Applying Digital Analysis to Corporate Governance and Financial Reporting Quality During Global Financial Upheavals

In implementing financial reforms, government authorities in Taiwan have set a primary goal to encourage firms to enhance corporate governance efficacy and to improve financial reporting quality. This study examines the impact of changes in the global financial environment on corporate governance effectiveness and financial reporting quality in Taiwan. The authors follow the model of the financial statement deviation (FSD) score, using the digit of holistic data to identify whether the distribution of the whole firm-year financial statement numbers deviates from Benford’s Law. The FSD score overcomes the insufficient explanatory power for detecting financial reporting quality in accrual models. The results show that the quality of corporate governance has improved significantly for sound firms, but has not improved – and may even have worsened – for poor firms. These findings suggest that legislative authorities and investors in Taiwan may wish to re-examine whether a suitable environment has been created to enhance financial reporting quality.