The role of the corporate governance code and its effects on the improvement of the corporate sector in the kingdom of Bahrain

Abstract

The purpose of a corporate governance code is to put into practice the principles of best corporate governance in Bahrain, and to provide protection to the stakeholders of companies and investors through compliance with those principles. International experience has shown that the results of good corporate governance enhance the value of companies, protecting the investors and attracting investments. This research comprises two empirical studies. In the first study, it examines the relationship between corporate governance characteristics, including financial expertise of the board, number of independent members, frequency of the audit committee meetings and the of audit and the board of directors, and board size and the quality of the audit. The second study examines the efficiency of higher quality auditors and corporate governance characteristics in earnings management in the context of the Kingdom of Bahrain and provides more data about the effects of the audit committee and board of directors’ characteristics on earnings management. The research used three proxies of quality of audit; the proxies are auditors’ industry specialists, audit and non-audit fees. This study designed a conceptual framework that could be used to help explain the relationship between the effectiveness of the characteristics of the audit committee, boards of directors, and audit quality in respect of constraining Earnings Management. Based on data obtained from the listed companies in Bahrain between 2010 and 2013, the current findings recommend that the independent directors on the board should demand that the auditors do additional audits in the firm for the ratification of the function of supervision, which will lead to an increase in the quality of the audit and an increase in audit fees. The findings also suggest the positive association between the fees of non-audit services and independent boards, indicating that independent boards view joint provision of non-audit services and audit as not necessarily compromising audit independence, but perhaps improving the judgments of the auditors and expanding their knowledge. The results of the second empirical study indicate that a higher quality of audit (which means either charging a higher auditor industry specialist fee or audit fees) are expected to reduce manipulation of earnings. However, no evidence of an association between the management of earnings and non- audit services fees been found. In addition, this study found inconsistent results linking the opportunistic earnings and the characteristics of corporate governance. Generally, both results are consistent with agency theory, which indicates that a high quality of audit and an independent board of directors are linked with effective supervision, which leads to improved financial reporting quality. The results of the issues of the practices of corporate governance, audit quality and management of earnings continue to be important to academics, professionals, policymakers and regulators.