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The Financial Statement Comparability of Listed Foreign Firms in Taiwan: The Effect of Board Interlocks and
Financial Statement Fraud

The Financial Statement Comparability of Listed Foreign
Firms in Taiwan: The Effect of Board Interlocks and Financial
Statement Fraud

Yuan-Tang Tsai, Department of Accountancy, National Taipei University
Xing-Rong Li, Department of Accounting, National Taiwan University

1. Purpose/Objective

The main purpose of this research is to explore the relationship between listed foreign

firms in Taiwan (hereafter KY companies) and their financial statement comparability.
KY companies are foreign enterprises that issue securities in Taiwan through a Taiwan
Stock Exchange or a primary Over-the-Counter (OTC) listing. KY companies tend to
have complex organizational structures and their main operating bases and activities are

overseas; auditors face higher difficulties when auditing these companies compared to
local firms. Therefore, it is not surprising that external investors have greater concerns
about the quality of KY companies’ accounting information.
Taking the major financial statement fraud case of one specific KY company in 2020

(hereafter, the case of Pharmally) as a research opportunity, this study first tests whether,
compared to non-KY companies, KY companies have higher audit difficulty that leads
to relatively opaque information and to a higher motivation for earnings management,
thus resulting in poorer financial statement comparability (Hypothesis 1). Second, prior

literature suggests that board interlocks are important channels for knowledge and strategy
exchange between companies (Haunschild et al., 1998; Carpenter et al., 2001). This study
further examines whether non-KY companies having board interlocks with KY companies
tend to exhibit poorer financial statement comparability due to the influence of KY

companies (Hypothesis 2).
Third, the case of Pharmally causes deep concerns regarding the audit quality of
accounting firms and the reliability of KY companies' financial information. To reduce
social anxiety and to stabilize market confidence, Taiwan's financial authority penalizes the

auditors involved and amends relevant regulations to strengthen audits of KY companies.
Therefore, this study also examines the subsequent impact of the case of Pharmally.

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