Interdependencies between corporate governance and financial audit: evidence from the Romanian Stock Exchange

Florin Dobre

doi:10.20869/auffin/2006/134/206

Abstract

The purpose of this research is to provide evidence about the relationship between the financial audit and corporate governance indicators. The study uses data from entities listed on the Bucharest Stock Exchange in Romania, which have both a one-tier system and a two-tier system management. The study aims to detect the interdependencies between financial audit (measured through the audit fees) and specific corporate governance indicators, such as the CEO/chair duality, the existence of the audit committee, the number of executive members from the board of directors or other characteristics of the board that are part of the corporate governance process. As there is a correlation between audit and corporate governance indicators, the research is conducted using a simultaneous equation model for the listed entities that have an obligation to report their individual financial statements using the IFRS approach. The data is manually collected from both the entitys individual financial statements and corporate governance statement. The results showed mixt evidence. While there is a negative relationship between the audit fees and the number of executive board members, ambiguous results are found for the other board characteristics. The explanation can be attributed to the fact that there is an important problem regarding data availability on the Romanian market and to a lack of transparency in the reporting process.

Highlights

Since the beginning of the financial crisis, there is a stronger need to certify that the financial information is correct and reliable, especially as this is audited by a financial auditor
The change of financial auditor is another element that we considered it could be correlated with the value of audit fees, which is both a measure of corporate governance and of financial audit
The purpose of this analysis is to reveal the correlation between audit fees, proxy as a measure of financial audit and corporate governance, with the corporate governance variables and the financial auditor’s characteristics

Summary

Introduction

Since the beginning of the financial crisis, there is a stronger need to certify that the financial information is correct and reliable, especially as this is audited by a financial auditor. His credibility has been mitigated as there is doubt about his ability to detect huge financial problems (Sikka, 2009). In a period of crisis, the entities seek to change their financial auditor to a BIG 4 company rather than to another company, as it is thought that BIG 4 financial auditors confer a higher credibility to the way in which the financial statements are prepared (Hubens, 2012). The entities with a weak corporate governance system have more agency problems and provide a lower protection of the minor shareholders (Core, Holthausen and Larcker, 1999)

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Conclusion