Earnings management and corporate governance: the role of the board and the audit committee |
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| Affiliation: | 1. Department of International Business, Ming Chuan University, Taipei, Taiwan, ROC;2. A.R. Sanchez School of Business, Texas A & M International University, Laredo, Texas, USA;3. Department of Business Administrtion, National Taiwan University of Science and Technology, Taipei, Taiwan, ROC;1. Accounting Department, School of Management, Xiamen University, Xiamen, Fujian 361005, China;2. Xiamen National Accounting Institute, Xiamen, Fujian 361005, China;1. Kennesaw State University, United States;2. Virginia Tech, United States;3. University of Kansas, United States;4. Central Michigan University, United States |
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| Abstract: | We examine the role of the board of directors, the audit committee, and the executive committee in preventing earnings management. Supporting an SEC Panel Report's conclusion that audit committee members need financial sophistication, we show that the composition of a board in general and of an audit committee more specifically, is related to the likelihood that a firm will engage in earnings management. Board and audit committee members with corporate or financial backgrounds are associated with firms that have smaller discretionary current accruals. Board and audit committee meeting frequency is also associated with reduced levels of discretionary current accruals. We conclude that board and audit committee activity and their members' financial sophistication may be important factors in constraining the propensity of managers to engage in earnings management. |
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