Journal of Management and Governance

, Volume 22, Issue 4, pp 921–946 | Cite as

On the relationship between compliance with recommendations on the audit committee of codes of good practices and financial reporting quality

  • Josep Garcia-BlandonEmail author
  • Josep Maria Argilés-Bosch
  • Monica Martinez-Blasco
  • David Castillo Merino


Codes of good practices provide a soft alternative to the hard legislation approach to corporate governance. These codes include a set of recommendations that companies are expected to follow in order to enhance governance structures and practices. Some of these recommendations specifically aim to improve the effectiveness of the audit committee. We investigate the relationship between the level of compliance with recommendations on the audit committee of the Spanish Unified Code and financial reporting quality, as measured by discretionary accruals and by the opinion of the audit report. We use a sample of companies listed in the Spanish stock market for the years between 2007 and 2013. Results show a strong and positive relationship between the level of compliance with recommendations and the quality of financial reporting. We also report significant results for some specific recommendations. These results are robust to various checks. Therefore, the level of compliance with recommendations on the audit committee might provide a feasible and reliable indicator of the quality of financial reports released by the company.


Codes of good practices Recommendations Audit committee Financial reporting quality 


  1. Abbott, L. J., & Parker, S. (2000). Auditor selection and audit committee characteristics. Auditing: A Journal of Practice & Theory, 19(2), 47–66.CrossRefGoogle Scholar
  2. Abbott, L. J., Parker, S., & Peters, G. F. (2004). Audit committee characteristics and restatements. Auditing: A Journal of Practice & Theory, 23(1), 69–87.CrossRefGoogle Scholar
  3. Aguilera, R. V., & Cuervo-Cazurra, A. (2009). Codes of good governance. Corporate Governance: An International Review, 17(3), 376–387.CrossRefGoogle Scholar
  4. Anthony, J. H., & Ramesh, K. (1992). Association between accounting performance measures and stock prices: A test of the life cycle hypothesis. Journal of Accounting and Economics, 15(2–3), 203–227.CrossRefGoogle Scholar
  5. Becker, C. L., DeFond, M. L., Jiambalvo, J., & Subramanyam, K. R. (1998). The effect of audit quality on earnings management. Contemporary Accounting Research, 15(1), 1–24.CrossRefGoogle Scholar
  6. Bedard, J., Chtourou, S. M., & Courteau, L. (2004). The effect of audit committee expertise, independence. Auditing: A Journal of Practice and Theory, 23(2), 13–35.CrossRefGoogle Scholar
  7. Carey, P. J., & Simnett, R. (2006). Audit partner tenure and audit quality. The Accounting Review, 81(3), 653–676.CrossRefGoogle Scholar
  8. Chen, A., Tsao, M., & Wu, C. (2007). Building a corporate governance index from the perspectives of ownership and leadership for firms in Taiwan. Corporate Governance: An International Review, 15(2), 251–261.CrossRefGoogle Scholar
  9. Chen, J. J., & Zhang, H. (2014). The impact of the corporate governance code on earnings management–Evidence from Chinese listed companies. European Financial Management, 20(3), 596–632.CrossRefGoogle Scholar
  10. Chi, H. Y., & Chin, C. L. (2011). Firm versus partner measures of auditor industry expertise and effects on auditor quality. Auditing: A Journal of Practice and Theory, 30(2), 201–229.CrossRefGoogle Scholar
  11. CNMV. (2004). Corporate governance report of entities with securities admitted to trading on official secondary markets. Madrid: Comisión Nacional del Mercado de Valores.Google Scholar
  12. CNMV. (2006). Good governance code of listed companies. Madrid: Comisión Nacional del Mercado de Valores.Google Scholar
  13. CNMV. (2012). Informe anual de la CNMV sobre los mercados de valores y su actuación. Ejercicio 2012. Comisión Nacional del Mercado de Valores, Madrid.Google Scholar
  14. CNMV. (2015). Good governance code of listed companies. Madrid: Comisión Nacional del Mercado de Valores.Google Scholar
  15. De Andres Suarez, J., Garcia, E. C., Mendez, C. F., & Gutierrez, C. R. (2013). The effectiveness of the audit committee in Spain: implications of its existence on the auditor’s opinion. SERIEs, 4(3), 333–352.CrossRefGoogle Scholar
  16. De Vlaminck, N., & Sarens, G. (2015). The relationship between audit committee characteristics and financial statement quality: evidence from Belgium. Journal of Management and Governance, 19(1), 145–166.CrossRefGoogle Scholar
  17. Dechow, P. M. (1994). Accounting earnings and cash flows as measures of firm performance: The role of accounting accruals. Journal of Accounting and Economics, 18(1), 3–42.CrossRefGoogle Scholar
  18. Dechow, P. M., Sloan, R. G., & Sweeny, A. P. (1995). Detecting earnings management. The Accounting Review, 70(2), 193–226.Google Scholar
  19. DeFond, M., & Zhang, J. (2014). A review of archival auditing research. Journal of Accounting and Economics, 58(2), 275–326.CrossRefGoogle Scholar
  20. Dopuch, N., Holthausen, R. W., & Leftwich, R. W. (1987). Predicting audit qualifications with financial and market variables. The Accounting Review, 62(3), 431–454.Google Scholar
  21. Francis, J. R., Maydew, E. L., & Sparks, H. C. (1999). The role of Big 6 auditors in the credible reporting of accruals. Auditing: A Journal of Practice & Theory, 18(2), 17–34.CrossRefGoogle Scholar
  22. Francis, J. R., & Wang, D. (2008). The joint effect of investor protection and Big 4 audits on earnings quality around the world. Contemporary Accounting Research, 25(1), 157–191.CrossRefGoogle Scholar
  23. Gonzalez, J. S., & Garcia-Meca, E. (2014). Does corporate governance influence earnings management in Latin American markets? Journal of Business Ethics, 121(3), 419–440.CrossRefGoogle Scholar
  24. Johnson, V. E., Khurana, I., & Reynolds, J. K. (2002). Audit firm tenure and the quality of financial reports. Contemporary Accounting Research, 19(4), 637–660.CrossRefGoogle Scholar
  25. Jones, J. (1991). Earnings management during import relief investigations. Journal of Accounting Research, 29(2), 193–228.CrossRefGoogle Scholar
  26. Klein, A. (2002). Audit committee, board of director characteristics, and earnings management. Journal of Accounting and Economics, 33(3), 375–400.CrossRefGoogle Scholar
  27. Krishnan, J. (2005). Audit committee quality and internal control: An empirical analysis. The Accounting Review, 80(2), 649–675.CrossRefGoogle Scholar
  28. Krishnan, J., & Krishnan, J. (1997). Litigation risk and auditor resignations. The Accounting Review, 72(4), 539–560.Google Scholar
  29. Lys, T., & Watts, R. L. (1994). Lawsuits against auditors. Journal of Accounting Research, 32(supplement), 65–93.CrossRefGoogle Scholar
  30. Monterrey, J., & Sanchez, A. (2008). Gobierno corporativo y calidad de la información contable: evidencia empírica española. Spanish Accounting Review, 11(1), 65–98.Google Scholar
  31. Mora, A., & Sabater, A. (2008). Evidence of income-decreasing earnings management before labour negotiations within firms. Investigaciones Económicas, 32(2), 201–230.Google Scholar
  32. Myers, J. N., Myers, L. A., & Omer, T. C. (2003). Exploring the term of the auditor-client relationship and the quality of earnings: A case for mandatory auditor rotation? The Accounting Review, 78(3), 779–799.CrossRefGoogle Scholar
  33. Park, Y. W., & Shin, H. H. (2004). Board composition and earnings management in Canada. Journal of Corporate Finance, 10(3), 431–457.CrossRefGoogle Scholar
  34. Patelli, L., & Prencipe, A. (2007). The relationship between voluntary disclosure and independent directors in the presence of a dominant shareholder. European Accounting Review, 16(1), 5–33.CrossRefGoogle Scholar
  35. Pucheta-Martínez, M. C., & De Fuentes, C. (2007). The impact of audit committee characteristics on the enhancement of the quality of financial reporting: An empirical study in the Spanish context. Corporate Governance: An International Review, 15(6), 1394–1412.CrossRefGoogle Scholar
  36. Rahman, R., & Ali, F. (2006). Board, audit committee, culture and earnings management: Malaysian evidence. Managerial Auditing Journal, 21(7), 783–804.CrossRefGoogle Scholar
  37. Rodriguez-Fernandez, M. (2016). Social responsibility and financial performance: The role of good corporate governance. BRQ Business Research Quarterly, 19(2), 137–151.CrossRefGoogle Scholar
  38. Sanchez, P. C., Ballesta, J. P. S., & Garcia-Meca, E. (2012). Factores explicativos del buen gobierno en la empresa española. Spanish Accounting Review, 15(2), 237–255.Google Scholar
  39. Shu, S. (2000). Auditor resignations: clientele effects and legal liability. Journal of Accounting and Economics, 29(2), 173–205.CrossRefGoogle Scholar
  40. Sierra, L., Ruiz-Barbadillo, E., & Orta, M. (2012). Audit committee and internal audit and the quality of earnings: empirical evidence from Spanish companies. Journal of Management and Governance, 16(2), 305–331.CrossRefGoogle Scholar
  41. Sloan, R. (1996). Do stock prices fully reflect information in accruals and cash flows about future earnings? The Accounting Review, 71(3), 289–315.Google Scholar
  42. Trombetta, M., & Imperatore, C. (2014). The dynamic of financial crises and its non-monotonic effects on earnings quality. Journal of Accounting and Public Policy, 33(3), 205–232.CrossRefGoogle Scholar
  43. Wang, D. (2006). Founding family ownership and earnings quality. Journal of Accounting Research, 44(3), 619–656.CrossRefGoogle Scholar
  44. Watts, R. L., & Zimmerman, J. L. (1986). Positive accounting theory. Englewood: Prentice-Hall Inc.Google Scholar
  45. Weil, G. & Manges L. (2002). Comparative study of corporate governance codes relevant to the European Union and its member states, on behalf of the European Commission. Internal Market Directorate General.Google Scholar
  46. Zmijewski, M. E. (1984). Methodological issues related to the estimation of financial distress prediction models. Journal of Accounting Research, 22(supplement), 59–82.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  • Josep Garcia-Blandon
    • 1
    Email author
  • Josep Maria Argilés-Bosch
    • 2
  • Monica Martinez-Blasco
    • 1
  • David Castillo Merino
    • 1
  1. 1.IQS School of Management (Universitat Ramon Llull)BarcelonaSpain
  2. 2.Department of Accounting (Universitat de Barcelona)BarcelonaSpain

Personalised recommendations