Assessing the Relationship Between Corporate Governance Reforms and Audit Quality Improvements

Posted: Feb 12, 2017

• Penelope Hughes
• Riley Morris
• Nora Pearson

Abstract

The relationship between corporate governance reforms and audit quality improvements represents a critical area of inquiry in accounting and corporate regulation. Following numerous corporate scandals and financial crises, regulatory bodies worldwide have implemented extensive governance reforms aimed at enhancing financial reporting quality and audit effectiveness. However, the empirical evidence regarding the efficacy of these reforms remains mixed and often contradictory. This research addresses this gap by developing an innovative methodological framework that moves beyond traditional econometric approaches to capture the complex, multi-dimensional nature of governance-audit relationships. Corporate governance reforms typically encompass changes to board composition, audit committee requirements, internal control systems, and disclosure obligations. While these structural changes are theoretically designed to improve oversight and monitoring functions, their actual impact on audit quality depends on numerous contextual factors and implementation dynamics. Previous research has largely focused on isolated reform elements or short-term effects, neglecting the systemic and interactive nature of governance mechanisms. Our study makes several distinctive contributions to the literature. First, we introduce a novel assessment framework that integrates computational text analysis with traditional financial metrics to evaluate governance quality. Second, we employ network analysis to examine how board interlocks and professional relationships influence the diffusion of audit best practices following reforms. Third, we develop machine learning classifiers to identify patterns in audit committee effectiveness that transcend conventional demographic indicators.