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Women on board and auditors’ assessment of the risk of material misstatement

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Abstract

This paper considers the role of female directors’ statutory and demographic attributes in examining the relationship between the presence of women on board and auditors’ assessment of the risk of material misstatement. Using a sample of French listed companies between 2002 and 2010, we find that presence of women on board is negatively related to auditors’ assessment of the risk of material misstatement, but this relationship becomes positive when female directors’ attributes are included in regression analyses. These results suggest that attributes have a substantial effect on the relationship between female directors and auditors’ assessment of the risk of material misstatement. In particular, we find that female directors’ audit committee memberships, financial expertise, and experience reduces the risk of material misstatement. However, board leadership by women is not associated with auditors’ assessment of the risk of material misstatement. Finally, our findings have important implications for legislators’ and policymakers’ understanding of the importance of female directors’ attributes and skill sets while promoting gender diversity on corporate boards.

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Notes

  1. See Nekhili et al. (2020) for a detailed discussion on international reforms on gender diversity on boards.

  2. Abundant literature also suggests that female directors are positively associated with the quality of financial reporting (see Gull et al. 2018; Arun et al. 2015; Gavious et al. 2012).

  3. The term “attributes” is used interchangeably to refer to both statutory and demographic attributes of female directors.

  4. The report is available at https://europeanwomenonboards.eu/ewob-gdi-2019/.

  5. Anecdotal evidence based on well-known accounting scams maintains that women frequently play the role of whistleblowers (e.g., Sherron Watkins at Enron and Cynthia Cooper at WorldCom).

  6. The French Financial Security Law of 2003 made it mandatory for companies to disclose the fees paid to their auditors. However, in compliance with the European Commission recommendations of May 2002, many firms had already started publishing audit fee data voluntarily.

  7. In 2011, the French parliament approved a law mandating gender quota for the boards of listed firms. French companies were required to comply with the 2011 quota legislation within 6 years. (That is, as of 2014, 20% of a firm's board members had to be women, rising to 40% in 2016.) As a result, the number of female directors began to grow considerably from 2011. This urgency leads to questions about the supply and legitimacy of the women who were appointed in the period between the quota law’s implementation in 2011 and its application (Gull et al. 2018; Singh et al. 2015).

  8. We apply a condition on the highest-propensity calliper to rule out the likelihood of poor matching by adjusting calliper distance to 0.01 without replacement. Matching without replacement ensures that a treated case will be matched with only one control observation.

  9. The results of the Pearson correlation analysis and VIFs are available from the corresponding author on request.

  10. The variables used in PCA are female board chair, independent female directors, audit committee memberships held by female directors, female directors’ education level, female directors’ business education, female directors’ nationality, multiple directorships held by female directors, and female directors’ tenure.

  11. The system GMM approach estimates the relationship between female directors and audit fees in both levels and first differences. The level equation shows audit fee as a function of its lagged values, observable firm characteristics, and the error term, which includes a fixed effect component. The difference equation presents year-to-year differences as instruments in the level equation.

  12. We also use Shannon and Blau’s diversity indices as alternate proxies for gender diversity and find results similar to those reported in Table 6. These unreported results are available from the corresponding author on request.

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Authors and Affiliations

  1. Essex Business School, University of Essex, Colchester, UK

    Ammar Ali Gull

  2. Department of Management Sciences, COMSATS University Islamabad, Lahore Campus, Lahore, Pakistan

    Ammar Abid

  3. School of Finance and Economics, Jiangsu University, Zhenjiang, People’s Republic of China

    Rashid Latief

  4. School of Accounting, Nanjing Audit University, Nanjing, People’s Republic of China

    Muhammad Usman

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  1. Ammar Ali Gull
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Gull, A.A., Abid, A., Latief, R. et al. Women on board and auditors’ assessment of the risk of material misstatement. Eurasian Bus Rev 11, 679–708 (2021). https://doi.org/10.1007/s40821-020-00173-7

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