in

the corporate governance system.

The aim of this paper is to examine the role of

female directors in corporate governance and, con-

cretely, on the effectiveness of audit committees

(hereinafter, ACs) in terms of enhancing the quality

of financial information. Therefore, we investigate

whether female directors on ACs affect the quality of

financial information reported by listed companies.

Financial reporting quality has been measured by

the type of opinion issued by external auditors in

their reports, in line with Carcello & Neal (2000),

S

anchez Ballesta & Garc



ıa-Meca (2005) and

Pucheta-Mart

ınez & De Fuentes-Barber

a (2007),

who also use the audit opinion as a proxy for finan-

cial reporting quality. The AC is the body responsi-

ble for reviewing the financial information prepared

by the board of directors before it is passed on to the

auditors for examination. The type of audit report

issued by auditors can be influenced by ACs in two

ways. Firstly, ACs may decrease the likelihood of

receiving error or non-compliance qualifications

because they may pressure managers to accept the

adjustment proposed by auditors (see Pucheta-

Mart



ınez & De Fuentes-Barber

a 2007, Garc



ıa-Meca

&S



anchez-Ballesta 2009). If a firm receives a

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Oxford OX4 2DQ, UK and 350 Main St, Malden, MA 02148, USA

doi: 10.1111/beer.12123

363

Business Ethics: A European Review

Volume 25 Number 4 October 2016

qualification for errors, non-compliance and omis-

sion of information, ACs have to inform boards with

the purpose of resolving these matters and getting a

clean opinion from the auditor. Accordingly, ACs

may have an effective role in decreasing the

likelihood of receiving audit reports with errors,

non-compliance and omission of information

qualifications, or at least, the occurrence of them.

Furthermore, McMullen (1996) showed that as part

of their oversight function, ACs ask questions of

both managers and auditors. As a consequence, the

risk of material errors in financial statements may be

reduced since ACs facilitate information flow

between external auditors, company management,

the board of directors and internal auditors. Sec-

ondly, if however, the AC observes any uncertainties

or scope limitations of the financial information, the

members’ task is to ensure that management does

not put pressure on the auditor (Tian & Peterson

2016) to pass over these matters in the audit report

issued. Auditors may accept the demands of manage-

ment for a clean audit report when the firm deserves

a scope limitation and an uncertainty qualification

(Carcello & Neal 2000). Thus, ACs have to ensure

that any uncertainties or scope limitations in finan-

cial statements are brought to the attention of users

in the audit report. ACs may influence the disclosure

of scope limitations and uncertainties qualifications

by auditors, understood as the full intention not to

hide them (managers will be more proactive to hide

scope and uncertainties qualifications) (Pucheta-

Mart



ınez & De Fuentes-Barber

a 2007), and there-

fore, it can be considered as an ethical behaviour

that transmits transparency (Cheung et al. 2007,

Chen et al. 2014). As a consequence, this transpar-

ency will result in an enhancement of financial

reporting quality (Cohen et al. 2004). Accordingly,

AC effectiveness would lead to greater disclosure of

scope limitations and uncertainties.

In the last decade, financial reporting quality and

the financial system in general, have been called into

question in the wake of financial scandals. Examples

of these scandals include: Ahold (2003) in the Neth-

erlands; Parmalat (2003) in Italy; Enron (2001),

Worldcom (2002), Xerox (2002), Lehman Brothers

(2008) and Madoff (2009) in the US; and Gescartera

(2001), Afinsa-F

orum Filat

elico (2006), Bankia

(2011) and Pescanova (2012) in Spain. Meanwhile, a

whole progression of regulations and corporate gov-

ernance recommendations has been issued at both

national and international levels in an effort to miti-

gate the problem. Among these regulations, the pub-

lication of Codes of Corporate Good Governance

(CGGs) can be highlighted. Numerous countries,

including Spain, have shown an interest in CGGs (an

extensive analysis of the most important CGGs can

be found in Ferruz et al. 2010). The ACs play an

important role as a mechanism of corporate gover-

nance (a deeper analysis of ACs can be found in

Braiotta et al. 2010). In Spain, the Financial System

Reform Act, 2002 (Law 44/2002, of 22 November)

obliged listed firms to create ACs.

Our findings contribute to the extant literature in

several ways. Firstly, the results of this study suggest

that having a high proportion of female directors

and independent female directors on ACs, and hav-

ing an AC chairperson who is a female, enhance

financial reporting quality. Consequently, these

results reinforce the belief that gender diversity in

corporate governance is likely to be useful in creating

value for some stakeholders, such as financial infor-

mation users or shareholders, by improving the reli-

ability of financial reporting. Given the implications

of this research for some stakeholders, policy-

makers should encourage gender diversity on ACs.

Secondly, the presence of females in senior manage-

ment positions has increased in recent years with the

political, cultural, social and legal changes in Spain

[C

odigo Unificado de Buen Gobierno (CUBG

2006)); Act 3/2007 of 22 March 2007, for Effective

Equality between Females and Men (LOIEMH

2007)]. However, it seems that these changes are not

enough; therefore, new measures are needed. Our

evidence supports the legislative initiative to

establish gender quotas for females in the decision-

making bodies of a firm, on the basis that AC’s gen-

der diversity enhances financial reporting quality.

However, the LOIEMH (2007) does not take into

account any sanction for firms that do not reach the

gender quota. Thus, the existing legislation should

encourage more participation of females in corpo-

rate bodies, establishing for companies that do not

reach the gender quota, the obligation of providing a

report for users explaining why this quota is not

achieved. As a consequence, the sanctions would

come from the own capital market and society, and

Business Ethics: A European Review

Volume 25 Number 4 October 2016

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