The bridge to quality financial reporting: Audit committees’ mediating role in IFRS implementation for emerging markets

• Published date: 01 January 2024
• Author: Ines Kateb
• Date: 01 January 2024
• DOI: http://doi.org/10.1002/jcaf.22664

Received: 17 May2023Revised: 8 September 2023Accepted: 14 September 2023

DOI: 10.1002/jcaf.22664

RESEARCH ARTICLE

The bridge to quality financial reporting: Audit committees’

mediating role in IFRS implementation for emerging

markets

Ines Kateb1,2

1Department of Accounting, Umm

Al-Qura University, Mecca, Saudi Arabia

2Department of Accounting, ISCAE,

Manouba University, Manouba, Tunisia

Correspondence

Ines Kateb, Department of Accounting,

Umm Al-Qura University, Mecca,

Saudi Arabia.

Email: iakateb@uqu.edu.sa

Abstract

This study aims to examine the impact of International Financial Reporting

Standards (IFRS) adoption on financial reporting quality in Saudi Arabia, with

a specific focus on the mediating role of effective audit committees (ACs) and

the specific characteristics of ACs that have a negative correlationwith earnings

management (EM) practices. The research collected financial data from 92 listed

firms spanning the period from 2012 to 2020 encompassing both the yearsbefore

and after the IFRS adoption in 2017. The study used regression and rigorous

mediation analysis based on the Baron and Kenny (1986) approach to investi-

gate the relationship between IFRS adoption, ACs,and EM. The findings indicate

that IFRS adoption has a negative and significant impact on EM practices. Addi-

tionally, the study found that AC expertise is positively influenced by the IFRS

adoption, while the AC size has a positive correlation with EM levels. The study

further revealed that AC expertise has a negative correlation with EM levels and

fully mediates the relationship between IFRS adoption and EM. The research’s

findings carry significant practical implications for a range of stakeholders. Reg-

ulators and policymakers in Saudi Arabia should consider the positive impact

of IFRS adoption on financial reporting transparency and accountability when

evaluating their regulatory framework.Firms can strengthen their corporate gov-

ernance practices by focusing on the recruitment and training of AC members

with robust financial and accounting backgrounds. This emphasis on AC qual-

ity, rather than size, is crucial to mitigating EM practices and enhancing the

effectiveness of IFRS implementation. Lastly, investors and analysts can utilize

these findings to assess the reliability of financial statements and identify firms

with robust governance structures. Furthermore, the study contributes tothe dis-

course on financial reporting and governance dynamics in emerging markets,

offering insights for future research and policy discussions.

KEYWORDS

Audit Committee, IFRS adoption, Earnings Management, Emerging Markets, Financial

Reporting Quality

250 © 2023 Wiley Periodicals LLC.J Corp Account Finance. 2024;35:250–268.wileyonlinelibrary.com/journal/jcaf

KATEB 251

1 INTRODUCTION

The adoption of International Financial Reporting Stan-

dards (IFRS) has been a critical topic for many countries

worldwide, including Saudi Arabia, which has adopted

IFRS since 2017 as part of its efforts to diversify itseconomy

from dependence on petroleum products and attract for-

eign investment. The overarching objective of regulatory

bodies and accounting organizations has been to create

a dependable, uniform, and transparent financial report-

ing framework through the adoption of IFRS to improve

decision-making and investment opportunities. During

the same period of IFRS adoption, Saudi Arabia imple-

mented various corporate governance reforms, such as the

adoption of the Saudi Regulations on Corporate Gover-

nance (SRCGs) of 2017and the Saudi Investment Company

Law. These reforms have provided a robust platform for

companies to enhance their governance practices and have

helped to protect investors’ rights, maintain market stabil-

ity,and promote transparency and harmonized disclosures

(Naif & Mohd. Ali, 2019). Audit committees (ACs) are an

important aspect of corporate governance in Saudi Arabia,

and the SRCGs 2017 have implementedrules to ensure the

independence and proper functioning of the AC, includ-

ing the selection of a suitable chairperson, the selection of

members, the means of their nomination, the term of their

membership, their remunerations, the number of meet-

ings, and the reporting of results. ACs play a crucial role

in ensuring the credibility and financial reporting qual-

ity by reducing earnings management practices. Therefore,

effective ACs combined with the adoption of IFRS could

potentially improve financial reporting quality in Saudi

Arabia. Several studies have investigated the relationship

between IFRS adoption and financial reporting quality,

such as Barth et al. (2008). However, none of these stud-

ies have focused on the Saudi Arabian context. Previous

research indicates that the economic benefits of adopt-

ing IFRS are contingent on a variety of factors, including

the institutional environment (Christensen et al., 2009;

Daske et al., 2008; Sato & Takeda, 2017), economic fac-

tors, country size, and cultural differences (Hope et al.,

2006) in the adopting countries. However, the transition

from Saudi GAAP to IFRS is not without challenges, and

presents obstacles for firms, professionals, and regulators.

One of the main challenges is the unique national prac-

tices of Saudi Arabia, which may not always align with

IFRS, and compliance with strict local laws and Sharia’ law

(Alsamkari et al., 2021). The effectiveness of IFRS adoption

in improving financial reporting quality is still a subject of

debate, particularly in Saudi Arabian context.

Earnings management (EM) occurs when managers

use accounting principles to achieve good earnings, and

consequently, they alter financial reports and mislead

some stakeholders (Healy & Wahlen, 1999). Given the

prevalence of accounting and financial scandals, several

studies provided evidence on the importance of effective

AC in enhancing financial reporting quality (Chiu et al.,

2021; Gul et al., 2013; Jaggi & Leung, 2007). These studies

have suggested that the existence of an AC is associated

with a lower degree of EM, and the effectiveness of an

AC depends on its independence, expertise, size, and fre-

quency of meetings. Furthermore, audit committees with

independent members and financial experts improve the

quality of internal control (Krishnan, 2005; Zhang et al.,

2007). Although, the SRCGs issued by the Board of Saudi

Capital Market Authority have emphasized on the role of

ACs in ensuring fair, balanced, and understandable finan-

cial reports, little research has focused on the impact of

ACs on financial reporting quality in this context. Addi-

tionally, no previous studies haveexamined the mediating

role of AC in the relationship between IFRS adoption and

financial reporting quality in Saudi Arabian listed firms.

This study provides several noteworthy theoretical con-

tributions. It enhances our comprehension of how the

adoption of IFRS affects EM, especially in the unique

context of Saudi Arabian companies, which has received

limited attention in prior research. Additionally, it sheds

light on the mediating role of ACs in the connection

between IFRS adoption and EM, offering insights into the

mechanisms through which regulatory changes impact the

quality of financial reporting. Furthermore, our results

emphasize the crucial importance of AC characteristics,

particularly within the distinctive Saudi Arabian context,

and reveal which AC characteristics are most relevant in

this context—a region characterized by distinct national

practices that may not perfectly align with IFRS. These

multifaceted contributions enhance our understanding of

IFRS adoption, ACs, and EM dynamics, providing valuable

insights into financial reporting and corporate governance

in emerging markets.

In order to achieve the research objectives, our study

conducted empirical analyses on a sample of 92 listed firms

in Saudi Arabia over the period of 2012–2020, resulting

in a total of 828 observations. Our methodology utilized

a mediation analysis approach based on the Baron and

Kenny (1986) approach, which allowed for the derivation

of several significant conclusions. Specifically,our findings

indicate that IFRS adoption has a detrimental and nega-

tive effect on the level of EM. Furthermore, our analysis

suggests that IFRS adoption has a significant impact on

the expertise of the AC, while the size of the AC is found

to have a positive correlation with EM levels. In addition,

our results reveal that the expertise of the AC exhibits a

negative correlation with EM levels and our mediation