Corporate Governance and Accounting Conservatism: Exploring the Linkages and Implications

Abstract

Listen

Translate article

This study examined the correlation between the corporate governance mechanism and accounting conservatism during the COVID-19 pandemic. In this paper, we employed regression analysis to examine the relationship between several aspects of corporate governance and accounting conservatism, including board independence, audit committee independence, CEO duality, multiple directorships, ownership concentration, and board metric. This study investigates how the COVID-19 pandemic and the adjustments to the Malaysian Code on Corporate Governance (MCCG) 2017 affect the performance and earnings quality of Main Board companies listed on Bursa Malaysia in 2020. Financial and governance data were collected from annual reports and Refinitiv DataStream using a quantitative approach. The first proxy for earnings quality was accounting conservatism, measured by the Khan and Watts (2009) model. Using regression analysis, the study explained how corporate governance mechanisms prevailed over conservatism during the pandemic and how it impacted accounting practice and decision making under increased uncertainty. This study revealed that conventional governance mechanisms for example, board independence, audit committee independence and CEO duality do not affect accounting conservatism. However, board metric, which measures the dispersion and the experience of the board, is positively and significantly related to accounting conservatism. Moreover, the results of this study suggest that the size and profitability of the firms increase the likelihood of using conservative accounting policies. The findings of the study indicate that during crisis period, organizations more extensive governance structures and diverse knowledge are in a vantage position to apply accounting conservatism, which is crucial for ensuring the reliability and credibility of financial reports.