Corporate Governance and Financial Reporting Quality: Preliminary Evidence from Saudi Arabia

Abstract

The investment climate in the country depends largely on the level of confidence of potential investors, which actualizes the need to provide transparent and quality financial reporting to economic entities. Powerful corporations that have established an effective corporate governance mechanism are able to provide high competitive advantage over the long term, contributing to their financial and economic stability. The purpose of the article is to determine the impact of corporate governance mechanisms on the quality of a company’s financial statements. The corporate governance rules in force in Saudi Arabia were developed in 2006, then revised twice in 2009 and 2015, and only finally approved in 2017. The survey was based on the results of an electronic survey of 56 Saudi financial analysts selected from their LinkedIn profiles (financial analysts were selected by respondents because they play a significant role in the capital markets and are users of financial statements). The author points out that the objectivity of the survey results can be enhanced by expanding the sample of survey participants. The questionnaire contained 11 questions about corporate governance and its contribution to improving the quality of the financial statements of the respective companies. The results of the survey have empirically confirmed that corporate governance is a factor contributing to improving the quality of financial reporting and, consequently, increasing foreign investment inflows, so compliance with the new corporate governance rules is extremely important for Saudi Arabia corporations. Improvements in corporate governance mechanisms are perceived by members of boards of directors, audit committees, and internal audit departments as one of the main factors in improving the quality of financial reporting. Keywords: corporate governance; Financial Statements; financial analysts; transparency of reporting; investors; Saudi Arabia.