Abstract
This study explores the relationship between audit committee characteristics and accounting information quality by justifying the role of the internal information environment and political connections under the theocracy state of Iran with syncretic politics. Using panel data of 558 firms from the Tehran Stock Exchange (TSE) for 2011–2016, we rank firms using Technique for Order Preference by Similarity to Ideal Solution (TOPSIS) and entropy method for determination of the weight of evaluating indicators. The firms are positioned into high- to low-level political connections, and two proxies for audit committee characteristics are used: independence of audit committee and financial knowledge. Furthermore, three proxies are used for an internal information environment: earning announcement speed, the accuracy of earning forecasting and lack of financial restatements. Our findings show that there is a significant and positive relationship between the audit committee and financial information quality characteristics in high-level political connections, as well as between financial knowledge and financial information quality. Furthermore, the findings of this study suggest that the application of political economy theories could be appropriate for more inquiry.
Highlights
The importance of strong corporate governance to the success of corporate enterprises is in line with the stockholder’s views (Paape et al 2003)
The existence of members with financial knowledge in the audit committee increases the quality of financial reporting
Results show that the internal information environment in firms with low-level political connection improves the relationship between audit committee characteristics and the financial reporting quality
Summary
The importance of strong corporate governance to the success of corporate enterprises is in line with the stockholder’s views (Paape et al 2003). Companies and shareholders rely on the judgment of the audit committee members for more accurate monitoring areas such as risk, prevention of loss of corporate resources, financial reporting accuracy, and the observation of legal and regulatory requirements. The above literature may suggest that the economic theory of political connection can be an appropriate lens for examining the relationship between audit committee characteristics and accounting information (Demirgüç-Kunt and Levine 2009). Creditors, another primary user, are always concern about the borrowers’ ability to repay their debt. This study relates legislators and other companies that are constantly working to improve the quality of financial reporting and have put independence and financial expertise of the audit committee at the centre of the current reform
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