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Title
Abstract
Key Takeaways
Introduction
Literature Review and Hypotheses Development
Research Methodology
Hypotheses Testing Models
Testing Model of the First Group of Hypotheses
Assessing the Second Group of Hypotheses
Descriptive Statistics
Empirical Results
Summary and Conclusion
References
FAQs
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Business and Management
Accounting

Audit committee features and earnings management

Profile image of Davood AskaranyDavood Askarany

2023, Heliyon

https://doi.org/10.1016/J.HELIYON.2023.E20825
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14 pages

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Abstract

Past studies have investigated the relationship between audit committee features and earnings management and reported mixed and inconclusive results. Some studies have found a significant relationship, while others have not. This study aims to explain these mixed results in the literature by dividing earning management into two groups: accrual and real earnings management (at three levels of sales, general and administrative costs, production costs and cash flows operation) and reexamining the relationship. Design/methodology/approach: The statistical model used in this study is a multivariate regression model; further, the statistical technique used to test the hypotheses is panel data. Findings: The findings show that both the audit committee members' financial expertise and the audit committee's size affect the accrual earnings management. However, the results show no meaningful relationship between the audit committee features and real-based earnings management at any levels of sales, general and administrative costs, production costs and cash flow operation. In addition, the findings suggest no meaningful relationship between the independence of the audit committee's members and accrual earnings management. In other words, not separating the earning management into 'accrual' and 'real' could be the critical factor for the reported mixed and inconsistent results in the literature. Practical implications: The findings of the current study provide an important guideline for investors and stakeholders to separate 'accrual' from 'real' earning management and pay more attention to the importance of audit committee features to limit the opportunities of earnings management. Indeed, by understanding the relationship between audit committee features and earnings management, investors and stockholders can make appropriate decisions regarding the optimal choice of funds. Originality/value: Dividing the earning management into two groups (accrual versus real) and reexamining its relationship with the audit committee features is new in this paper. Identifying one of the possible reasons for the past mixed and inconsistent results in the literature is also an incremental contribution provided by this study.

Key takeaways
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  1. The study reveals a significant relationship between audit committee financial expertise and accrual earnings management.
  2. Audit committee size positively influences accrual earnings management, enhancing oversight capabilities.
  3. No meaningful relationship exists between audit committee independence and accrual or real earnings management.
  4. Separating earnings management into accrual and real categories clarifies mixed results found in prior literature.
  5. The research provides practical implications for stakeholders to minimize earnings manipulation risks through effective audit committee features.

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The aim of the research is to investigate a substitution between accrual-based earnings management and real activities manipulation based upon the independence of the board of commissioners and the audit committee (number of audit committee members and number of audit committee meetings). This study involved a sample of manufacturing firms in the period of 2009-2014 with 664 observations. The hypothesis testing using multiple regression tests was carried out to obtain some evidence that the independence of the board of directors has no significant effect on accrual-based earnings management but a significant negative effect on real activities manipulation, to the extent of gaining stronger impacts after 2012. The number of audit committee members has a significant positive effect on accrual-based earnings management and a significant negative effect on real activities manipulation through abnormal production costs without any differences between pre and post 2012. The number of audit committee meetings has a significant effect on accrual-based earnings management but does not significantly influence real activities manipulation. In addition, substitution from accrual-based earnings management to real activities manipulation occurred due to the existence of independence of the board of commissioners that comes with a stronger impact on the real activities manipulation after 2012. Furthermore, there was a substitution from accrual-based earnings management to real activities manipulation based on the number of audit committee members without any different effects before and after 2012.

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Aims: The purpose of this study is to examine the effect of audit committee characteristics on real earnings management (REM) through abnormal cash flow from operations of listed companies in Nigeria. The study was conducted on non-financial listed companies in Nigeria for the period of five years (2016-2020). The data were extracted from the sample of firm's annual reports and Thompson Reuters database. Ordinary Least Square (OLS) regression was employed to test the study model. The analysis is based on a sample of 76 listed non-financial companies for five years with 380 firm-year observations. The finding shows that audit committee size and financial expertise reduces management opportunistic earnings manipulations. Also, the result demonstrates that the presence of independent directors in the audit committee is significantly associated with lower earnings management practices. However, the result further establishes that audit committee meeting frequency and real earnings management are positively related. The findings will give an insight to investors, policymakers, and regulators by enabling them to better understand the importance of audit committee in improving the financial reporting quality (FRQ), and the effect of audit committee characteristics in mitigating earnings manipulations.

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FAQs

sparkles

AI

How does audit committee financial expertise impact earnings management?add

The study reveals a significant relationship between financial expertise of audit committees and accrual earnings management (P = 0.000), indicating that knowledgeable members may deter such practices.

What effects does the size of the audit committee have on earnings management?add

Larger audit committees showed a significant relationship with accrual earnings management (P = 0.025), suggesting enhanced oversight capabilities due to diverse expertise among members.

Why is the independence of audit committee members critical for earnings management prevention?add

The independence of audit committee members was found to have no significant relationship with either accrual or real earnings management, highlighting potential weaknesses in oversight mechanisms.

What are the distinctions between accrual and real earnings management in this context?add

Accrual management involves manipulating accounting figures, while real earnings management pertains to altering actual business activities; findings demonstrate differential impacts of audit features on these types.

What limitations affect the generalizability of findings from Tehran Stock Exchange data?add

Data limitations include potential inaccuracies in financial records, restricted sample sizes, and a lack of qualitative context; thus, results may not be applicable to other contexts.

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