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

Author:Martin Kabwe, Erastus Mwanaumo, Henry Chalu
Publication Date:18 Nov 2020
Effect of corporate governance attributes
on IFRS compliance: evidence from
a developing country
Martin Kabwe, Erastus Mwanaumo and Henry Chalu
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
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
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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