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Corporate Governance and Its Association with Audit Opinion: The Case of Greece

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Advances in Longitudinal Data Methods in Applied Economic Research (ICOAE 2020)

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Abstract

This study assesses the impact of: (1) internal controls and audit compliance disclosures, (2) compliance with good corporate governance practices, and (3) the level of earnings management, on the type of audit opinion issued by the external auditor (unmodified opinion vs. unmodified with emphasis of matter paragraph), in a “comply-or-explain” corporate governance regime. This study also examines if these disclosures affect the number of issues identified in the emphasis of matter paragraph of an unmodified opinion. Data on disclosures were hand-collected from the annual reports of 341 companies listed on the Athens Stock Exchange, for the period 2014–2015. The results indicate that internal controls and corporate governance disclosures seem to have an impact on the type of audit opinion issued by the external auditor, as well as on the number of issues included in the unmodified opinion with emphasis of matter paragraph.

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Notes

  1. 1.

    For more information on the GCG Code, please refer to Boskou, Kirkos, and Spathis (2019).

  2. 2.

    The law on public limited companies places great importance on the composition of the Board of Directors and on the proportion of executive and nonexecutive members. According to the CG Law 3016/2002 of listed companies, the Board of Directors should consist of at least 1/3 of nonexecutive members. The adoption of this good CG practice aims to ensure that boards with a higher ratio of nonexecutive to executive members have greater independence and objective oversight.

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Author information

Authors and Affiliations

  1. Department of Accounting and Information System, International Hellenic University, Thermi, Greece

    Georgia Boskou

  2. Division of Business Administration, Department of Economics, Aristotle University of Thessaloniki, Thessaloniki, Greece

    Maria Tsipouridou & Charalambos Spathis

Authors
  1. Georgia Boskou
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  2. Maria Tsipouridou
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  3. Charalambos Spathis
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Corresponding author

Correspondence to Georgia Boskou .

Editor information

Editors and Affiliations

  1. Laboratory of Applied Economics, Department of Economics, University of Western Macedonia, Kastoria, Greece

    Nicholas Tsounis

  2. Laboratory of Applied Economics, Department of Economics, University of Western Macedonia, Kastoria, Greece

    Aspasia Vlachvei

Appendix: Definition of Variables

Appendix: Definition of Variables

Variable

 

Definition

Data Source

Dependent variables

AOE

=

Audit opinion with emphasis is a dummy variable that represents either an unmodified opinion or an unmodified opinion with an emphasis of matter paragraph. It is a dummy variable equal to 1 if the unmodified opinion has an emphasis of matter paragraph, 0 otherwise

Annual report

NOM

=

Number of matters is the number of issues included in the unmodified opinion with emphasis of matter paragraph

Annual report

Test variables

SEGR_DUTIES

=

Segregation of duties is a dummy variable that takes the value of 1 if the areas of responsibility and assigning task to employees are defined and incompatible duties are vested in different people, otherwise it equals 0

Annual report

AUTHORIZATION

=

Dummy variable that takes the value of 1 if the entity requires proper authorization procedures in order to safeguard its physical assets and protect the integrity of its records, otherwise it equals 0

Annual report

IC_DISCLOSURE

=

The number of words used to describe the internal controls in annual reports, paying particular attention to the processes of preparing transparent and reliable financial statements

Annual report

BOARD_SIZE

=

The number of members on the Board of Directors

Annual report

NON_EXE_MEMB

=

The percentage of nonexecutive members on the Board of Directors

Annual report

FIN_EXPERTISE

=

The percentage of board members with financial education and experience

Annual report

DUAL

=

Duality is a dummy variable that presents the practice of assigning two roles simultaneously to one person, the Chairman of the Board and the Chief Executive Officer. In this case, the variable gets the value 1, otherwise the value is 0

Annual report

AWCA

=

The absolute value of abnormal accruals is calculated according to De Fond and Park (2001), as follows: AWCAt = WCt − [(WCt − 1/St − 1) * St], where WC = (asset- and short-term investments)—(short-term liabilities-short-term loans) and S = sales.

All variables are scaled to total assets.

Datastream

Firm-specific control variables

CR

 

Current ratio is measured as current assets divided by current liabilities

Datastream

ROA

=

Return of assets is measured as the ratio of net income to total assets

Datastream

LEV

=

Total debt to total assets

Datastream

CFO

=

Cash flow from operating activities to total assets

Datastream

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Boskou, G., Tsipouridou, M., Spathis, C. (2021). Corporate Governance and Its Association with Audit Opinion: The Case of Greece. In: Tsounis, N., Vlachvei, A. (eds) Advances in Longitudinal Data Methods in Applied Economic Research. ICOAE 2020. Springer Proceedings in Business and Economics. Springer, Cham. https://doi.org/10.1007/978-3-030-63970-9_25

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