Relationships between corporate governance and internal control over financial reporting in Jordan

Confirmation of Candidature

Doctor of Philosophy

By

Ibrahim Amayreh

Student No: 17929729

Principal Supervisor: STELLA HUIYING

Co-supervisor: Yongqing Li

Western Sydney University

School of Business

2017

Contents

1 Introduction:32 Literature Review52.1 Introduction52.2 Corporate Governance52.2.1 Board directors72.2.2 Audit committee82.3 Internal control82.4 Financial Reporting Quality92.5 Corporate Governance Scenario in Jordan103.1 Review of previous studies113.1.1 Introduction113.1.2 The Role of Corporate Governance113.1.2 Board discloser123.1.3 Role of corporate governance & internal control133.1.4 Corporate governance & Audit committee153.1.5 Financial reporting16//The weaknesses of internal control over financial reporting173.1.6 The Context of Corporate Governance Studies in Jordan174. Contribution185. research questions and hypothesis development205.1 Research Questions205.2 Hypothesis Development205.2.1 Board of directors20Audit committee216. Significant of study237 Methodology237.1 Introduction237.2 Research approach237.3 Research methods247.4 Data collection247.5 Research Samples248 Reference25

Relationships between corporate governance and internal control over financial reporting in Jordan

1 Introduction

In the past few years, as a result of corporate misconduct and business failures, corporate governance has been the most important point of study in literature and academic practice. Moreover, the recent global financial crisis has further weakened corporate governance practices. But there is a belief that new corporate governance can solve weaknesses and suggest solutions. As a result, corporate governance continues to evolve, particularly in developing countries such as Jordan (Al-Zwyalif, 2015). Corporate governance helps manage the gap between the interests of companies through which the company is managed, such as shareholders in general, which will increase investor confidence and reduce the cost of the capital market. Corporate governance can ensure that the company complies with its due obligations such as legal obligations, creditors and employees (Jesover & Kirkpatrick, 2005). Orazalin et al. (2016) that good corporate governance will increase the organization's performance to cope with the effects of the financial crisis and the turbulent economic situation.

Developing countries need effective corporate governance because of structural problems, Structural problems include weak legal controls, investor protection, government intervention, economic uncertainty (Agyei-Mensah, 2016; Ahunwan, 2002; Rabelo & Vasconcelos, 2002; Reed, 2002; Young, Peng, Ahlstrom, Bruton, & Jiang, 2008). Due attention should be paid to improving corporate governance in the Middle East. The benefits of improving corporate governance in the region should include increasing the international competitiveness of the Middle East economies and increasing and attracting domestic and foreign investments (Shehata, 2015) Countries seek to improve corporate governance worldwide, and these reforms are being implemented in developing countries in the context of promoting development and the processes of recent economic globalization (Rabelo & Vasconcelos, 2002). That the developing country is facing a problem between the minority and the majority who ignore the rights of the minority, and this is due to the government's participation in the economy. As the government as an owner can affect the interests of shareholders (Ahunwan, 2002; Young et al., 2008).

The effectiveness of internal oversight has been of great importance in the responsibility for a quality financial reporting, the reduction of business risks and access to sustainable development. In the past few years, with the emergence of a range of accounting scandals, how to face these scandals, the United States Sarbanes Oxley Act (SOX) established in 2002 that the effectiveness of internal control to be able to meet the new challenges. Moreover, this will improve the reliability and credibility of financial information, which will provide shareholders and investors with an ideal basis for appropriate decisions (Xiaowen, 2012). requirement of corporate governance depends on the nature of internal control and risk management, but the board of directors is the first responsible to determine the extent and level of risk and prepare sound management and internal control systems to face that risk (Agyei-Mensah, 2016).

(Akgün, 2016) Point out that board composition improves the quality of financial reporting element. A number of regulatory bodies have emphasized the role of the Board of Directors and the Audit and Internal Oversight Committee in the preparation of financial reports (Laković, Cerović, & Stanovčić). The result will be valuable for managers to strengthen the corporate governance structure and increase the effectiveness of internal control. Recently, big companies increasingly started to include detailed management reports on the effectiveness and efficiency of internal control systems in their annual corporate reports as an indicator to a good corporate governance practice (Leng & Li, 2011; Saha & Arifuzzaman, 2011) However, the evaluation of internal control system is based mainly on assessment of the internal quality control of the intended company on three main levels, including appropriate internal control, insufficient internal control and deficient internal control Calotă & Iana, 2009)(Al Sawalqa & Qtish, 2012)

The higher control rules require management to assess the effectiveness of internal controls of companies on the basis of an appropriate control framework recognized by a group of due process within the framework. The framework includes five relevant elements: risk assessment, monitoring environment, monitoring activities, communications operations information, and monitoring activities (Johnstone, Li, & Rupley, 2011)p12,13. Attention to internal control would enhance the reliability of the financial report and help companies identify and address deficiencies in internal controls in a timely manner (River, 2005). Addressing these shortcomings will enhance the quality of financial reporting (Ashbaugh-Skaife, Collins, Kinney Jr, & LaFond, 2008). Furthermore, Goh, noted that persistent internal control problems could lead to a negative evaluation against the company (Goh, 2009).

And through what we have discussed about the Board of Directors and the Audit Committee on the quality of internal control and financial reporting. Our study will examine whether there is a relationship between corporate governance, specifically the Board of Directors and the Audit Committee, and its impact on internal control and financial reporting of companies listed on the Amman Stock Exchange in Jordan.

1.1 Corporate governance and internal control

Major corporations have recently begun to include detailed management reports on the effectiveness of internal control systems in annual corporate reports as an indicator of good governance practices(Leng, 2011 #113)(Saha, 2011 #114)

The complexity of institutional structures and changes in the company structure and inputs to internal control have been shown to affect the disclosure of internal control information(Leng, 2011 #113)

Suggest that there is a relationship between the characteristics of corporate governance and the disclosure of internal control information. In addition, Audit Committee, size of the Company and the place of listing have a significant impact on the disclosure of internal control information(Leng, 2011 #113)

point out that firms should intensify supervision of internal control and implementation in order to improve the efficiency of their work (Xiao, 2011 #125).

1.2 Jordan background

1.3 Research Question 2 Literature Review

increase the effectiveness of internal control over financial reporting that would increase the reliability of financial statement, that can lead to reduce the risk and cheating (Ghosh & Lee, 2013)(p324).

2.1 Corporate Governance in Jordan

Corporate governance has been built on the basis of the evolution of the national economy at all levels, and based on the efforts of the modern national capital market and regulatory templates. Corporate governance was established in Jordan on the basis of corporate governance for joint stock companies. Jordan is committed to the various corporate governance indicators listed on the Amman Stock Exchange, which aim to reach a clear cover that helps define the relationship and management, while defining the duties and rights to achieve its objectives and providing more protection rights to all stakeholders. There are also many of the legislation on which these standards and rules are based, including the Securities and Related Regulation Act, the Companies Act, and the OECD International Principles (OECD) (Mo'taz Amin, 2013).

In Jordan, there are six ways to classify corporate governance: legislative framework and government control, capital market, disclosure and accounting standards, transparency in privatization, effective supervision of the board, preservation of property rights and protection of minority rights. The six corporate governance practices are detailed in both the Securities Act 2002, the Companies Act 1977 and its 2002 mandates (Al-Zwyalif, 2015).

With regard to the legislative environment in Jordan, this has been supportive of the steps related to the rights and integrity of corporate governance. At the same time, a number of laws have been implemented, the most important of which are: Security Law, Banking Law, Insurance Law, Commercial Law, Competition, Monopoly Law, Investment Promotion Law and Privatization Law.

The Shanikat and Abbadi study shows that the laws focused on a range of corporate governance issues:

• Fixed legal personality is separate from its contribution. This also applies to the financial statements of the financial and financial disclosure of the shareholder; they are treated in an independent manner.

• Allow the disposal of assets and transfer of ownership or transfer of possession and mortgages, listed below or including the property rights of companies and individuals. There are some procedures and requirements for possession and transfer of property regulated by the above-mentioned laws.

• Legal form of independent limited liability companies, Board of Directors, General Shareholders and Audit Committee (Shanikat & Abbadi, 2011)

Corporate governance is defined in different ways depending on the desired objectives. According to Ahmed Sheikh, Wang, and Khan, (2013) corporate governance is a method to guide companies and controlled (Ahmed Sheikh, Wang, & Khan, 2013). Corporate governance is the way that can manage the relationship between employers to ensure that the rights of stakeholders are maintained (Shanikat & Abbadi, 2011). Corporate governance can also act as organizational control, helping to manage the conduct of managers and to limit their authority to them (Madhani, 2017).

According to corporate governance is the relationship between the company and all the owners and a set of systems by which to help investors from abroad to continue the ownership of the company and protect them from external interference. Corporate governance begins in the organization's collision between management and shareholders because of corruption that suffers from ownership and control (Abbadi, Hijazi, & Al-Rahahleh, 2016).

The agency's framework shows that internal control systems can help ensure that management is working on policies that prevent the flow of shareholders' wealth more than they actually are. In addition, these mechanisms or regulations include the proportion of non-executive members of the Board of Directors and the dismissal of the Chairman and Chief Executive Officer (Abbadi et al., 2016).

The development of the corporate governance system began in 2002 and 2003 in terms of internal audit, internal control, risk management and strategic planning (Al-Zwyalif, 2015). There are pillars which corporate governance is based:

· Transparency of the Board: This can help manage information and prove it to the necessary bodies in the ideal time (Al-Zwyalif, 2015). which is one of the most important parts of corporate governance, increases transparency and reduces conflict of information among decision makers(Fox, Ward, & Howard, 2002). The increased transparency has led to a number of studies by researchers on transparency and their impact on companies, and the results have found that increased transparency in information is useful for capital market participants to make good management decisions (Mateescu, 2015a). Transparency is useful to reduce the impact of the cost of the Agency and not To equalize information in the market that will be through the volume of disclosure of information on internal control and monitoring of the Board in the annual report, which will lead to the promotion of attracting foreign investment and improving the economy (Agyei-Mensah, 2016), but It was noted that a large extent that detection and transparency were limited to quantity rather than quality (Shanikat & Abbadi, 2011).

· Independent Board members: Independent Board members have a greater ability to improve information disclosure processes, which can improve the confidence of stakeholders in information (Mateescu, 2015b). Rose, Mazza, Norman, and Rose (2013) pointed out that the board independence reduces the likelihood of weak internal controls over financial reporting (Rose et al., 2013).

2.1.1 Board directors

The Board of Directors is a mechanism used by senior shareholders in control and supervision of management (Perry & Shivdasani, 2005). The Board of Directors is one of the mechanisms of management observation used in corporate governance by shareholders (Madhani, 2017). Recently, board of directors are the administrator for appropriations Of the internal control mechanism to ensure the management mentality and policies are in line with the aspirations of shareholders (Pararit, Ussahawanitchakit, & Boonlua, 2015). The responsibility of the Board of directors is the oversight role, strategic role, role of services and proposals and the role of lawyers (Madhani, 2017). Recording to Agyei-Mensah (2016) The Board of Directors is responsible for controlling the Company's risk management and internal control system and will report annually on its effectiveness and compliance with material and financial processes and controls. Safari and Safari (2017) agree that the culture, size of management and structure enhance the effectiveness of Board members, which can lead the Board to be stronger in managing decision-making by managers who do not serve stakeholders.

2.1.2 Audit committee

In Jordan, the Audit Committee is necessary and important in preparing corporate financial reports and helps to improve the control of financial reporting and internal control. In addition, the use of the Audit Committee (improved quality of financial reporting, effective freedom of internal and external audit, and increased reliability of users of financial statements in the reliability of financial reports) (Al-Sa'eed, 2011). The Audit Committee is defined as a monitoring mechanism and provides advice to ensure the reliability of financial reporting, Communication between the Board of Directors, management and auditors, and to ensure that there is effective internal control (Laković et al.) Jordanian auditors continue to use traditional auditing, and have not focused on business risk, but this has increased the challenges of the audit profession in Jordan (Al Sawalqa & Qtish, 2012).

Suggest that there is a relationship between the characteristics of corporate governance and the disclosure of internal control information. In addition, Audit Committee, size of the Company and the place of listing have a significant impact on the disclosure of internal control information (Leng, 2011 #113)

2.1.3 risk management 2.1.42.2 Internal control in Jordan companies

Internal control is a set of policies and procedures that govern the work of the establishment accredited by the administration to ensure effective management (Mihaela & Iulian, 2012). While Michelon, Bozzolan, and Beretta (2015) emphasized that the internal control system is designed to control internal and external cost control of the company, Measure their effectiveness by whether their components work properly.

At the outset, should increase our knowledge about internal controls and financial reports, it's operation carried out by a group of parties such as board directors, management and some of personal that led to improve the company operations, increase the credibility of financial reports and work within specific laws and regulation (Ghosh & Lee, 2013). Moreover, internal control over financial reporting is a process that includes a set of policies to achieve adequate safeguards with respect to the reliability and credibility of financial reporting and property safety. Gao & Jia also set a goal (ICFR) to ensure the quality of financial reporting, ensure internal policies and secure the safety of the company's resources (Gao & Jia, 2016). ICFR is the policies and procedures applied by the Board of Directors and a group of employees to ensure increased confidence in financial reporting, increased activity in the Company's operations and compliance with specific laws and regulations. Design defects can grow from an inability to internal control, which may adversely affect the company's operations, which may be reflected in the reliability of the financial statements (Ghosh & Lee, 2013).

Due to fraud, fraud and accounting irregularities in the United States, there were specific rules for the new governance in Sox coming to strengthen internal control, to ensure whether companies have policies to evaluate internal controls (Gao & jia, 2016)

However, internal control is defined as a process, affected by the actions of board of directors and otherorganizational structure levels in the firm, designed to provide reasonable assurance toward achieving firm’s objectives, plans and strategies under the related laws, rules, polices and regulations (Domnişoru & Vînătoru, 2008; Li & Wei, 2008).(Al Sawalqa & Qtish, 2012)need parfreas

The internal control of Jordanian firms suffers from many problems, such as the lack of qualified personnel, the lack of key elements of internal control systems, the inability to use important technical tools in internal control and the lack of professional staff in the Professional category (Rahahleh, 2011 #97).

Financial Reporting Quality

Financial reporting is one of the most closely related to corporate governance mechanisms, as financial reporting can help corporate governance reduce information disparities (Akgün, 2016). The main point of financial reporting is the provision of useful information to serve the users of financial statements in making appropriate decisions (Orazalin et al., 2016). Since the relevance of management decisions comes from the quality of the financial reports used (Palmer, 2013). the corporate governance structure has been considered as a financial reporting control within accepted accounting principles, ensuring the reliability of the financial reports of the company (Lin & Hwang, 2010). However, because of fraud and mistrust, the reliability of financial reporting has become low, increasing the role of the Audit Committee in the monitoring and processing of financial reporting (Akgün, 2016).

In accounting literature, the degree of accommodating quality of financial reporting is one of the core issues (Costello, 2011). According to Ghosh and Lee (2013) there are different principles that can affect the quality of financial reporting, the most important of which are the internal and external control mechanisms. Deumes (2000) reporting on internal control can increase the quality of financial reporting and also reduce the governance problem. Laković et al. point out that the purpose of preparing a financial report is to provide information to owners and users to make economic decisions.

Corporate Governance Scenario in Jordan

3.1 Review of previous studies Board directors move to 2.1.1

Michelon et al. (2015) aim to find if there mechanism to monitor board of directors and audit committee as well are done through internal control. And organizational environment and its role to enhancing relationship between internal control disclosure and monitor board. The sample of study were represented financial statement in six years for 149 companies listed in the markets of four European countries. The result show inverse relationship between internal control disclosure and proxies for board monitor. However, there are negative relation between board monitor and formal disclosure of internal control system. Also, there are mediation between monitoring mechanisms to correct of organizational environment.

Nelson, Gallery, and Percy (2010) aims to investigate the impact of corporate governance mechanisms on legal disclosure by companies listed in Australia during 2001-2004. The study showed a gradual improvement in the legal executive disclosures during the period 2001-2004. However, it turns out that the management is not serious in disclosing some important information such as stock options executive. Furthermore, the result shows a positive relationship between the principles of corporate governance (board independence audit committee independence and compensation committee) and increase effectiveness of compliance to legal disclosures.

Mateescu (2015b) aim to examine the impact of the board independence on the implementation mechanisms of financial and non-financial disclosure, and the Board's practices in this regard. The study was conducted on the companies of four European countries (Estonia, Poland, Hungary and Romania) listed on the stock exchange. the study concluded that there is positive relation between the size of disclosure of financial and non-financial information with the contain large of audit committees. Moreover, there is no influence by investors or owners on independent managers, as well as increasing their number and size of disclosure. Finally, all four European countries have terms of disclosure and its requirements.

Rose et al. (2013) aim to investigate the impact of the independence of the Board on the weakness of the company against weak internal controls. The study was based on a sample of 11226 companies during the period between 2004 to 2012. The results show a negative relationship between the independence of the Board and the size of disclosure of weaknesses in internal control. as well as negative relation was stronger in the unified leaderships compared with the bilateral leaderships. Moreover, the result show, positive relationship between board independence with the size of the reform in the weakness of internal control, as dependence on the auditing standard no 5 in 2007 reduces the impact of the Board's independence on identifying weaknesses in internal control

3.1.1 Introduction

Internal control literature focuses on financial reporting in two ways: firstly, weaknesses in internal control, and if this impact can increase the risk of financial reporting (Akgün, 2016; Donelson, Ege, & McInnis, 2016; Ghosh & Lee, 2013; Hoitash, Hoitash, & Bedard, 2009). Secondly,

The Role of Corporate Governance move to 2.1

Orazalin et al. (2016) study the uses of the dimensions of corporate governance on the operational performance of Russian banks in three times; before, during and after the financial crisis, by examining the characteristics of the Board, the structure of ownership, disclosure of companies, corporate discloser and CEO education. And offers some management proposals used by the Russian bank in future financial crises. The sample study was selected from 30 leading Russian bank listed on the stock exchange from 2004- 2012. The result shows that corporate governance has had a positive impact on performance before and after the financial crisis. However, there is no contribution to corporate governance to provide higher value to shareholders during the crisis period. Furthermore, the result shows that improving the structure of the company is useful to increase operational performance, but the greater the number of board members and the audit committee, the lower the performance. Finally, the author suggests that if investors, policymakers and practitioners focus on the educational level of executives, this will increase the performance reflected in the operating profit level.

Shehata (2015) The objective is to study corporate governance COD in the GCC countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates). The author explains the similarities in corporate governance in the Gulf states, and was among the composition of the Board and the Audit Committee, and the most different was corporate social responsibility. The researcher adopted an analytical approach to study the development of corporate governance in the GCC countries. The results show that efforts are being made to develop corporate governance in the GCC countries to be at the same level of international development.

Akgün (2016) purpose of the reliability of financial reporting make best decision through order of corporate governance role such as shareholders, partners, investors. He adopted the questionnaire to collect data from companies listed on the Istanbul stock exchange. The result shows the reliability of the financial report has effect on the management positions, and the most important type of management was oversight of financial reporting from the point of view of users of administrative information.

2.3 Role of corporate governance on internal control

karagiorgos points out that the economy of globalization, technological progress and allegations of fraudulent financial reports have increased attention to internal control and corporate governance (Karagiorgos, 2011 #112).

Nalukenge et al. (2017) aim to study the relationship between corporate governance and internal control over financial reporting in Uganda, through (analysed board independence, board roles performance, quality of CED and board expertise positively). The questionnaire was distributed to 70 Uganda MFls, using SPSS version 20 for data analysis, based on the ordinary least squares regression toanalyze assumed relationships. The results pointed to an important aspect of corporate governance with ICFR, of these aspects (board role performance, expertise and CEO quality). However, there is no great importance between ICFR and all (auditor type, size, accounting qual, function and age). In addition to giving more attention to the experience of the board MFls, the study also recommends in the future to improve the measurements used in this study.

Hoitash et al. (2009) aim to stimulate the relationship between corporate governance (association of audit committee and board advantage) and weaknesses in internal control over financial reporting. MW has been relied on for link analysis under the Sarbanes-Oxley Sections 302 and 404. The result showed, the 404 MW section has a lower probability of detecting relatively more members than Audit Committee having experience in supervisory and power of the board as well. Furthermore, sections 303 cannot be used for those used in sections 404.Finally, the relationship between the Governing Council and the Audit Committee is represented by the quality of internal control, which is found in Section 404 only in accordance with strict requirements.

Al-Zwyalif (2015) aim to investigate the structure of internal control elements such as control environment, risk assessment, control activities, communication and information, and monitoring. And impact that on the corporate governance pillars which are accountability, fairness, responsibility and transparency. The study sample was selected from a set of 27 Jordanian insurance companies. 162 questionnaires have been development to collect the data, and the returned questionnaires were 123 which is proportion 76 present. A Likert five- point scale was used to achieve to analyse the questionnaires. The outcome of this study showed positive effect of internal control elements on the successes of corporate governance and enhance pillars which are (accountability, fairness, responsibility and transparency). Internal control has plays a big role in enhancing the pillars of corporate governance, and to access to corporate governance successful requires commitment with all of internal control requirements.

D’Mello, Gao, and Jia (2017) aim to examine the management's successes in exploiting and enhancing corporate resources by investigating the impact of internal controls on financial reporting. Using cross-sectional analysis, the study concludes that the internal capital market is negatively affected whenever there is a weakness in internal control. However, weak corporate governance mechanisms are more acceptable to maintain effective internal control.

2.3.1 Role of board of directors on internal control

2.3.2 role of Audit committee on internal control

Auditors assess the quality of the Company's internal control system to determine the audit plan. In the Jordanian Auditing Standard, the quality of internal control should be assessed by the external auditor and an understanding of the Company and the internal control environment should be assessed before the audit (Al Sawalqa, 2012 #110) . Jordan follows the General Accounting System (GAAS) and the Provisional Law of the Jordanian Association of Certified Public Accountants No. 73 of 2003, as well as other laws governing and managing the auditing profession in Jordan. However, internal control has many interrelated elements including control environment, risk assessment, control activities, communication and monitoring (Karagigos, Drogalas and Geophanes, 2011; Lee & Wei, 2008; Takahiro and Jia, 2012; Wang, 2010).

Al-Matari, Mohammed, and Al-Matari (2017) aims to apply the Audit Committee to the internal control system of commercial banks by examining four of its features (audit committee meeting, meetings recurrence among audit committee and internal auditors and display the result of internal control by audit committee. The study was based on the survey method using the questionnaire used to collect Data from 17 Yemeni commercial banks and distribution of 170 questionnaires, of which 88 were able to be used. The result shows that the positive audit committee focused on meetings between the Audit Committee and internal auditors.

Sarens, Abdolmohammadi, and Lenz (2012) aimed at examining the relevant aspects of the internal audit function that could affect corporate governance such as the audit plan and audit committee inputs. And based on a paper on 782 of audit executives in United States. The results show positive relationships between corporate governance and the audit plan, and the auditor's experience has a strong positive correlation with the internal control function that also affects corporate governance.

(Al Sawalqa, 2012 #96) has examined of internal control (risk assessment, control environment and control activities) were examined and the impact on the audit program in Jordan was selected in 120 samples that were valid for use 43. The analytical results showed that the control environment and control activities do not contributed significantly to an effective audit program, and its shows that Jordanian firms lack the experience to deal with existing tools to assess internal controls and suggests some applications and recommendations for both corporate management and external auditors.

Pararit et al. (2015) Examines the relationship between internal audit, which comprises five aspects: such as internal audit ethics and internal audit knowledge, and their reflection on the improvement of internal control. To achieve that, they deliberately use questionnaire and distribute on the 126 listed companies in Thailand. The results showed a positive impact of internal audit controls on the quality of internal control, which is reflected in the impact on decision makers. moreover, corporate governance and what contain of regulation have a significant positive impact on understanding internal audit.

Brender, Yzeiraj, and Fragniere (2015) research in management audit and all related to the organization management to examine if was working as indicated in corporate governance. to investigate that, the researchers conducted interviews for three years from the Geneva region in Switzerland

2.3.3 The role of risk management on internal control2.3.4 The role of AC on the internal control

3.1.5 Financial reporting remove

Kelton and Yang (2008) sought to investigate corporate governance factors as (shareholder right, ownership structure board composition and committee characteristics) and its relation to the level of transparency of disclosure through internal financial reporting. The disclosure index has been developed to examine the financial reporting internet through take sample containing the presentation format, information and corporate governance disclosure, in each company. The study concluded that the decline in shareholder equity and the acquisition of property would weaken the offer on the financial reports of the Internet. In contrast, increasing the independence of managers, resolute audit committee and higher proportion of financial experts, thus enhancing participation in the internet financial reporting. In addition, the relationship between corporate governance and financial reporting varies depending on the size of the company and the nature of corporate governance mechanisms. Finally, the new organizational trends in corporate governance help to increase the transparency of disclosure through online financial reporting.

Donelson et al. (2016) to investigate internal controls and explain how its weak can grow the risk of financial by the higher authorities in the administration. The sample of study was containing the internal audit views of the auditors from 2004 to 2007, and the internal control opinion from 2007 to 2010, a total of 14093 samples were selected. The result show that there is a significant positive correlation between internal control weaknesses and estimated future fraud rates. The reasons for weakness are the manager's freedom, which can lead to more fraud, as well as poor reporting and integrity by management. Furthermore, the result shows that weaknesses in internal control at entity level increase the risk of fraud rather than process level controls.

Ghosh and Lee (2013) aims to study weaknesses in internal control in a group of companies in the United States under the Sarbanes-Oxley Act (SOX). The author shows that companies earlier suffered from a range of problems such as structural problems, prone to internal control problem, and the quality of financial reporting law. The sample of study are included 672 company, based on audit analyses (AA)which provide details on the effectiveness of internal controls, and data incoming in sections (SOX302 disclosure control) and (SOX404 internal control). The study found that firms with structural problems, poor internal controls and poor quality financial reporting were informed that internal controls were weak within the SOX system. Moreover, the costs allocated for disclosure of internal control are limited, and the usefulness of this disclosure is unclear.

3.1.6 The Context of Corporate Governance Studies in Jordan move

Nathmy, Al, and Almbaidin (2015) examined how the absence of corporate governance requirements could affect the quality of internal auditing to control financial corruption in Jordanian institutions. The author prepared a questionnaire and distributed to 300 employees, equivalent to 48 percent of the total, and (SPSS.19) was relied for analyse the data. The results showed a positive relationship between the lack of reliance on internal control and financial corruption in Jordanian institutions. There is a negative relationship between the requirements of applying corporate governance in Jordanian institutions and financial corruption.

Shahwan and Mohammad (2016) aim to examine whether there is a commitment from Jordanian companies at the request of the Organization for Economic Co-operation and Development (OECD). The conceptual approach was based on analysing the data of companies listed on the Amman stock Exchange. The study concluded that there are some of the (OECD) applied in Jordan such as framework of good corporate governance, shareholders' right and the role of stakeholders, which requires companies to apply the rest of the principles.

Al-Sa'eed (2011) examines the policies of the Audit Committee and how they can affect the financial reporting of companies listed on the Amman Stock Exchange in Jordan for 2010. The questionnaires were distributed to internal audit managers and finance managers in 156 questionnaires and 26 interviews with audit committee members. The study concluded that there was a positive relationship between (internal control, financial expertise, audit quality, audit committee understanding) and financial reporting by 79%. The most important impact of financial reporting is the quality of audit and the audit committee.

Risheh (2014) aim of to study the impact of international financial reporting standards on the cost of auditing in Jordan. The sample of study continued 1279 financial statement from 91 companies listed on the Amman stock exchange between 1998 to 2011 based on cross-regression across squares. The study concluded, that there is negative effect between adoption of international financial reporting standards with audit fees in Jordan, which increases the cost of audit. The auditor's experience had a direct impact on the increased audit fees. However, the quality of audit is increased through the application of international financial reporting standards.

BINO and Shorouq (2012) aim to study the impact of some aspects of corporate governance (eg, ownership structure, board composition and board size), as well as the Bank's performance in Jordan. the study sample consists of 14 banks listed in Amman stock exchange. The study, based on linear regression analysis, concluded that the majority-owned bank has the highest level of performance, and that the bank becomes more efficient if it relies on board members. Moreover, there no any effect of board size and bank performance.

3. Significant of the study

corporate governance has become one of the most important parts to focus in the academic literature, especially after the last global financial crisis and what encountered of failure because of this (Al-Zwyalif, 2015). Rezaee, Olibe, and Minmier (2003) noted that good corporate governance fosters accountability relationships among key corporate participants, which may enhance corporate performance as management is accountable to the Board of Directors and the Board of Directors is accountable to shareholders. Becker-Blease and Irani (2008) found that the independence of the Board and the size of the Audit Committee had mitigated the negative impact of property rights.

Attention to internal control would enhance the reliability of the financial report and help companies identify and address deficiencies in internal controls in a timely manner (River, 2005) Addressing these shortcomings will enhance the quality of financial reporting (Ashbaugh-Skaife et al., 2008). Furthermore, Goh (2009) noted that persistent internal control problems could lead to a negative evaluation against the company.

4. Expected Contribution

The Middle East still needs to be further developed in the area of corporate governance to achieve the status of developed countries (Al-Zwyalif, 2015; Shehata, 2015), as well as its advantages in the volatile economic climate given the challenges facing the region (Alzoubi, 2012). Also, Jordan is a small country with limited resources, and the financial market is aimed at the principles of equality, transparency and effectiveness (Alzoubi, 2012; Suwaidan, Abed, & Al-Khoury, 2013). However, there has been a financial collapse in Jordan such as the Shamayla Gatei (Alzoubi, 2012; Suwaidan et al., 2013). It also shows that most Jordanian companies are violating certain corporate governance requirements (Bilal Nayef Zureiqat 2014). For instance, In a study conducted by Biel, about 43% of Jordanian companies had no audit committee (Al Sawalqa & Qtish, 2012; Zureigat, Fadzil, & Ismail, 2014). And Jordanian companies face many challenges in relying on an effective control system and lack of expertise that effectively utilizes technical tools to assess internal controls (Rahahleh, 2011). Corporate governance cannot be active without good internal control and commitment with all of its requirements (Al-Zwyalif, 2015; Leng & Ding, 2011). Mihaela and Iulian (2012) Pointed out that the listed firms should improvement corporate governance and internal control for more development. hence the importance of our study to ensure corporate governance in Jordan and impact that on the internal control. Where there is no study combines corporate governance specifically board of directors and audit committee withe impact that in internal control.

from our knowledge, the most of literature in Jordan on the financial reporting were before 2013, while the last amendment to the corporate governance rules in Jordan was in 2009. The amendment came as a result of pressure on the audit committee and investment promotion. Recording to (Shanikat & Abbadi, 2011) notes that management pressure on auditors and poor accountability systems, auditors are restricted from expressing an independent opinion about the ability of an entity's to continue its business in Jordan. Akgün (2016) has explain that board composition improves the quality of financial reporting element. There are no mandatory rules for corporate disclosure in Jordan. The Governing Council is responsible for ensuring compliance with the law (Shanikat & Abbadi, 2011).

In accordance with Sarbanes-Oxley Act 2002 (SOX), specifically article 404, which requires companies and external supervision to report on the effectiveness of internal controls of companies in the preparation of financial reports and disclosure if there are weaknesses in internal control (Johnstone et al., 2011). While this law has not been applied in Jordan, so the importance of corporate governance as one of the supervisor of internal control function. (Agyei-Mensah, 2016; Leng & Ding, 2011; Tsamenyi, Enninful-Adu, & Onumah, 2007) Pointed out that the listed firms should improvement corporate governance and internal control for more development. And the effectiveness of internal control can lead firms reach to the goals and then stop of lose their resources (Agyei-Mensah, 2016).

5. Hypothesis development

In this section, we have development hypothesis concerning to the corporate governance such as board size, board independence, audit size, audit independence, and impact that on the internal control over financial reporting. These factors are important for a variety of reasons. Firstly, to amend the corporate governance regulation in Jordan in 2009, and impact that on the corporate governance practices in Jordanian companies. Song and Windram (2004) argues that the development of corporate governance affects the adequacy of the corporate board and its committee that monitors management.

The objectives of this study to examine the structure of corporate governance (bard size, independence, audit size and audit independence, and impact that on the effectiveness and discloser of internal control on sample firms in Jordan. That will be as reference for the stakeholder and regulator to develop the financial reporting.

5.1 Board size

Recording to Agyei-Mensah (2016) management control action is one of the most duties of the board of directors. Gandía (2008) point out that the small size of the Board has led to poor internal control and greater risk with minimal performance. Moreover, the structure of the Board should be within the ideal number of the member, and the ideal number depends on the level and quality of its performance of the supervisory function. Song and Windram (2004) argue that the size of the Board increases the non-compliance of companies with the financial reporting standards. Also (Orazalin et al., 2016) explained that the increase in the number of Board members led to a decrease in performance. While Leng and Ding (2011) argue that the size of the board can improve the quality of internal control, as the larger the board means more members have the expertise in various professional fields. As well Hoitash et al. (2009) explained that the quality of the Board of Directors based on the size of the Board of Directors is linked to a higher level of internal control quality.

5.2 Board independence

Song and Windram (2004) suggest that the more of director’s equity interest will enhancing incentives better to monitor top management, which will lead to more questioning and management reporting. companies with more autonomy for the board of directors have led to a solution to the weakness of internal controls faster (Goh, 2009) . Hoitash et al. (2009) point out that the quality of the Board based on the independence of the Board link with higher levels of internal quality of control.

5.3 Number of meeting

Audit committee

(Mihaela & Iulian, 2012) Point out that the risk of internal control cannot be removed but can be improving that by auditor’s experience. The Audit Committee is defined as a monitoring mechanism and provides advice to ensure the reliability of financial reporting. Communication between the Board of Directors, management and auditors should be ensured to ensure effective internal control (Laković et al.) The Agency's problem lies in the separation of ownership and control. This problem arises from the inconsistency of information between contracts between agents, resulting in inconsistencies between managers and shareholders (Alzoubi, 2016). Auditors assess the quality of the Company's internal control system to identify, plan and audit (Al Sawalqa & Qtish, 2012). Also, The audit function also helps reduce disparities in information and conflicts of interest between managers and shareholders (Alzoubi, 2016)

Audit size

the most of researchers in the auditor quality have focused on the differences of firm’s size, and that the size of large firms would have more incentives to detect administration manipulation, where companies can be further audited by senior corporate auditors (Alzoubi, 2016; Rusmin, 2010; Vander Bauwhede, Willekens, & Gaeremynck, 2003). That the auditors of large companies will be more effective maintaining their good name to avoid the legal issue (Alzoubi, 2016) . Key auditors have strong incentives to produce and maintain audit quality because they have more customers to take care of, which will provide opportunities to achieve audit resources such as employment and technology (Alzoubi, 2016; Rusmin, 2010). While, Orazalin et al. (2016) explained that the more members of the Audit Committee, the lower the performance.

Independent auditor

The participation of independent auditors is a necessary part to reducing managerial opportunism, If the auditors are not independent, means more risk and uncertainty in the financial statements, and therefore social costs will continue (Alzoubi, 2016). In Jordan, the Audit Committee is formed by the Board of Directors, leading to the Board's interference in the auditor’s function. The Jordanian Corporate Governance Law provides that " the company shall take appropriate actions to ensure that the external auditors perform their duties impartially without interference from the board of directors or the executive management" (Corporate Governance Codes in Jordan, 2009 Chapter Five, section four) (Shbeilat, 2014)p546. Krishnan (2005) found that independent audit committees were less closely linked to weak internal control disclosures, and indicates a negative correlation between the existence of internal control problems and the independence of the Audit Committee

Expertise

(Krishnan, 2005)Indicates a negative relationship between the existence of internal control problems and the number of members of the Audit Committee with financial experience

Number of meeting

Leverage

6. Research design

6.1 Data and sample

The sample will include companies listed on the Amman Stock Exchange during the period 2011-2016, 159 companies, all of which are legally bound to prepare the annual financial reports, and all reports are available on the Amman Stock Exchange.

6.2 research model7. Research schedule8. research budget

7.3 Research methods

We investigate internal control over financial reporting based on the audit analytics (AA) Ghosh and Lee (2013) pointed out that (AA) can proved details about effectiveness of internal control , in (SOX 302) include details related to discloser control and also in (SOX404) proved details related to internal control.

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APPENDIX (1)

Industrial Companies

Pharmaceutical and Medical Industries

COMPANY'S NAME

COMPANY'S SHORT NAME

SYMBOL

LISTED SHARES

DAR AL DAWA DEVELOPMENT & INVESTMENT

DAR ALDAWA DV/IV

DADI

25,000,000

THE JORDANIAN PHARMACEUTICAL MANUFACTURING

JORDAN PHARMA

JPHM

25,312,500

HAYAT PHARMACEUTICAL INDUSTRIES CO.

HAYAT PHAR. IND.

HPIC

9,500,000

PHILADELPHIA PHARMACEEUTICALS

PHILADELPHIAPHARMA

PHIL

7,500,000

Chemical Industries

COMPANY'S NAME

COMPANY'S SHORT NAME

SYMBOL

LISTED SHARES

THE INDUSTRIAL COMMERCIAL & AGRICULTURAL

INDSTRAL/COMM/AGR

ICAG

14,956,389

PREMIER BUSINESS AND PROJECTS CO.LTD

PREMIER

ACDT

1,500,000

JORDAN CHEMICAL INDUSTRIES

JOR INDSTR CHEM

JOIC

1,799,624

NATIONAL CHLORINE INDUSTRIES

NAT CHLORINE

NATC

9,000,000

JORDAN INDUSTRIAL RESOURCES

JORDAN IND.RES.

JOIR

16,625,000

COMPREHENSIVE MULTIPLE PROJECT COMPANY

COMPREHENSIVE

INOH

5,250,000

THE ARAB PESTICIDES & VETERINARY DRUGS MFG. CO.

ARAB PESTICIDES

MBED

12,000,000

INTERMEDIATE PETROCHEMICALS INDUSTRIES CO. LTD.

PETROCHEMICALS

IPCH

7,000,000

Printing and Packaging

COMPANY'S NAME

COMPANY'S SHORT NAME

SYMBOL

LISTED SHARES

AL-EKBAL PRINTING AND PACKAGING

EKBAL PRINT CO.

EKPC

3,500,000

Food and Beverages

COMPANY'S NAME

COMPANY'S SHORT NAME

SYMBOL

LISTED SHARES

JORDAN POULTRY PROCESSING & MARKETING

JORDAN POUL PROC

JPPC

23,558,305

JORDAN DAIRY

JORDAN DAIRY

JODA

4,000,000

GENERAL INVESTMENT

GENERAL INVEST

GENI

10,000,000

UNIVERSAL MODERN INDUSTRIES

UNIV MOD INDCO

UMIC

6,000,000

NATIONAL POULTRY

NAT'L POULTRY

NATP

30,000,000

THE ARAB INTERNATIONAL FOOD FACTORIES

ARAB INT'L FOOD

AIFF

10,500,000

NUTRI DAR

NUTRIDAR

NDAR

11,615,912

JORDAN VEGETABLE OIL INDUSTRIES

JOR VEG OIL IND

JVOI

4,000,000

SINIORA FOOD INDUSTRIES PLC

SINIORA

SNRA

22,000,000

Tobacco and Cigarettes

COMPANY'S NAME

COMPANY'S SHORT NAME

SYMBOL

LISTED SHARES

AL-EQBAL INVESTMENT COMPANY LTD

EQBAL INV. CO

EICO

30,000,000

UNION TOBACCO & CIGARETTE INDUSTRIES

UNION TOBACCO

UTOB

15,083,657

Mining and Extraction Industries

COMPANY'S NAME

COMPANY'S SHORT NAME

SYMBOL

LISTED SHARES

GENERAL MINING CPMPANY PLC

GENERAL MINING

GENM

500,000

ARAB ALUMINIUM INDUSTRY /ARAL

ARAB ALUM IND

AALU

6,750,000

NATIONAL STEEL INDUSTRY

NATIONAL STEEL

NAST

2,941,768

JORDAN PHOSPHATE MINES

JOR PHOSPHATE MN

JOPH

82,500,000

THE JORDAN CEMENT FACTORIES

JOR CEMENT FACT

JOCM

60,444,460

THE ARAB POTASH

ARAB POTASH CO

APOT

83,317,500

JORDAN STEEL

JOR STEEL

JOST

35,000,000

NATIONAL ALUMINIUM INDUSTRIAL

NAT'L ALUM IND

NATA

9,000,000

TRAVERTINE COMPANY LTD

TRAVCO

TRAV

4,600,000

UNITED IRON & STEEL MANUFACTURING CO. P.L.C

MANASEER STEEL

MANS

32,165,176

NORTHERN CEMENT CO.

NORTHERN

NCCO

55,000,000

Engineering and Construction

COMPANY'S NAME

COMPANY'S SHORT NAME

SYMBOL

LISTED SHARES

THE JORDAN PIPES MANUFACTURING

JOR PIPES MANFACT

JOPI

3,575,000

JORDAN WOOD INDUSTRIES / JWICO

JOR WOOD INDUSTR

WOOD

5,000,000

READY MIX CONCRTE AND CONSTRUCTION SUPPLIES

READY MIX CONCRT

RMCC

25,000,000

ARABIAN STEEL PIPES MANUFACTURING

ARAB STEEL PIPES

ASPMM

9,000,000

AL-QUDS READY MIX

AL-QUDS READY MIX

AQRM

7,460,026

ASSAS FOR CONCRETE PRODUCTS CO. LTD

AL ASSAS

ASAS

12,000,000

SHEBA METAL CASTING

SHEBA METAL CASTING

SHBA

1,000,000

Electrical Industries

COMPANY'S NAME

COMPANY'S SHORT NAME

SYMBOL

LISTED SHARES

NATIONAL CABLE & WIRE MANUFACTURING

NAT/CABL/WIRE/MF

WIRE

19,299,747

ARAB ELECTRICAL INDUSTRIES

ARAB ELECT IND

AEIN

6,000,000

UNITED CABLE INDUSTRIES

UNITED CABLE INDUSTRIES

UCIC

40,000,000

Textiles, Leathers and Clothing’s

COMPANY'S NAME

COMPANY'S SHORT NAME

SYMBOL

LISTED SHARES

CENTURY INVESTMENT GROUP

CENTURY INV.GRP

CEIG

10,000,000

THE JORDAN WORSTED MILLS

JOR WORSTED MILL

JOWM

15,000,000

AKARY FOR INDUSTRIES AND REAL ESTATE INVESTMENTS

AKARY

WOOL

1,200,000

EL-ZAY READY WEAR MANUFACTURING

EL-ZAY READY WR

ELZA

8,684,029

ARAB WEAVERS UNION COMPANY P.L.C

ARAB WEAVERS

ARWU

12,000,000

5