The Relationship Between Corporate Governance And Earnings Quality Of Hong Kong Listed Company

1779 words - 7 pages

Topic: The relationship between corporate governance and earnings quality of Hong Kong listed companyBackgroundCorporate governance means the relationship between the company's management, board of directors, shareholders and other persons associated with the business interests. Meanwhile, corporate governance also provides a system to allow bodies to set goals, develop strategies to achieve goals, and monitoring bodies' performance. That is what the company's management and the board duties and responsibilities.Corporate governance, being a crucial issue all over the world, is a no exceptional case for Hong Kong industries as well. Because of corporate governance have an important part for fiduciary responsibilities, responsibility, control mechanisms, auditing and disclose the information to shareholders and others. All related person should abide by the principles of corporate governance in all aspects. And also, the corporate governance system should be designed to detect and prevent fraud.Moreover, it is being increasingly discussed after the Enron, Adelphia and WorldCom scandals, which had a worldwide outreach (Core, Holthausen, & Larcker, 1999; Loomis, 1999). Therefore, the Sarbanes-Oxley Act of 2002 was produced, the most sweeping corporate governance regulation in the US in the last 70 years (Byrnes et al., 2003). The purpose of this Act is to enhance the quality of financial report of listed companies, and to improve the corporate governance structure in order to strengthen the supervision and management positions in the company.In addition, corporate governance is a certain extent affects the earnings quality. Prior studies have found the Board is the larger of scale, then the company may be more likely to occur financial reporting fraud (Beasley, 1996), and earnings management (DeChow, sloan, & Sweeney, 1996). On the other hand, other studies found that the board size was negatively correlated with earnings management (Chtourou, 2000) and (Xie et al., 2003) also held the same view that the greater size of the board, will more help to improve the quality of financial statements. These empirical researches have recorded that the link between the reliability of financial reporting and governance mechanisms directly. Therefore, what corporate governance and earnings quality in Hong Kong listed companies will show what relationship?Earnings Quality term is widely used in the accounting circle and practice circle, it is the main quality characteristics of financial statements, including the understandability, relevance, reliability and comparability. It is the cash flow and accruals composed (Palepu, Bernard, & Healy 1997).Besides, earnings reflect the results of a series of accounting for business operations, different accounting principles and assumptions will affect the accounting treatment of the results, thus making the current and future earnings figures fluctuate. According to Penman (2003) said that earnings quality is...

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