Corporate governance and the level of Bahraini corporate compliance with IFRS disclosure

Abstract

PurposeThe purpose of this paper is to examine the relation between corporate governance (CG) and International Financial Reporting Standards (IFRS) disclosure one year before the issuance of the first Corporate Governance Code (CGC) in Bahrain.Design/methodology/approachThe CG is measured by board composition, audit committee characteristics, and ownership structure. Ordinary least-squares regressions are used to examine the relationships between the level of Bahraini corporate compliance with mandatory IFRS disclosure requirements as dependent variable and eight CG mechanisms as independent variables and five other firm-specific attributes, as control variables.FindingsThe results show that three of the CG mechanisms (i.e. board independence, audit committee independence, and Chief Executive Officer duality) are associated with the level of IFRS disclosure. This suggests that CG mechanisms are effective in the financial reporting practices. However, the results show that the other five CG mechanisms (i.e. board size, audit committee size, blockholder ownership, managerial ownership, and government ownership) are not associated with the level of IFRS disclosure. This result may prove the importance of the CGC as an effective enforcement mechanism to enforce Bahraini companies to fully comply with IFRS disclosure.Research limitations/implicationsAlthough the study can contribute to the understanding of the relationship between CG and IFRS in Bahrain, it may not be able to be generalized to other countries. Such relationships could be different from country to country due to business and legal environments. Therefore, there is a need to investigate these relationships among different countries. This study examines the relation between CG and the level of compliance with IFRS disclosure one year before the issuance of the first CGC in Bahrain. Future research might attempt to examine the relation one year after the issuance of the first CGC in Bahrain to confirm the importance of the CGCs as an effective enforcement mechanism.Practical implicationsThe findings of this study are of great concern to all users of annual reports and of particular interest to accounting regulators to improve the level of supervision and the standard of reporting in Bahrain. Also, it is of great concern to professional accounting bodies, policy makers, and governments in emerging markets in countries that share similar economic, political, and cultural environments.Originality/valueThis paper’s contribution to the literature is twofold: it examines the relation between three groups of CG mechanisms (i.e. board characteristics, audit committee characteristics and ownership structure) and the level of corporate compliance with IFRS disclosure; it examines the relation one year before implementing the first CGC in Bahrain and provides new evidence on the importance and effectiveness of the CGCs.