The quality of reported earnings and the monitoring role of the board: Evidence from small and medium companies

Abstract

The purpose of this paper is to investigate whether corporate governance initiatives in South Africa that  relate to the monitoring ability of the non-executive  directors on the board of small and medium  companies have improved earnings quality by adopting conservative accounting practices. The sample construct includes the 2008 – 2011 reporting periods of South African companies listed on the Alternative  Exchange (AltX). A reverse regression of earnings on returns was used to examine the market-based attributes of earnings quality, i.e. conservatism and the timeliness of earnings. No evidence was found  that the boards of small and  medium-sized companies are inclined to adopt conservative accounting practices that will result in the  asymmetric timeliness of earnings. There is also no evidence that the quality of reported earnings improved as a result of the monitoring ability of the board with reference to the representation of non-executive  directors on  the board. The fi ndings can be of interest to investors, managers and regulators as the effi ciency of corporate boards and the transparency of financial reporting have implications for all of them.

Key words: agency theory, corporate governance, non-executive directors, board composition, earnings quality, conservatism, timeliness of earnings, monitoring ability, small and medium-sized companies