Governance mediation in the era of disruptive technologies: unveiling new perspectives on the risk of material misstatements
Journal of Financial Reporting and Accounting
ISSN: 1985-2517
Article publication date: 11 April 2024
Abstract
Purpose
This study aims to examine the mediating effects of corporate governance mechanisms like the board of directors on the association between disruptive technology adoption by audit clients and the risk of material misstatements, including inherent risk and control risk. In particular, the authors study the mediating effects of board characteristics such as board size, independence and gender diversity.
Design/methodology/approach
Based on a sample of 100 audit clients listed on the FTSE 100 from 2015 to 2021, this study uses structural equation modelling to test the research objectives.
Findings
The findings indicate a significant and negative association between disruptive technology adoption by audit clients and inherent risk. However, there is no significant evidence observed for control risk. The utilisation of disruptive technology by the audit client has a significant impact on the board characteristics, resulting in an increase in board size, greater independence and gender diversity. The authors also find strong evidence that board independence mediates the association between disruptive technology usage and both inherent risk and control risk. In addition, board size and gender exhibit distinct and differential mediating effects on the association and across the two types of risks.
Research limitations/implications
The study reveals that the significant role of using disruptive technology by audit clients in reducing the risk of material misstatements is closely associated with the board of directors, which makes audit clients place greater emphasis on the construction of effective corporate governance.
Practical implications
This study offers essential primary evidence that can assist policymakers and standard setters in formulating guidance and recommendations for board size, independence and gender quotas, ensuring the enhancement of effective governance and supporting the future of audit within the next generation of digital services.
Social implications
With respect to relevant stakeholders, it is imperative for audit clients to recognise that corporate governance represents a fundamental means of addressing the ramifications of applying disruptive technology, particularly as they pertain to inherent and control risks within the audit client.
Originality/value
This study contributes to the existing literature by investigating the joint impact of corporate governance and the utilisation of disruptive technology by audit clients on inherent risk and control risk, which has not been investigated by previous research.
Keywords
Acknowledgements
The authors thank the editor in chief, associate editor and three anonymous reviewers for providing detailed and valuable insights, constructive comments and feedback that significantly contributed to enhancing the direction, analyses and overall presentation of our study. The authors also acknowledge the valuable insights from practitioners and professional auditors on this study, and the co-authors would like to thank Mr Saif Khalil (Audit Manager, ACA) and Mr Terence Chung (Senior Associate Audit, ACA, CFA). The co-authors also thank David McCollum-Oldroyd and Dr Yousry Ahmed at Newcastle University for their valuable feedback and constructive comments on our study. We also thank participants and discussants of the “21st IFIP Conference e-Business, e-Services, and e-Society I3E2022” at Newcastle University and also the discussants and participants of the 6th International Conference ESI (Qatar University, 2023) for their thoughtful insights and comments on our paper. This research did not receive any specific grants from funding agencies in the public, commercial or non-profit sectors.
Citation
Elnahass, M., Jia, X. and Crawford, L. (2024), "Governance mediation in the era of disruptive technologies: unveiling new perspectives on the risk of material misstatements", Journal of Financial Reporting and Accounting, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JFRA-11-2023-0643
Publisher
:Emerald Publishing Limited
Copyright © 2024, Emerald Publishing Limited