Regulatory monitoring and university financial reporting quality: Agency and resource dependency perspectives

Abstract

AbstractIn this paper we exploit the complementarities between agency theory and resource dependence theory to investigate the influence of regulatory monitoring on financial reporting quality in the higher education sector. Our setting is U.K. universities. Using 14 years of data over the period 2002–2015, we find that financial reporting quality, (proxied by discretionary accruals), improves with the intensity of monitoring and resource dependence (proxied by the proportion of funding from regulators/funding bodies). However, this positive influence is mitigated in the presence of a pre‐discretionary deficit, a proxy for the threat of regulatory intervention. A net benefit from monitoring remains for those universities with low levels of regulated funding but in those where there is high dependence the monitoring benefit is reversed and a pre‐discretionary deficit is converted to a small reported surplus. Both agency and resource dependence theories offer explanations for these findings. Agency theory predicts increased financial reporting quality with increased monitoring and also a reduction in financial reporting quality to avoid costly regulatory intervention. Resource dependence theory predicts that both these effects will increase with increased dependence on resources from a key provider. These findings extend our theoretical understanding of financial reporting quality of universities, contribute to the limited literature on financial reporting quality in the not‐for‐profit and public sectors, and contribute to the exploration of the use of alternative theoretical frameworks in the domain of public sector accounting.