Description
The purpose of this paper is to identify some key issues for the analysis of corporate
governance based on the papers within this special issue including the Guest Editor’s perspectives.
Accounting Research Journal
Governance issues in accounting
Marion Hutchinson
Article information:
To cite this document:
Marion Hutchinson, (2009),"Governance issues in accounting", Accounting Research J ournal, Vol. 22 Iss 2
pp. 89 - 92
Permanent link to this document:http://dx.doi.org/10.1108/10309610910987466
Downloaded on: 24 January 2016, At: 21:08 (PT)
References: this document contains references to 13 other documents.
To copy this document: [email protected]
The fulltext of this document has been downloaded 1818 times since 2009*
Users who downloaded this article also downloaded:
Sebahattin Demirkan, Harlan Platt, (2009),"Financial status, corporate governance quality, and the
likelihood of managers using discretionary accruals", Accounting Research J ournal, Vol. 22 Iss 2 pp. 93-117http://dx.doi.org/10.1108/10309610910987475
Ahsan Habib, Istiaq Azim, (2008),"Corporate governance and the value-relevance of accounting
information: Evidence from Australia", Accounting Research J ournal, Vol. 21 Iss 2 pp. 167-194 http://
dx.doi.org/10.1108/10309610810905944
Richard Lane, Brendan T. O'Connell, (2009),"The changing face of regulators' investigations
into financial statement fraud", Accounting Research J ournal, Vol. 22 Iss 2 pp. 118-143 http://
dx.doi.org/10.1108/10309610910987484
Access to this document was granted through an Emerald subscription provided by emerald-srm:115632 []
For Authors
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Authors service information about how to choose which publication to write for and submission guidelines
are available for all. Please visit www.emeraldinsight.com/authors for more information.
About Emerald www.emeraldinsight.com
Emerald is a global publisher linking research and practice to the benefit of society. The company
manages a portfolio of more than 290 journals and over 2,350 books and book series volumes, as well as
providing an extensive range of online products and additional customer resources and services.
Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee
on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive
preservation.
*Related content and download information correct at time of download.
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GUEST EDITORIAL
Governance issues in accounting
Marion Hutchinson
Queensland University of Technology, Brisbane, Australia
Abstract
Purpose – The purpose of this paper is to identify some key issues for the analysis of corporate
governance based on the papers within this special issue including the Guest Editor’s perspectives.
Design/methodology/approach – The ?ve papers included in this special issue are summarized
and their main contribution to the literature is highlighted.
Findings – The paper collectively deal with the role and impact of corporate boards on the quality of
information provided to capital markets.
Practical implications – The theoretical and empirical research included in the special issue
advance the understanding of corporate governance which provides impetus for practitioner and
policy change.
Originality/value – The normative concepts of best practice need to be validated by empirical
testing in the context of ?rms and their institutional settings. This suite of papers provides evidence of
the effectiveness of corporate governance in improving accounting quality.
Keywords Corporate governance, Accounting, Best practice
Paper type Research paper
1. Introduction
The papers published in this special issue of Accounting Research Journal explore the
impact of corporate governance practices within the framework of accounting issues.
Corporations must provide stakeholders with relevant, reliable, and timely
information to maintain ef?cient global capital markets. Accounting, auditing, and the
corporate governance environment are essential components in the ?ow of information
to capital market participants. However, recent accounting failures have illustrated the
need for substantive improvements in these systems.
This special issue illustrates the importance of ?nancial statements and the role
governance plays in maintaining accounting quality. Within the ?nancial reporting
environment, global pressures motivate managers to manage earnings and to delay
and/or conceal bad news. In this context, the ?rst and third paper examine the role of
governance in constraining howsome companies manipulate their ?nancial statements.
The second paper examines the frauds that are committed in ?nancial statements in the
post-Enron regulatory environment. The fourth paper investigates the monitoring role
of institutional investors and howthe type of investor and political connections of ?rms
impacts their association with the external audit. Finally, the ?fth paper assesses the
association between corporate governance practices and ?rm risk. Together, this suite
of papers provides insight into the role of corporate governance in ensuring a
transparent and accountable capital market.
2. Corporate governance research
Creditors and investors must have faith in the reliability and quality of earnings if they
are to entrust their resources in a ?rm. Prior research in accounting and ?nance has
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1030-9616.htm
Governance
issues in
accounting
89
Accounting Research Journal
Vol. 22 No. 2, 2009
pp. 89-92
qEmerald Group Publishing Limited
1030-9616
DOI 10.1108/10309610910987466
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separately investigated the association between corporate governance and earnings
management and the classi?cation of the ?rm’s ?nancial health (Bowen et al., 2008;
Mather and Ramsay, 2006; Yeh and Lee, 2004). In this special issue, Sebahattin
Demirkan and Harlan Platt integrate these research paradigms. They select a discrete
sample of US ?rms in the manufacturing industry to show how managers’ incentives
to manipulate earnings are associated with the company’s ?nancial condition which is
a function of the ?rm’s governance quality. This study demonstrates the importance of
?nancial classi?cations of ?rms for creditors and investors when they evaluate
potential investments.
Supporting corporate governance are the regulatory initiatives associated with
commercial laws and codes of corporate governance that aim to regulate managerial
power. Many of the policy prescriptions contained in codes of recommended corporate
governance practice depend on universal notions of best practice. The normative
concepts of best practice need to be validated by empirical testing in the context of ?rms
and their institutional settings. A good deal of the concepts of best corporate
governance practices and associated research has adopted an agency theory approach.
Traditional agency theory is derived fromthe separation of ownership fromcontrol and
emphasizes the role of corporate governance as one of aligning the agent’s goals with
the interests of shareholders (Fama and Jensen, 1983). In contrast, institutional theory
adopts an open system perspective where organizations are strongly in?uenced by
their environments (DiMaggio and Powell, 1983; Bealing et al., 1996). Richard Lane and
Brendan T. O’Connell use institutional theory to hypothesise that the Securities and
Exchange Commission (SEC) increased the number and scale of its enforcement
activities to ensure maintenance of its societal legitimacy as a consequence of the major
accounting scandals. Their study extends the Committee of Sponsoring Organizations
of the Treadway Commission 1987-1997 (COSO Report, 1999) by examining US
Accounting and Auditing Enforcement Releases to provide insights into the
characteristics and realities of ?nancial statement fraud in the post-Enron regulatory
environment. In comparing the characteristics of ?nancial statement fraud pre- and
post-issuance of the COSO Report, they provide evidence that high-pro?le accounting
scandals have been instrumental in changing the focus of SEC investigations.
The plethora of research on corporate boards demonstrates the importance of this
area within corporate governance research. Directors’ responsibilities include
assurance that the ?rm is well governed and that the information provided to
stakeholders is reliable. There is also considerable research that has examined the
association between board independence and earnings management (Hutchinson et al.,
2008; Klein, 2002; Peasnell et al., 2005; Xie et al., 2003). However, much of the research on
board independence has not considered the motivation and incentives of non-executive
directors that are not truly independent. Liyu He, Sue Wright, Elaine Evans and Susan
Crowe investigate this issue by examining the role of non-executive directors in
effectively monitoring the quality of accounting information, paying particular
attention to the part played by af?liated directors in Australian ?rms. Further their
study is carried out post governance reforms, which in turn tests the effectiveness of the
recommendations made by the 2003 Australian Stock Exchange Principles of Good
Corporate Governance and Best Practice. Their study highlights the need for boards to
take care in the selection and reward of non-executive directors, particularly those with
af?liations with the ?rm.
ARJ
22,2
90
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There is an ever increasing call for institutional investors to take a more active
monitoring role in the governance of the ?rms in which they invest, particularly
since the global ?nancial crisis. Institutional shareholders have a responsibility to
generate long-term value on behalf of their bene?ciaries and therefore play an
important part in scrutinizing ?rms’ corporate governance practices. In addition, the
quality of the external audit function, as part of ?rms’ governance, is responsible for
ensuring the reliability of reporting and control processes of the ?rms they audit. Thus,
more active institutional investors are likely to pressure audit ?rms to carry out more
substantive testing of the ?rm’s systems and this relationship is likely to depend on the
institutional setting. Ef?ezal Aswadi Abdul Wahab, Mazlina Mat Zain, Kieran James
and Hasnah Haron study the relationship between institutional investors and the
external auditor in Malaysia, a country with a developing capital market, and provide
insights into a diverse range of institutional characteristics that impact corporate
monitoring costs. They ?nd that ?rms’ monitoring costs (audit fees) increase with
institutional ownership for investors that do not have a relationship with the ?rm. They
also ?nd that, due to the greater perceived inherent risk, politically connected ?rms
have higher monitoring costs. This paper demonstrates the factors that impact ?rms’
monitoring costs.
The ?nal paper in the special edition by Yi Wang and Judith Oliver also considers
the role of board independence but considers the association between board
independence and the risk pro?le of the ?rm. Agency theory assumes risk-neutral
shareholders prefer managers increase ?rm value by undertaking all positive net
present value projects. However, risk-averse managers prefer to undertake less risky
positive net present value projects and may therefore reject risky but pro?table projects
(Hutchinson, 2003). Firm risk refers to the underlying volatility in the ?rm’s earnings
stream and has been identi?ed as a source of agency con?ict (Bathala and Rao, 1995).
The agency con?ict arises because managers are more concerned about their
employment risk and ?rmsurvival than pro?t maximization of shareholders. To reduce
these agency con?icts, ?rms use supervisory and incentive alignment mechanisms that
alter the risk and effort orientation of agents to align them with the interests of
principals (Tosi and Gomez-Mejia, 1989). Wang and Oliver study of Australian ?rms
?nds that ?rms with more executive directors on the board have lower risk. However,
af?liated and independent directors, have no signi?cant in?uence on the level of
performance variance. The results of their study imply monitoring by independent
boards is ineffective in mitigating the agency con?icts associated with managers’ risk
avoidance.
3. Conclusion
The ?ve papers presented in this special issue, although diverse, share a common
theme. The authors have highlighted the importance of contextual factors in corporate
governance research that is based on different organizational and institutional
environments. Theoretical and empirical research should progress understanding of
corporate governance which will, in turn, prove useful for practitioners and policy
makers.
The studies discussed above are in many ways complementary, as they focus on
corporate governance mechanisms that inform capital markets. Taken together, they
Governance
issues in
accounting
91
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represent a comprehensive overview of current corporate governance research and
suggest a number of opportunities for future studies.
References
Bathala, C.T. and Rao, R.P. (1995), “The determinants of board composition: an agency theory
perspective”, Managerial and Decision Economics, Vol. 16, pp. 59-69.
Bealing, W.E. Jr, Dirsmith, M.W. and Fogarty, J. (1996), “Early regulatory actions by the SEC:
institutional theory perspective on the dramaturgy of political exchanges”, Accounting
Organizations and Society, Vol. 21 No. 4, pp. 317-38.
Bowen, R., Rajgopal, S. and Venkatachalam, M. (2008), “Accounting discretion, corporate
governance, and ?rm performance”, Contemporary Accounting Research, Vol. 25,
pp. 310-405.
DiMaggio, P.J. and Powell, W.W. (1983), “The iron cage revisited: institutional isomorphism and
collective rationality in organizational ?elds”, American Sociological Review, Vol. 48,
pp. 113-23.
Fama, E.F. and Jensen, M.C. (1983), “Separation of ownership and control”, Journal of Law &
Economics, Vol. 26, pp. 301-25.
Hutchinson, M.R. (2003), “An analysis of the association between ?rm risk, executive share
options and accounting performance: some Australian evidence”, Review of Accounting
and Finance, Vol. 2 No. 3, pp. 48-71.
Hutchinson, M.R., Percy, M. and Erkurtoglu, L. (2008), “An investigation of the association
between corporate governance, earnings management and the effect of governance
reforms”, Accounting Research Journal, Vol. 21 No. 3, pp. 239-62.
Klein, A. (2002), “Audit committee, board of director characteristics and earnings management”,
Journal of Accounting and Economics, Vol. 33, pp. 375-400.
Mather, P. and Ramsay, A. (2006), “The effects of board characteristics on earnings management
around Australian CEO changes”, Accounting Research Journal, Vol. 19, pp. 78-93.
Peasnell, K.V., Pope, P.F. and Young, S. (2005), “Board monitoring and earnings management: do
outside directors in?uence abnormal accruals?”, Journal of Business Finance &
Accounting, Vol. 32 Nos 7/8, pp. 1311-46.
Tosi, H.L. and Gomez-Mejia, M.L. (1989), “The decoupling of CEO pay and performance: an
agency theory perspective”, Administrative Science Quarterly, Vol. 34, pp. 169-90.
Xie, B., Davidson, W.N. and DaDalt, P.J. (2003), “Earnings management and corporate
governance: the roles of the board and the audit committee”, Journal of Corporate Finance.,
Vol. 9, pp. 295-316.
Yeh, Y.H. and Lee, T.-S. (2004), “Corporate governance and ?nancial distress: evidence from
Taiwan”, Corporate Governance: An International Review, Vol. 12, pp. 378-88.
Corresponding author
Marion Hutchinson can be contacted at: [email protected]
ARJ
22,2
92
To purchase reprints of this article please e-mail: [email protected]
Or visit our web site for further details: www.emeraldinsight.com/reprints
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This article has been cited by:
1. Victoria J. Clout, Larelle Chapple, Nilan Gandhi. 2013. The impact of auditor independence regulations
on established and emerging firms. Accounting Research Journal 26:2, 88-108. [Abstract] [Full Text] [PDF]
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doc_394959293.pdf
The purpose of this paper is to identify some key issues for the analysis of corporate
governance based on the papers within this special issue including the Guest Editor’s perspectives.
Accounting Research Journal
Governance issues in accounting
Marion Hutchinson
Article information:
To cite this document:
Marion Hutchinson, (2009),"Governance issues in accounting", Accounting Research J ournal, Vol. 22 Iss 2
pp. 89 - 92
Permanent link to this document:http://dx.doi.org/10.1108/10309610910987466
Downloaded on: 24 January 2016, At: 21:08 (PT)
References: this document contains references to 13 other documents.
To copy this document: [email protected]
The fulltext of this document has been downloaded 1818 times since 2009*
Users who downloaded this article also downloaded:
Sebahattin Demirkan, Harlan Platt, (2009),"Financial status, corporate governance quality, and the
likelihood of managers using discretionary accruals", Accounting Research J ournal, Vol. 22 Iss 2 pp. 93-117http://dx.doi.org/10.1108/10309610910987475
Ahsan Habib, Istiaq Azim, (2008),"Corporate governance and the value-relevance of accounting
information: Evidence from Australia", Accounting Research J ournal, Vol. 21 Iss 2 pp. 167-194 http://
dx.doi.org/10.1108/10309610810905944
Richard Lane, Brendan T. O'Connell, (2009),"The changing face of regulators' investigations
into financial statement fraud", Accounting Research J ournal, Vol. 22 Iss 2 pp. 118-143 http://
dx.doi.org/10.1108/10309610910987484
Access to this document was granted through an Emerald subscription provided by emerald-srm:115632 []
For Authors
If you would like to write for this, or any other Emerald publication, then please use our Emerald for
Authors service information about how to choose which publication to write for and submission guidelines
are available for all. Please visit www.emeraldinsight.com/authors for more information.
About Emerald www.emeraldinsight.com
Emerald is a global publisher linking research and practice to the benefit of society. The company
manages a portfolio of more than 290 journals and over 2,350 books and book series volumes, as well as
providing an extensive range of online products and additional customer resources and services.
Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee
on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive
preservation.
*Related content and download information correct at time of download.
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GUEST EDITORIAL
Governance issues in accounting
Marion Hutchinson
Queensland University of Technology, Brisbane, Australia
Abstract
Purpose – The purpose of this paper is to identify some key issues for the analysis of corporate
governance based on the papers within this special issue including the Guest Editor’s perspectives.
Design/methodology/approach – The ?ve papers included in this special issue are summarized
and their main contribution to the literature is highlighted.
Findings – The paper collectively deal with the role and impact of corporate boards on the quality of
information provided to capital markets.
Practical implications – The theoretical and empirical research included in the special issue
advance the understanding of corporate governance which provides impetus for practitioner and
policy change.
Originality/value – The normative concepts of best practice need to be validated by empirical
testing in the context of ?rms and their institutional settings. This suite of papers provides evidence of
the effectiveness of corporate governance in improving accounting quality.
Keywords Corporate governance, Accounting, Best practice
Paper type Research paper
1. Introduction
The papers published in this special issue of Accounting Research Journal explore the
impact of corporate governance practices within the framework of accounting issues.
Corporations must provide stakeholders with relevant, reliable, and timely
information to maintain ef?cient global capital markets. Accounting, auditing, and the
corporate governance environment are essential components in the ?ow of information
to capital market participants. However, recent accounting failures have illustrated the
need for substantive improvements in these systems.
This special issue illustrates the importance of ?nancial statements and the role
governance plays in maintaining accounting quality. Within the ?nancial reporting
environment, global pressures motivate managers to manage earnings and to delay
and/or conceal bad news. In this context, the ?rst and third paper examine the role of
governance in constraining howsome companies manipulate their ?nancial statements.
The second paper examines the frauds that are committed in ?nancial statements in the
post-Enron regulatory environment. The fourth paper investigates the monitoring role
of institutional investors and howthe type of investor and political connections of ?rms
impacts their association with the external audit. Finally, the ?fth paper assesses the
association between corporate governance practices and ?rm risk. Together, this suite
of papers provides insight into the role of corporate governance in ensuring a
transparent and accountable capital market.
2. Corporate governance research
Creditors and investors must have faith in the reliability and quality of earnings if they
are to entrust their resources in a ?rm. Prior research in accounting and ?nance has
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1030-9616.htm
Governance
issues in
accounting
89
Accounting Research Journal
Vol. 22 No. 2, 2009
pp. 89-92
qEmerald Group Publishing Limited
1030-9616
DOI 10.1108/10309610910987466
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separately investigated the association between corporate governance and earnings
management and the classi?cation of the ?rm’s ?nancial health (Bowen et al., 2008;
Mather and Ramsay, 2006; Yeh and Lee, 2004). In this special issue, Sebahattin
Demirkan and Harlan Platt integrate these research paradigms. They select a discrete
sample of US ?rms in the manufacturing industry to show how managers’ incentives
to manipulate earnings are associated with the company’s ?nancial condition which is
a function of the ?rm’s governance quality. This study demonstrates the importance of
?nancial classi?cations of ?rms for creditors and investors when they evaluate
potential investments.
Supporting corporate governance are the regulatory initiatives associated with
commercial laws and codes of corporate governance that aim to regulate managerial
power. Many of the policy prescriptions contained in codes of recommended corporate
governance practice depend on universal notions of best practice. The normative
concepts of best practice need to be validated by empirical testing in the context of ?rms
and their institutional settings. A good deal of the concepts of best corporate
governance practices and associated research has adopted an agency theory approach.
Traditional agency theory is derived fromthe separation of ownership fromcontrol and
emphasizes the role of corporate governance as one of aligning the agent’s goals with
the interests of shareholders (Fama and Jensen, 1983). In contrast, institutional theory
adopts an open system perspective where organizations are strongly in?uenced by
their environments (DiMaggio and Powell, 1983; Bealing et al., 1996). Richard Lane and
Brendan T. O’Connell use institutional theory to hypothesise that the Securities and
Exchange Commission (SEC) increased the number and scale of its enforcement
activities to ensure maintenance of its societal legitimacy as a consequence of the major
accounting scandals. Their study extends the Committee of Sponsoring Organizations
of the Treadway Commission 1987-1997 (COSO Report, 1999) by examining US
Accounting and Auditing Enforcement Releases to provide insights into the
characteristics and realities of ?nancial statement fraud in the post-Enron regulatory
environment. In comparing the characteristics of ?nancial statement fraud pre- and
post-issuance of the COSO Report, they provide evidence that high-pro?le accounting
scandals have been instrumental in changing the focus of SEC investigations.
The plethora of research on corporate boards demonstrates the importance of this
area within corporate governance research. Directors’ responsibilities include
assurance that the ?rm is well governed and that the information provided to
stakeholders is reliable. There is also considerable research that has examined the
association between board independence and earnings management (Hutchinson et al.,
2008; Klein, 2002; Peasnell et al., 2005; Xie et al., 2003). However, much of the research on
board independence has not considered the motivation and incentives of non-executive
directors that are not truly independent. Liyu He, Sue Wright, Elaine Evans and Susan
Crowe investigate this issue by examining the role of non-executive directors in
effectively monitoring the quality of accounting information, paying particular
attention to the part played by af?liated directors in Australian ?rms. Further their
study is carried out post governance reforms, which in turn tests the effectiveness of the
recommendations made by the 2003 Australian Stock Exchange Principles of Good
Corporate Governance and Best Practice. Their study highlights the need for boards to
take care in the selection and reward of non-executive directors, particularly those with
af?liations with the ?rm.
ARJ
22,2
90
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There is an ever increasing call for institutional investors to take a more active
monitoring role in the governance of the ?rms in which they invest, particularly
since the global ?nancial crisis. Institutional shareholders have a responsibility to
generate long-term value on behalf of their bene?ciaries and therefore play an
important part in scrutinizing ?rms’ corporate governance practices. In addition, the
quality of the external audit function, as part of ?rms’ governance, is responsible for
ensuring the reliability of reporting and control processes of the ?rms they audit. Thus,
more active institutional investors are likely to pressure audit ?rms to carry out more
substantive testing of the ?rm’s systems and this relationship is likely to depend on the
institutional setting. Ef?ezal Aswadi Abdul Wahab, Mazlina Mat Zain, Kieran James
and Hasnah Haron study the relationship between institutional investors and the
external auditor in Malaysia, a country with a developing capital market, and provide
insights into a diverse range of institutional characteristics that impact corporate
monitoring costs. They ?nd that ?rms’ monitoring costs (audit fees) increase with
institutional ownership for investors that do not have a relationship with the ?rm. They
also ?nd that, due to the greater perceived inherent risk, politically connected ?rms
have higher monitoring costs. This paper demonstrates the factors that impact ?rms’
monitoring costs.
The ?nal paper in the special edition by Yi Wang and Judith Oliver also considers
the role of board independence but considers the association between board
independence and the risk pro?le of the ?rm. Agency theory assumes risk-neutral
shareholders prefer managers increase ?rm value by undertaking all positive net
present value projects. However, risk-averse managers prefer to undertake less risky
positive net present value projects and may therefore reject risky but pro?table projects
(Hutchinson, 2003). Firm risk refers to the underlying volatility in the ?rm’s earnings
stream and has been identi?ed as a source of agency con?ict (Bathala and Rao, 1995).
The agency con?ict arises because managers are more concerned about their
employment risk and ?rmsurvival than pro?t maximization of shareholders. To reduce
these agency con?icts, ?rms use supervisory and incentive alignment mechanisms that
alter the risk and effort orientation of agents to align them with the interests of
principals (Tosi and Gomez-Mejia, 1989). Wang and Oliver study of Australian ?rms
?nds that ?rms with more executive directors on the board have lower risk. However,
af?liated and independent directors, have no signi?cant in?uence on the level of
performance variance. The results of their study imply monitoring by independent
boards is ineffective in mitigating the agency con?icts associated with managers’ risk
avoidance.
3. Conclusion
The ?ve papers presented in this special issue, although diverse, share a common
theme. The authors have highlighted the importance of contextual factors in corporate
governance research that is based on different organizational and institutional
environments. Theoretical and empirical research should progress understanding of
corporate governance which will, in turn, prove useful for practitioners and policy
makers.
The studies discussed above are in many ways complementary, as they focus on
corporate governance mechanisms that inform capital markets. Taken together, they
Governance
issues in
accounting
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represent a comprehensive overview of current corporate governance research and
suggest a number of opportunities for future studies.
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Corresponding author
Marion Hutchinson can be contacted at: [email protected]
ARJ
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