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Boulila Dan Mbarki
Boulila Dan Mbarki
Article information:
To cite this document:
Neila Boulila Taktak Ibtissem Mbarki , (2014),"Board characteristics, external auditing quality and earnings
management ", Journal of Accounting in Emerging Economies, Vol. 4 Iss 1 pp. 79 - 96
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External
auditing
quality
79
1. Introduction
Tunisia is the first emerging economy from MENA region which has adopted a series
of reforms in order to liberalize, modernize and adapt the financial sector to the
international standards (adoption of Basel accord in 1999, universal banking model in
July 2001, enhancing the financial security in 2006). Given these changes, Tunisian banks
are increasingly forced to provide better performance. However, the non-performing
loans (NPL) ratio and loan loss allowances remain below the targets set by the Tunisian
Central Bank. The overall provisioning rate averaged about 54 percent in 2006, far below
the target level of 70 percent recommended by the International Monetary Fund (IMF).
These efforts are still offset by the leeway offered by accounting and prudential rules for
bank managers in the assessment of the credit quality.
In this context, it would be appropriate to examine the capacity of governance
systems to minimize opportunistic behavior of some managers. This recognition of the
usefulness of governance in the delimitation of discretionary behaviors within
Tunisian firms has led to the adoption of the Governance Good Practice Guide.
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80
board decisions and reduces agency costs. In fact, the combination of these functions
increases the managers authority by allowing him to satisfy his own interests over
those of shareholders ( Jensen, 1993; Epps and Ismail, 2009). Splitting the roles of
chairman and CEO is also favorable to make the board more independent (Coombes
and Wong, 2004). Proponents of stewardship theory, in contrast, argue that CEO
duality enhances the firms performance as it avoids power dilution, reduces rivalry
and provides more clarity in the business conduct (Bradbury et al., 2006). In addition,
CEO duality facilitates decision making with a minimum board interference (Reshner
and Dalton, 1991; Lin, 2005).
Regarding the banking context, the results of previous studies addressing the
impact of this feature on earnings management are mixed. Cornett et al. (2009) found
that the cumulative functions of management and control affects negatively earnings
management, particularly the level of discretionary provisions, contrary to Brickley
et al. (1997) and Anuchitworawong (2004) who found that CEO duality increases the
provisions adjustment. On a sample of Tunisian banks, Omri et al. (2007) found that
the duality in the board appears to increase earnings management only in the presence
of institutional directors.
The Governance Good Practice Guide for Tunisian firms (2008) recommends the
separation of management and control functions. It provides that dissociation
promotes the right decisions, when the board decides the combination of the two
functions; it has to justify to shareholders the reasons for this choice. So the sign of
CEO duality variable is expected to be positive. Hence, it is hypothesized that:
H2. There is a positive relationship between CEO duality and discretionary
provisions.
2.1.3 Affiliation of directors. Theoretically, the relationship between the presence of
affiliated directors in the board and its effectiveness is mixed. According to the agency
theory, the affiliated directors are cause of inefficiency or lack of control, because
they are usually appointed by the manager and seek to maximize their revenues.
Only independent directors can limit the manager discretionary practices
(Anuchitworawong, 2004). In addition, affiliated directors seek to privilege their
private interests to the detriment of minority shareholders (Anderson et al., 2003;
Schulze et al., 2003). On the other side, the resource dependence theory considers that
the presence of affiliated directors in the board is equivalent to efficiency. They are
more familiar with the specificities of the company and its environment, as they
maintain business relationships with it.
Empirical results confirm that independent directors are more likely to reduce
discretionary practices than affiliated ones. They can control and discipline more
effectively the discretionary behavior of managers (Klein, 2002; Jaggi et al., 2007). Such
directors are known by their expertise and their ability to judge independently and
objectively the firm performance (Booth and Deli, 1996). It should be noted, however,
that despite the high number of independent directors comprising the board of Enron,
it was ineffective in its mission of control (Healy and Palepu, 2003). In fact, many
studies failed to find a significant relationship between board independence and
earnings management (Park and Shin, 2004; Hashim and Devi, 2008).
The Tunisian system is characterized by the presence of strong blockholders often
including families. In fact, 80 percent of total shares are held by the five largest
shareholders (Omri, 2003), which explains the domination of affiliated directors in
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H4-3. There is a positive relationship between the presence of State directors in the
board and discretionary provisions.
2.2 Characteristics of the external audit
External auditing is another governance mechanism that can restrict the managerial
discretionary practices. Based on the agency theory, an external audit reduces the
information asymmetry between the principal and the agent and minimizes conflicts
of interest (Watts and Zimmerman, 1983). According to the literature, the quality of
external audit is measured by the reputation of the auditor, his ability to disclose
reservations and the presence of a co-audit.
2.2.1 Auditors reputation. Several studies have examined the relationship between
earnings management and auditors reputation, generally measured by its membership
in Big 4[5] group (De Angelo, 1981). According to Rusmin (2010), BIG 4 audit firms
have more capital, human resources, technology and experiences which enable them to
provide higher quality audit. Furthermore, they typically have a large client base and
internationally recognized brand names, thus they have more incentive to maintain
higher quality audits.
The hypothesis related to the existence of a negative relationship between earnings
management and the auditors reputation has been validated only in the American
context, characterized by a significant legal risk (Becker et al., 1998). However, other
studies conducted in other contexts invalidate the relevance of the auditors reputation
in limiting earnings management (Piot, 2001; Kabir et al., 2011). In fact, since the
bankruptcy of Enron the reputation of these networks has been called into question. So
the sign of auditors reputation variable is expected to be negative:
H5. There is a negative relationship between the external auditor reputation and
discretionary provisions.
2.2.2 Disclosure of reservations. De Angelo (1981) defines the quality of external audit
as the assessment by the market of the joint probability that an auditor discovers
simultaneously a significant anomaly in the accounting system of the company and
publishes this anomaly or this irregularity. This definition highlights two
fundamental aspects of external audit quality: the technical competence of the
auditor represented by its ability to detect errors in the annual reports and his
independence codified through revelation quality[6] (Lennox, 1999). Such
characteristics are essential for the delimitation of earnings management practices
(Datar et al., 1991). So the sign of this variable is expected to be negative:
H6. There is a negative relationship between the disclosure of reservations and
discretionary provisions.
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2.2.3 Co-audit. The co-audit is a specificity of the French law that allows companies to
ensure the independence of the auditor in expressing his opinion as many pressures
may be exercised in the case of one auditor. Or, the manager cannot corrupt the two
auditors at the same time (Ebondo Wa Mandzilla, 2006). Piot and Janin (2007) suggest
that the co-audit provides two main advantages. In one hand, it offers the possibility of
a reciprocal control of the auditors procedures which allows the comparison of the
auditors opinions. On the other hand, it strengthens the independence of each of them,
limiting any potential domination of the auditees. The co-audit can then enhance the
audit quality and therefore the reliability of financial reporting (Noel et al., 2009).
However, its main limitation lies in the asymmetry of information that links the two
auditors, which could affect the distribution of work between them. In fact, Sometimes
a BIG 4 is co-auditor with a small firm of audit. The latter lacks the same technical and
physical skills that are available to the BIG4. Consequently, the distribution can go up
to a ratio of 20/80 between the two auditors, see 0/100. The asymmetry in the size of
audit firms causes an imbalance of power relations between the two auditors that leads
to the dependence of one to the other (Bennecib, 2004). In fact, when an auditor BIG
shares a co-audit mandate with a no BIG auditor, it gets usually benefit from such
situation to allocate the whole work to their advantage to preserve their reputation in
case of problem. The sign of co-audit variable is expected to be negative:
H7. There is a negative relationship between the co-audit and discretionary
provisions.
3. Methodology
3.1 Sample
This research uses individual annual data of the ten major Tunisian banks[7] which
represent about 90 percent of the aggregate outstanding loans. All these banks are
listed on Tunisia Stock Exchange.
Data on governance were collected manually from annual reports and banks web
sites covering a period of five years (2003-2007). The financial data used to estimate the
discretionary provisions were collected from BANKSCOPE database and banks
annual reports over a period of ten years (1998-2007). Indeed, the period before 2003 is
essential to estimate the discretionary portion of provisions.
3.2 Variables measurement
3.2.1 Measurement of earnings management (dependent variable). We use the
discretionary provisions as a proxy of earnings management, measured by adopting
the methodology of Elleuch-Hamza and Boulila-Taktak (2009) which is strongly
inspired from Cornett et al. (2007). It consists of three steps.
.
The first step consists on estimating the coefficients of the model that identifies the
normal part of provisions (model 1) on the estimation period (1998-2002). The model is
as follows:
LLPit =TCit1 b0 b1 NPLit =TCit1 b2 LLAit1 =TCit1
b3 COLLit =TCit1 ULLPit
where LLPit is the loan loss provisions of the bank i at date t; NPLit the NPL of the bank
i at time t; LLAit1 the loan loss allowance of the bank i at date t1; COLLit the total
collaterals received by the bank i at date t; TCit1, the total credit of the bank i at
time t1. All model variables are standardized by total credit (TCit1) to avoid
heteroscedasticity problem; ULLPit, the error term of the equation representing the
discretionary portion of LLP of bank i in period t [8].
.
The estimated coefficients b0, b1, b2 and b3 of regression (1) are used to calculate the
predicted values of loan loss provisions (LLPNDit) over the period 2003-2007. This
component is calculated using the following equation:
LLPNDit =TCit1 b^0 b^1 NPLit =TCit1 b^2 LLAit1 =TCit1
b^3 COLLit =TCit1
.
The last step consists on calculating the discretionary provisions (LLPD) given as the
difference between the actual amount of loan loss provisions (LLP ) and the
non-discretionary portion of loan loss provisions estimated at the second stage (LLPND):
LLPDit LLPit LLPNDit
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Definitions
LLPD
Ln-BD
DUAL
DAFFIL
DSTAT
DINST
DFORG
Co-Audit
BIG4_0
BIG4_1
BIG4_2
RESERV
SMOOTH
CAR
Table I.
Variables definition
and expected signs
Expected
signs
Variables
SIZE
CONC
/
/
/
/
Table II.
Descriptive statistics of
the dependent variable
and governance
variables (continuous
variables)
Variables
Mean
Median
Minimum
Maximum
SD
LLPD
BD
DFORG
DSTAT
DINST
0.0043
11
25.57
25.81
28
0.002
11
23.61
0.00
25.00
0.012
8
0.00
0.00
0.00
0.0780
12
66.67
100.00
58.33
0.015
1.293
24.58
36.35
19.79
Notes: LLPD, discretionary loan loss provisions; BD, number of directors on the board; DFORG,
percentage of foreign directors on the board; DSTAT, percentage of State directors on the board;
DINST, percentage of institutional directors on the board
Variables
Proportions (%)
DUAL
0
1
1
0
0
1
0
1
2
0
1
DAFFIL
Co-Audit
BIG4
RESERV
36
64
74
26
52
48
46
40
14
33
66
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auditing
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Notes: DUAL, binary variable equals to 1 if there is an overlapping of the functions of chairman of the
board and CEO and 0 otherwise; DAFFIL, binary variable equals to 1 if the percentage of affiliated
directors to the first shareholder on the board exceeds 50 percent and 0 otherwise; Co-Audit, binary
variable equals to 1 if the bank is audited by two auditors and 0 otherwise; BIG4_0, binary variable
that takes 0 if the auditor does not belong to a BIG4; BIG4_1, binary variable that takes 1 if one of the
two auditors belongs to a BIG4; BIG4_2, binary variable that takes 1 if the two auditors belong to a
BIG4; RESERVE, binary variable equals to 1 if the auditor discloses at least one reservation in its
annual report, 0 otherwise
Table III.
Proportions of
governance variables
(qualitative variables)
This result shows that the two functions remain associated despite the enactment of a
new legislation in 2000 which provides the separation. Previous studies have shown
that duality is not specific to the Tunisian context; it is also expressed in US banks
where 80 percent of managers combine the two functions (Cornett et al., 2009). Table III
also shows that boards of Tunisian banks are mainly characterized by the presence of
affiliated directors with an average of 74 percent, which can influence the board
decisions. This result does not comply with the Governance Good Practice Guide
which recommends that firms should have a minimum of 1/3 of independent directors.
Regarding variables related to the quality of external auditing, it appears that
nearly the half of banks (52 percent) is audited by two auditors. This result shows the
voluntary adhesion of Tunisian banks to strengthen control since the requirement of a
double audit does not come into effect until 2007. Similarly, descriptive statistics show
that in 54 percent of cases, Tunisian banks are audited by an external auditor
belonging to one of the BIG 4 groups. Finally, the reservations revealed by the auditors
are about 66 percent over the study period.
Table IV, reporting the descriptive statistics of control variables, shows that the
average of the variable measuring earnings smoothing coincides with its median
Variables
Mean
Median
Minimum
Maximum
SD
SMOOTH
CAR
CONC
SIZE
0.017
10.406
45.97
14.709
0.017
10.400
52
14.624
0.004
1.800
5.61
13.848
0.037
19.870
69
15.445
0.008
4.054
17.93
0.448
Notes: SMOOTH, net income before tax and loan loss provisions reported to total assets; CAR,
capital adequacy ratio; CONC, percentage of the largest shareholder in the banks capital; SIZE, log of
total assets
Table IV.
Descriptive statistics
of control variables
(representing 1.7 percent of total assets). The banks in the sample are sufficiently
capitalized (with an average of 10.4 percent), far surpassing the regulatory minimum
required of 8 percent. The table also reveals that the ownership structure is relatively
concentrated since the largest shareholder holds on average 46 percent of the capital
with a maximum of 69 percent.
88
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(1)
LLPD
(2)
LLPD
DUAL
0.00690***
(3.72)
0.00467*
Ln-BD
0.00500
(0.49)
0.00291
DAFFIL
0.0352***
(4.54) 0.0339***
DFORG
0.0129**
DSTAT
DINST
SMOOTH
0.462**
(2.52)
0.289*
CAR
0.00103**
(2.34) 0.00132***
SIZE
0.00288
(1.59) 0.00923***
CONC
0.000357***
(3.82)
0.000433***
Constant
0.0435*
(2.31)
0.148**
n
50
50
R2
66%
66.17%
Table V.
Panel regression of the
board characteristics
on discretionary
provisions
(3)
LLPD
(4)
LLPD
(1.65)
0.00457***
(3.68)
0.00372
(0.25)
0.0104
(0.89)
0.00951
(5.16) 0.0413*** (4.75) 0.0290***
(2.22)
0.00709
(1.62)
0.0209**
(1.88)
0.622***
(3.97)
0.282**
(3.99) 0.000429
(1.09) 0.00104**
(4.18) 0.00705
(1.49) 0.0120***
(4.11)
0.000225**
(2.24)
0.000415***
(3.25)
0.0282134
(0.32)
0.1839176***
50
50
68%
71%
(1.29)
(1.01)
(5.41)
(2.89)
(2.05)
(2.65)
(5.49)
(4.23)
(2.35)
Notes: LLPD, discretionary loan loss provisions; DUAL, binary variable equals to 1 if there is an overlapping of the
functions of chairman of the board and CEO and 0 otherwise; Ln-BD, log of the number of directors on the board;
DAFFIL, binary variable equals to 1 if the percentage of affiliated directors to the first shareholder on the board
exceeds 50 percent and 0 otherwise; DFORG, percentage of foreign directors on the board; DSTAT, percentage of State
directors on the board; DINST, percentage of institutional directors on the board; SMOOTH, net income before tax and
loan loss provisions reported to total assets; CAR, capital adequacy ratio; SIZE, log of total assets; CONC, percentage
of the largest shareholder in the banks capital. ***, **, *Significance at 1, 5 and 10 percent levels, respectively
conflicts ( Jensen, 1993). However, duality does not impact the provisioning policy in
the presence of institutional directors on the board (panel 4 of Table V). These findings
support, on the one hand, the recommendations of the Governance Good Practice
Guide which is in favor of the separation of management and control functions. On the
other hand, they confirm the mixed results of earlier researches. Results also show
that whatever the specification used, boards dominated by affiliated directors affect
negatively the discretionary provisions because of the intensity of coalition between
the first shareholder who exercise the control (or officer of the bank) and directors. This
counter-intuitive result confirms the notion that boards dominated by such directors,
control and discipline more effectively discretionary behavior of managers ( Jian and
Ken, 2004; Cornett et al., 2009). Another plausible explanation for this result lies in the
fact that banks with a large number of affiliated directors are those least provisioned.
This is particularly about the two State banks (STB and BNA) and a private family
bank (Amen bank). These banks are required to increase their provisioning policy to
achieve the target of 70 percent by the end of 2009 required by IMF.
Regarding the nature of directors, results show that the presence of foreign and
institutional directors on the board reduces the discretionary practices. The first allows
banks to access to the best practices of governance through their knowledge and
expertise. The latter seek to maximize long-term value of the bank as they maintain a
substantial stake. On the other side, the results show that the board size has no effect
on the discretionary practices of Tunisian banks confirming the findings of Cornett
et al. (2009) on a sample of American banks.
Eventually, concerning the control variables, the coefficient associated with
(SMOOTH ) variable is positive and significant, which emphasizes the practice of
earnings management through provisions in Tunisian banks (Boulila Taktak, 2008).
The capital adequacy ratio has a significant and negative impact on discretionary
provisions. The highly capitalized banks are those that handle to lower the
discretionary provisions (Dewatripont and Tirole, 1994). Finally, results also show the
variable (CONC ) is significant and positive in all specifications showing that banks
which are heavily concentrated are those that manipulate the most their provisions.
Table VI presents the results regarding the effect of the external audits quality on
discretionary provisions. It shows that the more auditors disclose reservations about
the reliability of financial information conveyed through the financial statements of the
bank, the more the intention to manipulate provisions declines. This result highlights
how much it is important that the external auditor must maintain its independence
toward his client (Lennox, 1999). Indeed, the ability of revelation is essential to limit
earnings management in banks. Another result that seems very interesting is the
positive effect associated with the variable Co-Audit. This result interpellates the
usefulness of the implementation of the new law on financial security that provides
increased control through the appointment of two auditors. Moreover, the affiliation
between two BIG 4 auditors increases accounting manipulations. The co-audit is
working properly only in the presence of a single member belonging to the BIG 4. This
result is consistent with researches conducted in European countries (Piot, 2001;
Vander Bauwhede, 2005) and contradicts the conclusions of the Anglo-Saxon studies
(Becker et al., 1998), supporting the theory of deep pockets developed by De Angelo
(1981). According to this view, only large firms are able to compensate for any losses
caused by an incorrect certification because of the significant financial resources at
their disposal. Indeed, the ineffectiveness of BIG 4 auditors in the reliability of
accounting data seem to be attributed to the fragility of the legal and discipline system
External
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Table VI.
Panel regression of the
external audit quality
on discretionary
provisions
(1)
LLPD
RESERV
Co-Audit
BIG4_1
BIG4_2
SMOOTH
CAR
SIZE
CONC
Constant
n
R2
0.00807***
0.00407**
0.166
0.00218***
0.00666**
0.0000275
0.253614**
50
51%
(2)
LLPD
(3.55)
(2.35)
(1.18)
(4.57)
(2.26)
(0.61)
(2.94)
(3)
LLPD
0.00730***
(3.35)
0.000574
(0.20)
0.102
0.00209***
0.00557*
0.00000838
0.115**
50
48%
(0.70)
(4.09)
(1.89)
(0.23)
(2.58)
0.00648***
(3.59)
0.0135***
0.190
0.00191***
0.00530*
0.0000633
0.2219685**
50
51%
(4.29)
(1.45)
(4.29)
(1.89)
(1.34)
(2.70)
Notes: LLPD, discretionary loan loss provisions; RESERVE, binary variable equals to 1 if the auditor
discloses at least one reservation in its annual report, 0 otherwise; Co-Audit, binary variable equals to 1
if the bank is audited by two auditors and 0 otherwise; BIG4_1, binary variable that takes 1 if one of
the two auditors belongs to a BIG4; BIG4_2, binary variable that takes 1 if the two auditors belong to a
BIG4; SMOOTH, net income before tax and loan loss provisions reported to total assets; CAR, capital
adequacy ratio; SIZE, log of total assets; CONC, percentage of the largest shareholder in the banks
capital. ***, **, *Significance at 1, 5 and 10 percent levels, respectively
of auditors in Tunisia. The civil and criminal liability of auditors is much less
pronounced in the Tunisian context than in the USA.
4.3 Discussion and policy implications
The results of the previous regressions showed that among the characteristics of
the board, the presence of affiliated directors (DAFFIL) impacts negatively and
significantly the discretionary provisions. This result, which we thought, a priori,
counter-intuitive, led us to run further investigations by distinguishing between
different categories of affiliated. We consider four types of affiliation: AFFILSTAT if
the directors on the board are affiliated with the largest shareholder who is the State;
AFFIFORG if the directors on the board are affiliated with the largest shareholder
who is foreign; AFFILINST if the directors on the board are affiliated with the largest
shareholder who is institutional and finally AFFILFAM if the directors affiliated to
the largest shareholder are mainly members of the same family. The results reported
in Table VII show that the effect of affiliation variable changes depending on its
nature. In fact, for directors affiliated to State and institutions, the effect is
still negative and significant. Their presence reduces the discretionary portion
of provisions; this is explained by the fact that these banks are characterized by
the lowest provisioning rate in the industry. So, they have interest to reduce
manipulation to achieve the provisioning target of 70 percent. However, if the
directors are affiliated with a leading shareholder composed of the same family
members, the manager manipulate upward the reserves primarily to lower income
and therefore to distribute lower dividends.
By controlling the nature of affiliation, the coefficient relative to the size of the board
becomes significant in two regressions. It seems then that it is difficult in a large board
of directors to be influenced by the decisions of managers. Large boards can usually
take advantage of the different experiences of the members which impacts negatively
earnings management ( Jian and Ken, 2004). Finally, concerning control variables, the
(1)
LLPD
DUAL
Ln-BD
AFFILFORG
AFFILSTAT
AFFILINST
AFFILFAM
SMOOTH
CAR
SIZE
CONC
Constant
n
R2
0.00448
0.0158
0.00230
0.547*
0.00197***
0.00167
0.0000662*
0.0339
50
48%
(2)
LLPD
(1.57)
(1.58)
(0.35)
(1.89)
(5.03)
(0.24)
(1.85)
(0.32)
(3)
LLPD
0.000971
0.0417*
(0.40)
(1.97)
0.0155**
(3.28)
0.449*
0.0028***
0.0139*
0.0000465
0.0907304
50
59%
(1.75)
(5.41)
(1.81)
(0.52)
(0.89)
External
auditing
quality
(4)
LLPD
0.00974**
0.0155
(2.58)
(1.07)
0.0250***
(5.22)
0.179*
0.000947*
0.0187***
0.000174*
0.333***
50
60%
(0.97)
(2.27)
(3.29)
(1.73)
(3.52)
0.00522*
0.0362*
(1.67)
(2.34)
91
0.0152***
0.442*
0.00238***
0.00174
0.000082**
0.0875
50
52%
(4.21)
(1.77)
(5.33)
(0.36)
(2.54)
(1.26)
Notes: LLPD, discretionary loan loss provisions; DUAL, binary variable equals to 1 if there is an overlapping of the
functions of chairman of the board and CEO and 0 otherwise; Ln-BD, log of the number of directors on the board;
AFFIFORG, percentage of directors affiliated with the largest shareholder who is foreign; AFFILSTAT, percentage
of directors affiliated with the largest shareholder who is the State; AFFILINST, percentage of directors affiliated
with the largest shareholder who is institutional; AFFILFAM, percentage of directors affiliated with the largest
shareholder who are mainly members of the same family; SMOOTH, net income before tax and loan loss provisions
reported to total assets; CAR, capital adequacy ratio; SIZE, log of total assets; CONC, percentage of the largest
shareholder in the banks capital. ***, **, *Significance at 1, 5 and 10 percent levels, respectively
results remain unchanged even after controlling for the nature of affiliation which
confirms the robustness of our results.
5. Conclusion
The objective of this research is to provide a better understanding of the consequences
of the codification of governance practices on discretionary practices. It aims to test
the impact of the board characteristics and the quality of external audit on the
provisioning policy of Tunisian banks. To do this, we used a sample of ten Tunisian
banks listed on Tunisia Stock Exchange and representing over 90 percent of total bank
assets over the period (2003-2007).
The results show that among the characteristics of the board of directors, the
combination of management and control functions contributes to the ineffectiveness of
the decisions of the board by increasing the discretionary practices of provisions.
However, the affiliation variable, which measures the degree of affiliation of directors to
the largest shareholder, affects significantly and negatively the discretionary provisions.
Further analysis reveals that directors affiliated to the State and institutions behave
differently than those affiliated to the same family members. Our results reveal also that a
co-audit belonging to the BIG 4 increases the discretionary provisions while the capacity
of the external auditor to disclose reservations impacts negatively the managers
discretion. Finally, the Tunisian banks use loan loss provisions to manage their results
and those heavily capitalized have less intention to manipulate their provisions.
These results have implications for both stakeholders and policy makers. First, it
is not desirable to appoint a co-audit both belonging to the BIG 4. Second, the effect
of affiliated directors on accounting manipulations is favorable. Generally, the presence
of affiliated directors on the board reduces the discretionary practices except in cases
Table VII.
Panel regression
of affiliation nature
on discretionary
provisions
JAEE
4,1
where directors are affiliated to families. In this case, banks should strengthen the
presence of independent directors. Finally, the delineation of the leeway left in the
Tunisian accounting standards would provide more transparent financial information.
92
Notes
1. Although the estimation of provisions is intended by accounting standards, it stills in part
subject to the subjective assessment of the manager. Thus, the constitution of provisions
includes an objective part set by the banking regulation and a discretionary part that
managers can use to manage their results upwards or downwards depending on the outcome
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