The association between corporate governance mechanisms and compliance with IFRS mandatory disclosure requirements: evidence from 12 African countries

• Date: 23 October 2020
• DOI: https://doi.org/10.1108/CG-08-2019-0270
• Pages: 1371-1392
• Published date: 23 October 2020
• Author: Yosra Mnif,Hela Borgi
• Subject Matter: Strategy,Corporate governance

The association between corporate

governance mechanisms and

compliance with IFRS mandatory

disclosure requirements: evidence

from 12 African countries

Yosra Mnif and Hela Borgi

Abstract

Purpose –The purpose of this study is toexamine the association between two corporate governance

(CG) mechanisms,namely, the board of directors and the audit committee(AC) and the compliance level

with International Financial Reporting Standards (IFRS) mandatory disclosure requirements across 12

Africancountries.

Design/methodology/approach –This paper usesa self-constructed checklist of 140 itemsto measure

the compliance with IFRS mandatory disclosure requirements (here after, COMP) of 202 non-financial

listedfirms during the 2012–2016 period. This paper applies panelregressions.

Findings –The findingsreveal that CG mechanisms playan important role in enhancing compliancewith

IFRS in the African context. The results show that board independence, AC independence and the

number of meetings held by the AC are positively associated with COMP. Regarding expertize, this

paper find thatAC industryexpertise along with accounting financial expertiseis associated with a higher

level of COMP than accountingfinancial expertize alone. These results show the importanceof the CG

mechanismsto enforce African companies to fullycomply with IFRS required disclosures.

Practical implications –The findings should give a signal to supervisory authorities that more effortis

necessary to enforce IFRS across African countries if the introduction of IFRS is to bring the expected

benefits to investors and other users. Hence, the lack of full compliance should remain a concern for

regulators,professional accounting bodies and policymakers.

Originality/value –This study contributes to the literature by providing further insights that, within the

African region an understudied context, extend current understanding of the association between CG

mechanismsand COMP.

Keywords Corporate governance, Compliance, IFRS, African countries

Paper type Research paper

1. Introduction

The International Financial Reporting Standards (IFRS) are recognized as a comprehensive

set of “high quality” standards (Ball, 2006). However, accounting standards are only one

pillar upon which a sound financial reporting infrastructure should be built, yet other

important pillars should be considered such as the corporate governance (CG)

mechanisms (Tweedie and Seidenstein, 2004). CG mechanisms could have an important

influence on the preparers’ incentives to comply with IFRS disclosure requirements

(Pope and McLeay, 2011). Managers with undue discretion could generateincomplete and

Yosra Mnif is based at the

High Institute of Business

Administration of Sfax,

Sfax, Tunisia. Hela Borgi is

based at the Department of

Accounting, College of

Business and

Administration, Princess

Nourah bint Abdulrahman

University, Riyadh,

Saudi Arabia.

Received 29 August 2019

Revised 12 December 2019

7 March 2020

14 September 2020

25 September 2020

Accepted 25 September 2020

This research was funded by

the Deanship of Scientific

Research at Princess Nourah

bint Abdulrahman University

through the Fast-track

Research Funding Program.

DOI 10.1108/CG-08-2019-0270 VOL. 20 NO. 7 2020, pp. 1371-1392, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 1371

biased financial reporting, and thereby, not compliant with IFRS disclosure requirements

(Glaum et al., 2013). Previous compliance studies show that the even the mandatory IFRS

adoption does not guarantee that the companies are fully compliant with IFRS mandatory

disclosure requirements and provide evidence that it is usually at the discretion of

managers that leads to a heterogeneity in the level of mandatory disclosures across

companies (Glaum et al., 2013;Juhmani, 2017;Mazzi et al.,2017;Sellami and Fendri, 2017;

Sellami and Borgi, 2020). Followingthis, Mbir et al. (2020) show that effective CG structures

could ensure a high level of compliance to IFRS, which, in turn, leads to achieve the

expected high levels of reporting quality.

The high-profile financial scandals and the increasing instances of financial restatements

have focused more attention on the role of CG mechanisms in enhancing the corporate

financial reporting quality (Juhmani, 2017). Verriest et al. (2013) provide evidence that

companies with strong CG structures tend to be more compliant with IFRS disclosure

requirements compared to companieswith weak CG structures.

There is a growing recognition of the important role of CG mechanisms in enhancing financial

reporting quality, aligning management’s interests with those of the shareholders and reducing the

agency and information asymmetry problems (Juhmani, 2017). However, McGee (2009) argues

that the special issues in developing countries (e.g. African countries), such as weak legal

systems and corrupt practices, make the implementation of CG questionable. Furthermore,

Dahawy (2009) shows that African countries are ill-equipped to put in place the type of CG

established in developed countries because of the characteristics of the political and economic

systems of these jurisdictions, such as weak judicial and legal systems, corruption, political

interference in corporate affairs and limited skills of human resources.

The World Bank (2005,2010) also suggests that corporate reporting in Africa, such as in

Kenya and Tanzania, is poor and, generally, the lack of transparency pervades the

corporate reporting system, which may have contributed to the recent corporate failures

(Uchumi in 2006 and CMC holdings in 2011). The World Economic Forum (2012) reports

that corporate scandals involving companies listed in Kenya, at the Nairobi Securities

Exchange and Tanzania, at the Dar es Salaam Securities Exchange have reduced investor

confidence and raised questionson the integrity of financial reporting and CG regime.

Africa is a particular and interesting context because of its unique socio-economic, cultural

and business set-ups (Tawiah and Boolaky, 2019b). As argued by Gordon et al. (2012),

Nnadi and Soobaroyen (2015) and Tawiah and Boolaky (2019a), companies in developing

economies and more particularly African countries have different governance structures

compared to those in developed ones (La Porta et al., 1999). Tawiah and Boolaky (2019b)

argue that cross-continental studies that included African countries using generic proxies

do not really reflect the African settings, hence tend to have contrasting findings. The

African continent provides also motivation for this research because of the lack of evidence

on the association between CG mechanisms and compliance with IFRS mandatory

disclosure requirements (COMP)in this context.

In addition, the transition to democratic governance in many African countries presents an

opportunity for accounting and public policy research. Several African countries, such as

Ghana, Kenya, Malawi, Mauritius, Nigeria, Tanzania, Uganda, Zimbabwe and Zambia have

published national codes of CG to strengthen the enforcement of IFRS (Rossouw, 2005;

Waweru, 2014), and therefore, to enhance the compliance with IFRS requirements.

However, the World Bank and the International Monetary Fund (IMF) show in the Reports on

the Observance of Standards and Codes (ROSC) that compliance with IFRS required

disclosures was problematic in many African countries such as Botswana, Kenya,

Mauritius, Tanzania, Uganda,South Africa, Zambia and Zimbabwe.

Hence, the purpose of this research is to investigate the association between two CG

mechanisms, namely, the board of directors (BD) and the audit committee (AC) and

PAGE 1372 jCORPORATE GOVERNANCE jVOL. 20 NO. 7 2020