The effect of board links, audit partner tenure, and related party transactions on misstatements: Evidence from chile

Sakthi Mahenthiran, Berta Silva Palavecinos, HANNS ANIBAL DE LA FUENTE MELLA

Research output: Contribution to journalArticlepeer-review

Abstract

Companies restate when material misstatements are identified in previously issued financial statements. Misstatement research in Latin America is sparse, even though they are an important context to study this phenomenon. Chile’s corporate governance regulations are considered exemplars for Latin American countries but its auditing profession is not well developed. Thus, Chile provides an interesting context to study the complementary roles of audit and board governance affecting misstatements. Using a sample of 104 Chilean listed firms over seven years, our study finds that the board links and audit partner tenure negatively affect misstatements. Specifically, given the prevalence of related party transactions (RPTs) in conglomerates, the finding suggests that cross directors monitor high-value RPTs, but that this is not a substitute for auditor expertise. The findings raise questions about the advisability of mandating audit partner rotation to strengthen auditor independence because the results indicate that a short audit partner tenure leads to the auditor not developing client-specific knowledge. The study makes contributions to the corporate governance literature by highlighting that board monitoring is not a good substitute for auditor monitoring of financial reporting integrity, and suggesting the need for having licensing requirements to become an auditor.

Original languageEnglish
Article number78
Pages (from-to)1-21
Number of pages21
JournalInternational Journal of Financial Studies
Volume8
Issue number4
DOIs
StatePublished - 2020
Externally publishedYes

Keywords

  • Audit governance
  • Board independence
  • Corporate governance
  • Financial reporting integrity
  • Misstatements
  • Related party transactions

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