Corporate governance, ethics, internal controls and compliance with IFRS

Abstract

Purpose

The purpose of this paper is to establish the relationship between corporate governance, ethical culture, Internal Controls over Financial Reporting (ICFR) and compliance with International Financial Reporting Standards (IFRS) by microfinance institutions (MFIs).

Design/methodology/approach

This is a cross-sectional survey based on a sample of 85 MFIs in Uganda. Hypotheses were tested using partial least squares (PLS) analysis technique. An unweighed IFRS compliance index to capture the level of compliance with IFRS was constructed. Yet to capture corporate governance, ethical culture and ICFR variables, the perceptions of top management of MFIs have been taken into consideration.

Findings

Corporate governance, ethical culture and ICFR, each makes a significant contribution to compliance with IFRS. Also both corporate governance and ethical culture are significantly associated with ICFR. However, compliance with IFRS by MFIs is better enhanced by corporate governance and ethical culture through ICFR.

Research limitations/implications

Results support the idea that in terms of agency and virtue ethics theories, the board should support ICFR to minimize egocentric managers and other employees and also inculcate an ethical culture to achieve better compliance with IFRS because corporate governance and ethical culture are associated with sound ICFR which in turn lead to compliance with IFRS.

Practical/implications

Boards of MFIs should encourage investments that improve ICFR. At the same time, regulators should ensure that boards are composed of members with financial expertise, with no conflict of interest and introduce mechanisms that encourage boards to perform their roles.

Originality/value

The study contributes towards a methodological position by showing that the behavioural perspective of corporate governance can be an alternative to the boards’ structural variables in investigating compliance with IFRS. A direct association of ethical culture and compliance with IFRS and an indirect association through ICFR can be envisaged.

Citation

Nalukenge, I., Nkundabanyanga, S.K. and Ntayi, J.M. (2018), "Corporate governance, ethics, internal controls and compliance with IFRS", Journal of Financial Reporting and Accounting, Vol. 16 No. 4, pp. 764-786. https://doi.org/10.1108/JFRA-08-2017-0064