The impact of board independence on financial statement comparability the moderating role of audit quality

Abstract

This paper investigates the impact of board independence on financial statement comparability (FSC) and examines the moderating role of audit quality. The study employs panel data from Vietnamese listed firms during the period 2015–2024. Comparability is measured by using two proxies: (i) FSC4, an average of the four highest firm-level comparability scores (FSCijt) of firm i in year t of the same industry and (ii) FSCind, a median of all FSCijt values across industry and year.The regression findings indicate that FSC4 can be regarded as negative and statistically significant in association with board independence but not FSCind. This implies that independent directors can use firm-specific accounting strategies that are not in line with industry leaders and this can decrease comparability among the best performed firms but does not exhibit any noticeable impact across the entire industry. Moreover, the results also indicate that the correlation between board independence and FSC4 is heavily moderated by quality of the auditing. Namely, the adverse impact of board independence on comparability is substantially mitigated in the case of firms audited by the Big Four auditors, which adds to the complementary nature of high quality external and internal governance in encouraging reporting uniformity. The research has practical implications on the companies, the investors and the regulators of the developing economies in that the structure of the boards and the quality of the audit can complement each other to influence greater comparability of the financial information. Research purpose: This study investigates the impact of board independence on financial statement comparability (FSC) and examines whether audit quality, proxied by Big Four auditors, moderates this relationship in the context of Vietnamese listed firms. Research motivation: Prior research provides mixed evidence on the effect of board independence on FSC, and the interaction between internal governance (board independence) and external assurance (audit quality) has been understudied, especially in emerging markets. Vietnam offers a unique setting to address this gap. Research design, approach, and method: Using panel data of 5,510 firm-year observations from non-financial firms listed on HOSE and HNX during 2015–2024, the study employs the De Franco et al. (2011) model to measure comparability (FSC4 and FSCind) and applies multiple regression analysis with firm- and year-fixed effects to test the hypotheses. Main findings: The results reveal that board independence is negatively associated with FSC4 but shows no significant effect on FSCind. Importantly, the negative relationship between board independence and FSC4 is significantly mitigated when firms are audited by Big Four auditors, highlighting the complementary role of high-quality external auditing. Practical/managerial implications: The findings suggest that promoting board independence alone may not guarantee greater comparability of financial statements unless complemented by high audit quality. For firms, combining strong internal governance with reputable auditors enhances reporting consistency. For regulators and investors, the study underscores the importance of considering both governance structures and audit quality when assessing financial transparency in emerging markets.