The impact of public governance perception on the quality of financial reporting

Abstract

The article examines the relationship between public governance perception (PG) and the overall quality of the financial reporting index (OQFRI). The study combines the World Bank’s Worldwide Governance Indicators (WGIs), which are used as a measure for country-level governance. In addition, the study of Tang et al. for the overall financial reporting index (OQFRI) is used to measure the quality of financial reporting. Our balanced panel data set has 418 observations, constructed with 38 countries and the period from 2004 to 2014 is tested using a linear mixed model (LMM) to consider both random and fixed effects. The results indicate a positive relationship between regulatory quality, political stability, the rule of law, government effectiveness and quality of financial reporting. But, findings reveal that voice and accountability and control of corruption have no significant impact on the quality of financial reporting. Our results suggest that institutional quality and public governance perception should be considered by auditors while evaluating the quality of financial reports and their risk. Also, it is important to consider the role of public governance in addition to the role of corporate Governance in improving the quality of financial reporting.