Study: Women Improve Quality of Corporate Accounting; Mandating Board Gender Quotas Does Not

Jul 24th 2013
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Are women better equipped than men to oversee corporate finances? Several recent studies in Accounting Horizons, published by the American Accounting Association (AAA), have suggested as much. One study found that women CFOs produce more reliable financial statements than their male counterparts, and another revealed that the presence of females on corporate boards greatly reduces the chance of financial restatements.

Given the relative paucity of women in top corporate positions, such findings would seem to argue for heightened pressure to increase female representation. And, in fact, female presence on boards of directors has emerged as an increasingly salient issue. For example, a number of European countries have passed laws to increase the number of women on boards, and last November, the European Union's (EU) commissioners approved a plan mandating that companies listed in the EU reserve 40 percent of their board seats for women by 2020.

Yet, research to be presented at the annual meeting of the AAA (August 3–7 in Anaheim, California) raises doubts that such a mandate, whether in the EU or elsewhere, will spur improvements in company financial reporting and suggests that, initially at least, its effects are likely to be counterproductive.

The study, based on developments over a decade in Norway, the only country that has the same quota requirement as the one lately enacted by the EU, finds that its adoption was accompanied by a decline in the quality of corporate financial reporting. And while the negative effect dissipated within a few years, no evidence emerges that subsequent reporting has been better or worse than that of the pre-mandate era, even though the study "leaves an open window for further research on the long-run effects of the gender quota on accounting quality."

The authors of the new report, Mariano Scapin, Juan Manuel Garcia Lara, and Jose Penalva Zuasti of Carlos III University in Madrid, observe that "after the gender quota, new female board members . . . are younger, have lower executive experience, and have more education compared to the exiting male board members that they replace. . . . These new qualitatively different boards may have lower monitoring skills than boards before the quota."

They add: "Since European governments are currently considering imposing gender quotas, our results show that such affirmative action could have negative effects, though possibly only in the short run, in terms of corporate governance and, consequently, on shareholders' interests."

After being announced informally by a cabinet minister in February 2002, the Norwegian board quota system, establishing a target of 40 percent female representation in a major class of companies, was enacted by the nation's parliament in December 2003, initially on a voluntary basis. When only 13.1 percent of affected firms had met the envisioned goal by July 2005 (at which time female board membership stood at 16 percent), the quota was made compulsory, with companies required to comply by January 2008 or face liquidation. By April 2008, about six years after the informal announcement of the quota, all Norwegian public limited companies (the class affected by the mandate) had met the 40 percent requirement.

In general, companies responded to the mandate not by expanding their boards, but by replacing male directors with women, a strategy that served to increase the difference between old and new boards. In the eighty-one companies sampled in the study, the average age of newly recruited women was forty-six, compared to fifty-three among exiting males; about 6 percent of new women directors were major shareholders, compared to 24 percent among departing males; and about 38 percent of the female newcomers had CEO experience, compared to 75 percent of the exiting males. In contrast, 52 percent of the recruited women had graduate-level education, compared to 38 percent of the departing men.

To gauge how changing board gender profiles affected the quality of firms' financial reporting, the researchers analyzed the relationship between the extent of gender change in boards over the period 2001–2010 and the amount of accruals in company financial statements. Accruals, frequently used as a measure of accounting quality, are items that are recognized on balance sheets or income statements at the time they are earned or incurred, regardless of when cash is actually received or paid out. Accruals and cash flow are the yin and yang of corporate accounting: both are necessary to a clear picture of financial performance, but accruals are more subject than cash to uncertainty, so that estimating them offers managers considerable accounting flexibility, whether the items are current accruals, like accounts receivable and inventory, or longer-term items, like pension liabilities or property, plant, and equipment.

The study finds that the more change in board membership companies had to make to achieve the mandated 40 percent quota, the higher their levels of unexpected accruals – that is, levels exceeding what would be expected on the basis of a company's previous year's financials. Because accruals are more subject to manipulation than cash flow, unexpectedly high levels tend to be regarded as suspect – a sign of questionable accounting and of earnings management.

Such results, the study's authors write, suggest "that these younger, less experienced boards fail, ceteris paribus, to fulfill one of the main roles of boards of directors, namely monitoring. . . . Our results show that, after the passage of the gender quota, earnings management is more pronounced in firms for which the impact of the passage of the quota was larger."

The researchers also probe whether "the effects of the gender quota persist over time or are clustered around the years when boards are experiencing higher changes." They find the latter to be the case. Thus, while during the periods 2005–2008 and 2005–2009, gender quota has a statistically significant negative effect over monitoring, this is no longer true for the period 2009-2010, when shareholders had more time to look for board members and members elected earlier to meet the mandated gender quota had more experience.

The study, entitled "Accounting quality effects of imposing gender quotas on boards of directors", will be among hundreds of scholarly presentations at the AAA meeting, which is expected to draw more than 3,000 scholars and practitioners to Anaheim, California, August 3–7. 

Source: July 23, 2013, American Accounting Association Press Release


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