Women on Corporate Boards Encourage Better Financial Reporting

A female presence on a company board reduces the chance of financial restatements by close to 40 percent, according to a new study.

The study, which appears in the December issue of the American Accounting Association journal Accounting Horizons found that the presence of at least one woman on an otherwise male board is associated with a likelihood of restatement that is 62 percent of the likelihood without the gender diversity.

The study was carried out by Lawrence J. Abbott of the University of Wisconsin-Milwaukee, Susan Parker of Santa Clara University and Theresa Presley of Kansas State University. The researchers found that a woman's board presence does more to encourage financial integrity than such tried-and-true measures as requiring the board's audit committee to consist entirely of independent directors, one of them with financial expertise, and mandating that it meet at least four times annually.

The study found those measures in combination to reduce the likelihood of restatements by about 20 percent, about half the effect achieved by having a woman director.

While the study doesn't provide a definitive reason for the effect, the authors surmised that it has to do with the ample measure of independence that diversity confers upon corporate boards. This can be of particular value in cases where "a CEO or CFO justifies a financial reporting decision by suggesting that he or she is in a more knowledgeable position regarding the potential recognizability of this transaction.

In this scenario, gender diversity can potentially affect the outcome by generating more questioning of the status quo, greater acknowledgment and legitimization of opposition and third-party viewpoints (including those of the audit committee, auditor, or internal audit director) and a slower, more deliberative and collaborative decision-making process...heightening the monitoring effectiveness that may [otherwise] be diminished by groupthink."

As to how gender diversity among directors might influence a firm's financial reporting, the authors envision board meetings where "the details of significant accounting estimates and accruals, auditor's comments as to the aggressiveness or conservatism of financial reporting, and even individual items, such as particularly large sales wins or losses, may be described.

A more diverse, less cohesive board may be more likely to question assumptions and inquire as to the comparability of accounting with industry practice, resulting in more in-depth discussion and slower decision-making."

The authors also cited experiments in which gender differences tended to prevent escalation of commitment by groups. The study noted, "Given that many restatements start out on a small basis, but grow as a result of an escalation of commitment to a particular reporting philosophy or standard (particularly with respect to the recognition and collectability of future revenues), it seems reasonable that a board with at least one female director may be more proactive in its governance duties and display a more conservative financial reporting philosophy."

The study's findings derive from a comparison of companies that had to issue financial restatements with a control group of similar firms with no such reporting problem. The restatement sample consisted of 540 firms in total, with each of the restating firms matched with a control company on the basis of market capitalization, industry, and the ranking of the firm that performed its auditing.

In all, approximately 27 percent of the restating companies had at least one woman on their boards, compared with about 40 percent of the firms in the control group, a more than 50 percent higher prevalence in the controls than in the restatement sample.

On average, assets of restating firms amounted to less than 2 percent of the mean for companies in the Fortune 500, leading the study's authors to observe that smaller firms "are less likely [than the 500] to have a female board presence and are less apt to feel public pressure to establish a female board presence, due to their lack of visibility." They added that this lack of external pressure "reduces the chance that female board presence is a form of tokenism, with no real costs or benefits. By minimizing the likelihood of tokenism, we believe our test setting provides an ideal environment to investigate the impact of female board presence on the governance role of boards."

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