Effect of corporate governance attributes on IFRS compliance: evidence from a developing country

• Pages: 1-22
• DOI: https://doi.org/10.1108/CG-03-2020-0103
• Date: 17 November 2020
• Published date: 17 November 2020
• Subject Matter: Corporate governance,Strategy
• Author: Martin Kabwe,Erastus Mwanaumo,Henry Chalu

Effect of corporate governance attributes

on IFRS compliance: evidence from

a developing country

Martin Kabwe, Erastus Mwanaumo and Henry Chalu

Abstract

Purpose –This study aims to analyzethe relationship between corporate governanceattributes and the

InternationalFinancial Reporting Standard(IFRS) compliance among Zambianlisted companies.

Design/methodology/approach –Data was collected through contentanalysis of annual reports and

audited financial statements of 20 Zambian listed companies for the period 2012 to 2018. This is a

longitudinal study which involved panel data analysis. A Hausman test was conducted to select the

model touse to run the panel regression analysis.

Findings –The results indicate a positive statistically insignificant relationship between board size,

board independenceand IFRS compliance. A statisticallysignificant negative relationshipbetween audit

committeeindependence and IFRS compliance. However,there is a positive relationship between board

members with accounting and auditing experience, the inclusion of women on the board and IFRS

compliance.

Research limitations/implications –Limitation includes the narrow focus on listed companies only

which cannotbe generalized to other public interest and privatecompanies in Zambia.

Practical implications –The study findings imply that corporate governance attributes such as the

inclusion of qualified and experienced Chartered Accountants and women on the board will increase

IFRS compliance.The appointment criteria of non-executivedirectors should be strengthened.

Originality/value –This is the first empirical studyto analyze the relationship between IFRS compliance

and corporate governance in Zambia.The study also responds to the call by the World Bank (2017) to

empirically study IFRS compliance in Zambia and contributes to the scant literature in developing

countrieson determinants of IFRS compliance.

Keywords Corporate governance, Developing country, IFRS compliance, Zambian listed companies

Paper type Research paper

1. Introduction

The purpose of the International Financial Reporting Standards (IFRSs) is to enhance the

quality of financial information contained in the financial statements. Compliance with the

standards is as important as the accounting standards themselves (Hodgdon et al.,2008).

Compliance with IFRS disclosure requirements is important because users of financial

information need to have confidence that the financial information is of high quality and has

not been manipulated by the management (Elliot and Elliot, 2013). Disclosure reduces

information asymmetry and assists users in understanding how transactions, other events

and, conditions are reflected inreported financial performance and financial position (IASB,

2010). It is also important for the users to know the measurement basis used by an entity to

prepare its financial statementsbecause that significantly affects users’ analysis.

Prior studies show that compliancewith IFRSs disclosure requirements improves the quality

of information intermediation in capital markets and accounting comparability; reduces the

Martin Kabwe is based at

the Graduate School of

Business, University of

Zambia, Lusaka, Zambia

and Directorate of

Graduate Studies,

University of Zambia,

Lusaka, Zambia.

Erastus Mwanaumo is

based at the School of

Engineering, University of

Zambia, Lusaka, Zambia.

Henry Chalu is based at the

School of Business,

University of Dar es

Salaam, Dar es Salaam,

United Republic of

Tanzania.

Received 20 March 2020

Revised 22 April 2020

15 July 2020

9 September 2020

30 September 2020

Accepted 1 October 2020

DOI 10.1108/CG-03-2020-0103 VOL. 21 NO. 1 2021, pp. 1-22, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 1

information gap between investors and companies and increase firm investment efficiency

(Chen et al., 2013;Horton et al.,2013;Hodgdon et al., 2008). Also, IFRS disclosure

requirements contribute to fewer earnings management, timely loss recognition, reduction

in forecast errors, elimination of cross-border barriers and increased market efficiency

(Bushman and Piotroski, 2006;Sun, 2006;Barth, 2008;Brown, 2011;Cai et al.,2008;

Hodgdon et al.,2008). The company can also benefit from areduction in the cost of capital,

increased foreign direct investment and liquidity (Leuz and Verrecchia, 2000;Young and

Guenther, 2003).

Despite the benefits derived from compliance with IFRS disclosures, studies show that

companies from both developed and developing countries have failed to fully comply with

IFRS disclosure requirements (Hellman et al.,2018;ESMA, 2018; Sellami and Tahari, 2017;

Agyei-Mensah, 2017;Glaum et al.,2013;Al-Shammari et al., 2008). Zambian listed

companies do not also fully comply with IFRS disclosure requirements with regard for

instance to IAS2, IAS12, IAS8, IAS10, IFRS13, IAS21, IAS24 and IAS36 (World Bank, 2017;

Kabwe et al.,2020). A company is deemed compliant with IFRS standards if it complies

fully with all the prescribed IFRS disclosure requirements(IASB, 2010).

The challenges of compliance with IFRS disclosure requirement is associated with the

country-specific institutional setting such as legal and political system, regulatory

enforcement, corporate governance code and firm’s financial reporting incentives (Nobes,

1983;Soderstrom and Sun, 2007). Regulatory enforcement is the most important factor in

determining compliance with IFRS disclosures (Hellman et al.,2018;Christensen et al.,

2013). However, the regulatory enforcement of compliance with IFRS disclosure

requirements in developing countries is weak including Zambia (Ali et al., 2004;World

Bank, 2017).

In an environment where theregulatory enforcement mechanisms are weak, the compliance

with IFRSs will be determined by the effectiveness of the corporate governance system and

the firm’s financial reporting incentives (firm characteristics). In addition, as part of the

corporate governance system, external auditors can enforce compliance with IFRS.

However, there is an increase in audit fees following IFRS adoption (Abdul Rashid et al.,

2017). Consequently, this increases the IFRS compliance costs to companies. Nevertheless,

empirical studies from both the developed and developing countries have produced

contradicting results on the relationship between compliance with IFRS disclosures and

corporate governance attributes. Studies have indicated either positive, insignificant or

negative relationship between compliance with IFRS disclosures and corporate governance

attributes (Agyei-Mensah, 2017;Sellami and Fendri, 2017;Rahman and Hamdan, 2017;

Bova and Pereira, 2012;Al-Shammari et al.,2008;Hodgdonet al.,2008).

Notwithstanding the contradiction in the empirical evidence, there is limited research on the

determinants of compliance with IFRS standards focused on developing countries

compared with the developed countries (Samaha and Khlif, 2016;Kimeli, 2017). Besides,

prior studies have paid very little attention to the relationship between having board

members with financial reporting expertise, the inclusion of women on the board and

compliance with IFRS disclosures.

In Zambia, there is no known empirical study on the determinants of IFRS compliance and

the World Bank (2017) called for empirical studies on IFRS compliance in Zambia. Also, in

Zambia, there is no independent institution responsible for overseeing compliance with

governance and financial reporting requirements (World Bank, 2017). Zambia Institute of

Chartered Accountants (ZICA) established the Standards and Regulatory Board (SRB) in

2009 to enforce compliance with IFRSs. However, there is still high non-compliance with

IFRSs among Zambian listed companies.It appears the SRB is not independent because it

is funded by the ZICA members and reports back to ZICA members at the AGM; the same

members it is supposed to be regulating(World Bank, 2017).

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