Corporate Governance, Auditing and Reporting Distortions

By Ram Ramanan
Journal of Accounting, Auditing & Finance | July 2014

DOI

doi.org/10.1177/0148558X14535779

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Citation

Ramanan, Ram. Corporate Governance, Auditing and Reporting Distortions Journal of Accounting, Auditing & Finance doi.org/10.1177/0148558X14535779.

Journal of Accounting, Auditing & Finance, 2014

Abstract

Conventional wisdom suggests that independent boards limit earnings distortions and promote accurate reporting. In contrast, this study indicates that having insiders on boards enhances reporting integrity. The central result is that strengthening board independence curtails earnings overstatements but heightens the likelihood of understatements. This asymmetry occurs because reinforcing board independence on one hand limits the CEO’s ability to overreport but on the other hand encourages the auditor to rely on the board’s monitoring and consequently economize on effort. The reduced effort impairs the auditor’s ability to verify high earnings and, because auditors favor conservative reports when in doubt, leads to increased incidence of conservative understatements.

Ram Ramanan is an Associate Professor of Accounting at the Indian School of Business (ISB). Before joining ISB, he served as a faculty member at the University of California, Davis and at SUNY, Binghamton.

Professor Ramanan’s research focuses on the role of accounting in management decisions. Specifically, he examines the incentive effects of financial reports and disclosures on various managerial decisions both inside an organisation and within supply chains. His work has been published in leading academic journals, including The Accounting Review, Journal of Accounting and Economics, The Review of Accounting Studies, Contemporary Accounting Research, Management Science, and Production and Operations Management.

At ISB Professor Ramanan teaches the core Managerial Accounting course and the elective in Strategic Performance Management.

Professor Ramanan holds a PhD in Accounting from the Kellogg School of Management, Northwestern University, and an MBA from the Indian Institute of Management, Bangalore. He is also a Chartered Accountant.

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