From acting as key decision- makers to monitoring financial reporting, a firm’s board of directors is supposed to play a crucial role in any company. Yet, the extent of the board’s influence remains unclear, as there is limited evidence of their involvement in reporting financial statements.
Sudipta Basu and Yi Liang’s research investigated the extent of the board’s influence on a company by measuring the quality and consistency of their financial reporting. Overall, outside directors were far more conservative with financial reporting before corporate laws were passed to protect them from shareholders.
By affecting what the company reports, the board’s influence within a firm can also extend to other areas, such as employee job security and pension funds. Additionally, Basu and Liang’s findings offer a way of measuring how much influence outside directors actually have over a firm’s accounting quality.