Two-tier board characteristics and expanded audit reporting: Evidence from China

Emad Noureldeen (), Mohamed Elsayed (), Ahmed A. Elamer () and Jianming Ye ()
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Emad Noureldeen: Lancaster University
Mohamed Elsayed: Queen’s University Belfast
Ahmed A. Elamer: Brunel University London
Jianming Ye: Xiamen University

Review of Quantitative Finance and Accounting, 2024, vol. 63, issue 1, No 7, 195-235

Abstract: Abstract This paper investigates the relationship between the characteristics of the two-tier board structure (board of directors and supervisory board) and the disclosure of key audit matters (KAMs) in the expanded audit report. Using a sample of 10,857 firm-year observations of Chinese listed firms spanning the 2017–2020 period, we offer two main results. First, with regard to the board of directors, we find that the auditor discloses a greater number and lengthier content of KAMs when there is a CEO duality and the board meetings are more frequent. Second, conversely, we find that the size and independence of the supervisory board are related to a lower number and length of KAMs disclosure. When we distinguish between account-level KAMs and entity-level KAMs, our further analysis shows that our results are principally associated with account-level KAMs rather than entity-level KAMs. Specifically, we find that CEO duality and the frequency of board of directors meetings are positively related to account-level KAMs. We also find that the size and independence of the supervisory board are negatively related to account-level KAMs. Our further analysis also shows evidence that these two-tier board structure characteristics are associated with the tone of KAMs disclosure in a consistent fashion. Our findings are robust and address endogeneity problems. Overall, our results suggest that the characteristics of the two-tier board structure drive KAMs disclosure, which should be of interest to regulatory bodies, policymakers, auditors, multinational firms, and users of financial reports.

Keywords: Expanded audit report; Two-tier board; Corporate governance; Key audit matters; Board of directors; Supervisory board (search for similar items in EconPapers)
JEL-codes: M41 M42 M48 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s11156-024-01256-6

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