MIDLANDS STATE UNIVERSITY

FACULTY OF COMMERCE

NAME: TENDAI REBECCA BWANYA

REG NUMBER: R2215367R

ASSIGNMENT: CORPORTATE GOVERNANCE

AND BUSINESS ETHICS 2

DEPARTMENT OF STRATEGIC MANAGEMENT AND CORPORATE

GOVERNANCE

PROGRAM: MASTER OF COMMERCE IN STRATEGIC MANAGEMENT AND

CORPORATE GOVERNANCE

YEAR: 2022

LEVEL: 1.1

TENDAI R. BWANYA CORPORATE GORVENACE ASSIGNMENT 2 1

Introduction

The International Financial Reporting Standards (IFRS) adoption is considered the most
significant regulatory change in financial reporting around the world in the last 30 years
(Chen, Tang Jiang, & Lin, 2010). Regulators and IFRS supporters suggested that the benefits
intended with its use include increase in reliability, transparency and comparability of
financial reporting, international investment flows and market efficiency (Jermakowicz &
Gornik-Tomaszewski, 2005; Brown, 2011; Alon & Dwyer, 2014). Several studies have
shown that the application of IFRS regulations has led to an improvement in confidence for
enterprises, the properties of accounting information, and the transparency of capital markets
(Barth, Landsman, & Lang, 2008; Zhang, 2011).

Researchers confirmed the positive impact of IFRS on the accuracy of analysts' forecasts
(Ashbaugh & Pincus, 2001), the quality of financial information (Chen et al, 2010; Yip &
Young, 2012) and investment flow (Florou & Pope, 2012). Moreover, a number of authors
have found that the results of the IFRS implementation are specific to the context and
environment, rather than uniform (Sunder, 2011). Similarly, as accounting regulation is an
important corporate governance mechanism, researchers have examined the factors that
contribute to IFRS adoption at the organizational level (Baker & Barbu, 2007). The search for
good corporate governance is associated with ethics in the business ambient, and for its
implementation, the field of accounting is a crucial factor. Corporate governance has become
the imperative condition for the stability of the economic ambient, as it ensures to partners-
owners the strategic management of the company and the effective monitoring of executive
management (IBGC, 2009).

According to numerous research (Brown, 2011; Brüggemann, Hitz, & Sellhorn, 2013), the
national institutional environment of financial reports plays a role in the heterogeneity of the
consequences of IFRS. This is hardly surprising considering that IFRS interpretation and
application can vary between nations, indicating significant and pervasive institutional
environment disparities (Whittington, 2005, Pope & McLeay, 2011). Ball (2006) believes
that isolated uniform standards cannot result in uniform financial reporting in this category.
Financial report regulation should not be viewed in a vacuum or separately from other
institutional infrastructure components.

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Many studies have found that the effects of IFRS are not homogeneous and are connected to
the national institutional environment of financial reports (Brown, 2011; Brüggemann, Hitz,
& Sellhorn, 2013). This is not surprising given that the interpretation and the use of IFRS
may differ between countries, reflecting substantial and long-standing differences in
institutional settings (Whittington, 2005, Pope & McLeay, 2011). In this line, Ball (2006)
argues that isolated uniform standards are not able to produce uniform financial reporting.
The regulation of financial reports should not be considered in isolation and independently of
other elements of institutional infrastructure.

DEFINITION OF TERMS

International Financial Reporting Standards (IFRS)

International Financial Reporting Standards (IFRS) are a set of accounting standards that
govern how particular types of transactions and events should be reported in financial
statements. They were developed and are maintained by the International Accounting
Standards Board (IASB). The IASB’s objective is that the standards be applied on a globally
consistent basis to provide investors and other users of financial statements with the ability to
compare the financial performance of publicly listed companies on a like-for-like basis with
their international peers. IFRS are now used by more than 100 countries, including the
European Union and by more than two-thirds of the G20. IFRS are sometimes confused with
International Accounting Standards (IAS), which are older standards that IFRS replaced in
2000.

Corporate Governance

Corporate governance is the system of rules, practices, and processes by which a firm is

directed and controlled. Corporate governance essentially involves balancing the interests of
a company's many stakeholders, such as shareholders, senior management executives,
customers, suppliers, financiers, the government, and the community. Corporate governance
is the system by which companies are directed and controlled. Boards of directors are
responsible for the governance of their companies. The shareholders’ role in governance is to
appoint the directors and the auditors and to satisfy themselves that an appropriate
governance structure is in place. The responsibilities of the board include setting the
company’s strategic aims, providing the leadership to put them into effect, supervising the

TENDAI R. BWANYA CORPORATE GORVENACE ASSIGNMENT 2 3

management of the business, and reporting to shareholders on their stewardship. Corporate
governance is therefore about what the board of a company does and how it sets the values of
the company, and it is to be distinguished from the day-to-day operational management of the
company by full-time executives.

Agency Problem

An agency problem is a conflict of interest inherent in any relationship where one party is

expected to act in another's best interests. In corporate finance, an agency problem usually
refers to a conflict of interest between a company's management and the company's
stockholders. The manager, acting as the agent for the shareholders, or principals, is supposed
to make decisions that will maximize shareholder wealth even though it is in the manager’s
best interest to maximize their own wealth.

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It is incorrect to assert that corporate governance and International Financial Reporting
Standards (IFRS) cannot be compared and that doing so would be like comparing apples and
oranges. Undoubtedly, one of the key factors affecting national economies around the world
is the financial system, which is always changing and facing difficulties that have a
significant impact on a country's possibilities for economic progress. A sound financial
system is thought of as a custodian of financial stability since it is the steam engine of the
economy, a significant driver of economic growth through which capital is drawn for
investments. We examine the extent to which the implementation of International Financial
Reporting Standards (IFRS) along with Corporate Governance practices affected the quality
of financial and narrative reporting given the differences in structure and function of the
financial sector across various countries. Corporate governance has been a significant
contributor to the financial success and caliber of financial reporting of corporate entities. It
plays a significant role in the development of financial reporting in emerging economies,
particularly when new rules and laws are adopted and put into effect.

Corporate governance is essential to ensuring accurate financial reporting. The relationship

between corporate governance and the standard of financial reporting has been the subject of
numerous studies. Numerous kinds of research have revealed several conclusions on the
governance system and how it significantly and favourably influences the quality of firms'
financial information (Honu & Gajevszky, 2014). The influence of outside users, families,
and investors primarily has a negative impact on the quality of financial reporting, even if
government regulation of financial institutions is connected with high-level quality in
financial disclosures.

Research exploring the effects of rules of governance on financial information quality has
shown that corporate governance influences accounting quality (Klai, & Omri, 2011).
According to numerous studies, businesses with good corporate governance can provide the
highest-quality financial reports (Cao, Ying, Linda, Omer & Thomas, 2011). Furthermore,
ownership concentration has the effect of reducing managers' incentive to manipulate
companies’ profitability. Additionally, there is a negative relationship between managerial
ownership and earnings manipulation; nevertheless, a different study found that managerial
ownership had no impact on earnings manipulation, which in turn affects the accuracy of
financial reporting (Usman, 2013). The ability of corporations and their auditors to perform

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all of these responsibilities depends critically on effective corporate governance of financial
reporting processing. Thomas, Vyas, and Hope (2011).

It is evident that aspects of corporate governance, such as board size, independence, diversity,
and audit committee independence, have an effect on the degree of reporting quality of
businesses and reporting quality in the following subsections. The importance of corporate
governance systems in establishing a high standard of reporting quality has been recognized
in numerous studies. Governance, the accounting profession, economic factors, international
forces, taxation, and political systems are some of the factors that influence and control the
quality of financial reporting (Gajevszky, 2015). Researchers have revealed an association
between financial reporting quality and executive compensation, and corporate management
turnover.

In contrast to managers who might desire to perpetrate fraud, the effectiveness of firm-level
corporate governance mitigates the agency problem and minimizes agency costs, producing
value for shareholders who want to maximize their return on investment (Rezaee 2009;
Shleifer and Vishny 1997). Due to increased board monitoring activity, good corporate
governance moderates the incentives for opportunism. Evidence indicates that managers are
substantially less likely to perpetrate fraud in companies with more board independence
(Beasley 1996). High-quality corporate governance also lessens the danger of financial
information misrepresentation, which could affect capital management practices and earnings
management in financial institutions (Duh et al. 2009; Garcia Osma 2008; Sarkar et al. 2008;
Shen and Chih 2007).

Thus, investors have fewer doubts about the accuracy of accounting figures. The reduction of
incentives for opportunistic behaviour, according to Siekkinen (2017, p. 440), increases
confidence in financial accounts. Additionally, a higher level of confidence in financial
accounts causes book values to match market values more accurately, which raises the book
values' relevance. The value and usefulness of accounting information are therefore higher in
companies with excellent corporate governance (Habib and Azim 2008).

Therefore, to enhance the appreciation of the relationship between IFRS and reporting
quality, there is a need to take into consideration the corporate governance structures of firms.
For instance, Krismiaji et al. (2016) found that IFRS adoption in firms with proper board
TENDAI R. BWANYA CORPORATE GORVENACE ASSIGNMENT 2 6
governance increased the value relevance of their financial statements than firms without
proper board governance. Differences in reporting quality have been attributed to differences
in corporate governance. It has been established that several corporate governance structures
matter for reporting quality (Abbott et al., 2000; Adams & Ferreira, 2003). Effective
corporate governance structures set the centre stage for IFRS to effectively fashion out the
high level of reporting quality.

There aren't many studies in developing nations connecting internal audit quality and
corporate governance characteristics to financial reporting quality. Nalukenge et al. (2018)
examined how corporate governance, ethics, and internal controls affect compliance with
International Financial Reporting Standards (IFRS) and discovered that there is a strong
correlation between corporate governance and IFRS compliance. He clarified that for
effective internal controls over financial reporting, corporate governance characteristics such
as board experience, board independence, and board role performance are essential.

Financial reports are frequently reported on the choices made by corporate governance
elements, yet these aspects also go beyond to validate the recorded data that financial reports
present. In this opinion, it might be best to point out the connection between corporate
governance and financial reporting. Prior studies have repeatedly shown a strong correlation
between various company governance practices and inadequate financial reporting standards,
such as earnings management or financial statement fraud (Beasley et al., 2001).

Mansor et al. (2013) note in their study that corporate governance is necessary for the
effective overall management, including financial management, decision-making, and
reporting. Any business's basic and formal performance is significantly influenced by
corporate governance, and in this debate, the current study focuses on the connections
between corporate governance and financial performance. According to the research of
Changezi and Saeed (2014), corporate governance is a crucial component of businesses'
ability to be more productive, governed, and controlled. As a result, various stakeholders
make a significant contribution to the function and process of financial reporting.

Studies have generally examined how corporate governance mechanisms relate to the quality
of financial reporting and firm performance. Factors such as independent non-executive
directors, board composition, ownership structure, institutional ownership, outside
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ownership, and governmental ownership were some of the variables that were looked
considered. (Chen and Jaggi, 2000; Haniffa and Cooke, 2002; Eng and Mak, 2003). In the
subsections that follow, we will talk about how these corporate governance structures and
reporting quality are related.

Board size and reporting quality

Existing literature has emphasized the significance of board size in guaranteeing the accuracy
of financial reporting. According to Vafeas (2000), larger boards are less successful in their
monitoring duties because they are distributed across numerous directors. Larger boards may
have trouble making judgments when it comes to writing high-quality reports, and because of
their sheer size, each director may feel less personally responsible. These are two of the
reasons put forth (Vafeas, 2000). Beasley (1996) asserted in an earlier remark that bigger
boards are more prone to produce financial statements that are dishonest. In order to ensure
high levels of reporting quality, K. Ahmed et al. (2006) discovered that smaller boards are
more effective.

Board independence and reporting quality

According to Osma and Noguer (2007), board members who are independent of management
play a critical role in a company's governance, particularly when it comes to preventing fraud
and discretionary accounting accruals. Klein (2002) discovered once more that an increase in
the proportion of independent board members on a board results in a decrease in the size of
earnings management. When there are several independent board members, according to Xie
et al. (2003), they act as a form of check on managers' behaviour. Thus, managers are no
longer free to manipulate or control earnings to provide a false picture of the companies'
financial performance and position; instead, they must ensure that the reported financial
statements accurately reflect the firm's financial situation. This is especially important
because Xie et al. (2003) said that the board of directors should be independent of the
company to resolve the agency problem in enterprises. This is due to the fact that, in contrast
to the work of dependent board members, the work of executive board members is not
threatened by familiarity. As a result, the more independent board members are on a board,
the less likely it is that earnings will be managed and the higher the level of reporting quality
within the company will be.

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Audit committee independence and reporting quality
The Audit Committee is one of the crucial board committees that supports the Board of
Directors in its oversight of the financial reporting process. It ensures transparency and
integrity of financial reporting (Klein, 2002). Companies are required to have an audit
committee in accordance with Section 202 of Sarbanes Oxley. Along with their financial
knowledge, the audit committee members' independence is a requirement for the committee's
effectiveness. Klein (2002) emphasized once more that an audit committee's composition
must be independent for the committee to be effective. This rule is justified by the idea that
independent directors analyse financial accounts with greater objectivity. Abbott, Park, and
Parker (2000) as well as Klein (2002) discovered that the independence of the audit
committee genuinely prevents false representations of financial data and improper
management of earnings. In particular, Klein (2002) argued that companies with a larger
proportion of outside members on their audit committee had much lower anomalous or
discretionary accruals. As a result, the audit committee is better off with more independent
members since it acts as a check on management's opportunistic behaviour. Similar evidence
was also discovered by Nelson and Devi (2013).

The Case of The Lion Finance Bank

Lion Finance Bank was placed under curatorship in July 2019. This follows a determination
that the institution was not in a sound financial condition mainly due to critical
undercapitalization and weak corporate governance. There were issues of insider lending and
misappropriations of depositor’s funds that came to light. The minimum capital requirement
for a microfinance bank when Lion Finance registered was 5 million dollars. However, at the
date of curatorship, the total of outstanding loans, loans with the collection and total deposits
was 3 million dollars. The other two million dollars was unaccounted for. The managing
director Lin Mukonoweshuro did not have a board of directors above her to check her actions
and govern how she was using the funds of the bank.

The RBZ approached the bank in connection with its undercapitalization and she tired to
source out funds from investors. However, the other shareholders were not happy with that
approach. They seek permission from the RBZ to form a temporary board of directors, which
voted her out of the bank as the managing director. The managing director did not receive the
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news very well and she refused to step down as she said she was the brains behind the bank
formation. The other shareholders asked her to buy them out but she did not have the funding.
They offered to buy her out which she refused. The squabbling did not stop until the RBZ
took the bank and placed it under curatorship. The Deposit Protection Corporation was
appointed the Curator of Lion Microfinance Limited. The curatorship stretched on for over a
year and its only recently that Lion Finance has reopened its doors. The case of Lion Finance
goes on to show that without proper governance, an institution cannot be run properly. For
any accounting standard to be adopted in a company, the management should have strong
governance as alluded above. If the management is defunct, the organization will not move
forward. It will suffer from the agency problem. Managers will look out for their needs first
before the needs of the shareholders. It came to light that management gave themselves
allowances not less than US$5,000 every quarter. On top of that, they had a whole array of
other benefits that they enjoyed.

Strong corporate processes are needed to assure excellent reporting quality of enterprises,
according to several empirical research (Abbott, Park & Parker, 2000; Adams & Ferreira,
2003). Therefore, it is worthwhile to perform studies on this topic while considering
corporate governance structures of organizations in order to improve understanding of the
relationship between IFRS and reporting quality. So, according to our argument, IFRS may
interact with corporate governance structures to improve reporting quality depending on
absorptive capacities like the firm's corporate governance structures. For instance, according
to a 2016 study by Krismiaji et al., the adoption of IFRS boosted the value relevance of
financial statements in companies with adequate board governance compared to those
without such governance.

Corporate governance in business organizations is a factor that contributes to the financial

success and quality of financial information (Ebrahim & Fattah, 2015). Likewise, it is
expected that the IFRS adoption will produce benefits such as greater transparency,
international comparability, and market efficiency (Barth et al, 2008; Brown, 2011; Zhang,
2011; Alon & Dwyer, 2014; Doukakis, 2014). Effective governance requires accurate and
reliable financial information. Historically, each nation has developed and used its own

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financial rules. However, as the financial markets have been consolidated in a global market,
there is a need for a common set of financial rules. As a result, there is a movement toward
harmonization of international financial reporting standards (IFRS) across the global
economy (Judge, Li & Pinsker, 2010). Based on various literature on corporate governance, it
is assumed that companies with the best corporate governance practices provide superior
information during the transition from local standards to IFRS.

Conclusion

In this study, we looked at how corporate governance affects the relationship between IFRS
compliance and a firm's degree of financial reporting quality. Based on the findings of
numerous kinds of research conducted by diverse schools of thought, we discovered that
there is a favorable impact of IFRS compliance on financial reporting. Furthermore, research
also found that the relationship between IFRS compliance and the degree of reporting quality
is significantly moderated by corporate governance frameworks. These results provide
credence to our claim that, while IFRS compliance can raise the degree of reporting quality,
better corporate governance structures can also produce higher levels of financial reporting
quality. The findings show a strong correlation between the implementation of best practices
in corporate governance and the adoption of IFRS.

In other words, businesses that follow the finest corporate governance principles tend to be
more open about implementing global norms. What the literature says about the advantages
of corporate governance for transparency is supported by this study (Barth et al, 2008;
Brown, 2011; Zhang, 2011; Alon & Dwyer, 2014; Doukakis, 2014). The implementation of
IFRS results in higher disclosure and fewer accounting options, which causes the company's
members to lose access to private perks. This loss is based on institutional traits (ie, the
investor protection level). Additionally, in nations with robust laws or comprehensive
corporate governance standards, governance suggestions are just as successful as regulations
at promoting the use of IFRS (Renders & Gaeremynck, 2007).

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