Abstract:
The purpose of this paper is to investigate whether corporate governance
initiatives in South Africa that relate to the monitoring ability of the
non-executive directors on the board of small and medium companies
have improved earnings quality by adopting conservative accounting
practices. The sample construct includes the 2008 – 2011 reporting
periods of South African companies listed on the Alternative Exchange
(AltX). A reverse regression of earnings on returns was used to examine
the market-based attributes of earnings quality, i.e. conservatism and
the timeliness of earnings. No evidence was found that the boards of
small and medium-sized companies are inclined to adopt conservative
accounting practices that will result in the asymmetric timeliness of
earnings. There is also no evidence that the quality of reported earnings
improved as a result of the monitoring ability of the board with reference
to the representation of non-executive directors on the board. The
findings can be of interest to investors, managers and regulators as the
efficiency of corporate boards and the transparency of financial reporting
have implications for all of them.
