Board Independence and Audit Committee Effectiveness as Determinants of Financial Reporting Quality

Abstract

This study examines the influence of board independence and audit committee effectiveness on financial reporting quality. Grounded in corporate governance theory, it investigates how independent oversight mechanisms enhance the credibility, transparency, and reliability of financial disclosures. Board independence was measured using an adapted Governance Index (G-Index) with acceptable internal consistency (Cronbach’s α > 0.70), while audit committee effectiveness was assessed using the framework of DeZoort et al. (2002), which demonstrated strong reliability (α = 0.78–0.91) and construct validity. Financial reporting quality was measured using items adapted from Beest et al. (2009), with reliability exceeding 0.80. Data were collected through structured questionnaires on five-point Likert scales. The study hypothesized that higher levels of board independence and more effective audit committees significantly predict improved financial reporting quality. The findings indicate that both board independence (β = 0.342, p < .01) and audit committee effectiveness (β = 0.377, p < .01) positively and significantly influence financial reporting quality. Additionally, their joint effect was significant (R = 0.23, R² = 0.19, p < .01), explaining 19% of the variance in financial reporting quality. These results suggest that effective corporate governance mechanisms, particularly independent boards and active audit committees, play a critical role in enhancing the quality of financial reporting. The study contributes to the corporate governance literature by providing empirical evidence on governance practices that strengthen transparency, accountability, and investor confidence.