Board Members With Style: The Effect of Audit Committee Members and Their Personal Styles on Financial Reporting Choices

2018 ◽  
Vol 35 (3) ◽  
pp. 530-557
Author(s):  
Charlotte Tianshu Qu
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Fixed Effects ◽  
Audit Committee ◽  
Board Members ◽  
Reporting Practices ◽  
Accounting Choices ◽  
Prior Literature ◽  
Specific Factors ◽  
Over Time

This article studies whether audit committee members and chairpersons exhibit individual-specific “styles” that affect corporate financial reporting practices. I track 2,941 audit committee members and 683 chairpersons across firms over time, and test whether member (chair)-specific factors explain firms’ accounting choices. I find that member and chairperson “style” (captured by fixed effects) is significant in explaining a firm’s probability of accounting misstatements and earnings management, and the effects are not explained away by observable member (chairperson) characteristics found by prior literature, or by the effects of CEOs or CFOs.

Earnings management: do attendance and changes of audit committee members matter?

2018 ◽  
Vol 33 (8/9) ◽  
pp. 760-778 ◽  
Author(s):  
Murad Abdulsalam Qamhan ◽  
Mohd Hassan Che Haat ◽  
Hafiza Aishah Hashim ◽  
Zalailah Salleh
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Fixed Effects ◽  
Audit Committee ◽  
Reporting Quality ◽  
Securities Market ◽  
Annual Reports ◽  
Fixed Effects Model ◽  
Content Type ◽  
New Evidence

Purpose This paper aims to examine the association between new audit committee characteristics – attendance of audit committee members at meetings and changes of members through the demission or appointment of members of the audit committee during the year – and earnings management. Its objective is to contribute new evidence that extends studies on audit committee characteristics in reducing earnings management. Design/methodology/approach The sample comprises 370 observations obtained from the annual reports of 74 companies listed on the Muscat Securities Market for the years 2008-2012. The panel data are analysed using a fixed effects model to validate the hypotheses and model. Findings This study finds a negative association between earnings management and members’ attendance at the audit committee meetings. Additionally, there is a positive significant relationship between earnings management and changes to members through demission or appointment. Originality/value This study broadens the scope of audit committee characteristics by providing empirical evidence of the relationship between new audit committee characteristics and earnings management and may assist policymakers and regulators in determining ways to enhance audit committee characteristics and improve financial reporting quality.

scholarly journals An Investigation on the Audit Committees Effectiveness: The Case for GLCs in Malaysia

2011 ◽  
Vol 13 (3) ◽  
pp. 287 ◽  
Author(s):  
Nurul Nazlia Jamil ◽  
Sherliza Puat Nelson
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Audit Committee ◽  
Reporting Quality ◽  
Audit Committees ◽  
Financial Reporting Quality ◽  
Financial Expertise ◽  
Monitoring Mechanism ◽  
The Impact

Financial reporting quality has been under scrutiny especially after the collapse of major companies. The main objective of this study is to investigate the audit committee’s effectiveness on the financial reporting quality among the Malaysian GLCs following the transformation program. In particular, the study examined the impact of audit committee characteristics (independence, size, frequency of meeting and financial expertise) on earnings management in periods prior to and following the transformation program (2003-2009). As of 31 December 2010, there were 33 public-listed companies categorized as Government-Linked Companies (GLC Transformation Policy, 2010) and there were 20 firms that have complete data that resulted in the total number of firm-year observations to 120 for six years (years 2003-2009).  Results show that the magnitude of earnings management as proxy of financial reporting quality is influenced by the audit committee independence. Agency theory was applied to explain audit committee, as a monitoring mechanism as well as reducing agency costs via gaining competitive advantage in knowledge, skills, and expertise towards financial reporting quality. The study is important as it provides additional knowledge about the impact of audit committees effectiveness on reducing the earnings management, and assist practitioners, policymakers and regulators such as Malaysian Institute of Accountants, Securities Commission and government to determine ways to enhance audit committees effectiveness and improve the financial reporting of GLCs, as well as improving the quality of the accounting profession.     

scholarly journals An Assessment of the Application of Earnings Management Objectives and Instruments in Financial Reporting – Evidence of Survey Research Results

2013 ◽  
Vol 60 (2) ◽  
pp. 148-173
Author(s):  
Andrzej Piosik ◽  
Marzena Strojek-Filus
Keyword(s):  
Earnings Management ◽  
Survey Research ◽  
Financial Reporting ◽  
Research Problem ◽  
Financial Statement ◽  
Board Members ◽  
Executive Board ◽  
Management Tools ◽  
Management Objectives ◽  
Effective Instrument

Abstract The study contains an overview of earnings management tools of reporting entities and capital groups in Poland. Relations between the phenomenon of earnings management and financial reporting policy have been analysed. A research problem related to the significance and application of particular earnings management tools as perceived by practitioners (accountants, executive board members, specialists) has been discussed. Selected tools of earnings management, usually linked with operations, are perceived to be used more intensively. The conducted analysis shows that in the opinion of the surveyed respondents the most effective instrument influencing the desired level of results presented in a financial statement is carrying out transactions under conditions which ensure the achievement of a reported goal. This applies also to capital groups, in which transactions effected between group units were indicated as the ones used to the greatest extent.

scholarly journals Venture Capital and Financial Reporting in Newly Public Firms

2018 ◽  
pp. 411-429
Author(s):  
Lars Helge Hass ◽  
Monika Tarsalewska
Keyword(s):  
Earnings Management ◽  
Empirical Evidence ◽  
Financial Reporting ◽  
Reporting Quality ◽  
Active Role ◽  
Real Earnings Management ◽  
Venture Capitalists ◽  
Public Firms ◽  
Reporting Practices

Financial intermediaries such as venture capitalists (VCs) not only provide financing, they also play an active role in firm governance and in financial practices before a firm goes public. Venture capitalists are actively engaged in monitoring and advising their portfolio firms. Thus, one also expects them to exert significant influence over the development of financial reporting practices. This chapter reviews recent literature and empirical evidence on VCs and financial reporting quality in newly public firms. It surveys the role of VCs in such activities as earnings management. In particular, it discusses how their monitoring activities and reputation can impact how their portfolio firms establish financial reporting practices. Subsequently, it also reviews the consequences of misreporting, and whether they affect VC behavior ex ante. Finally, the chapter uses recent data to provide empirical evidence on the effect of VCs on accrual and real earnings management.

The effect of the need for subsequent seasoned equity offerings on earnings management motivation

2019 ◽  
Vol 18 (1) ◽  
pp. 25-52
Author(s):  
Guannan Wang ◽  
Moshe Hagigi
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Seasoned Equity Offerings ◽  
Common Stock ◽  
Equity Offerings ◽  
Content Type ◽  
Equity Issues ◽  
Total Magnitude ◽  
Prior Literature ◽  
Reported Earnings

PurposeMost prior literature focuses on how managers’ immediate needs affect their current earnings management. The purpose of this paper is to expand this body of literature by investigating the managerial motivation in a multi-period setting. The authors believe that managers’ incentive to engage in earning management around current equity issues is not only determined by the companies’ immediate need, but that it is also determined by their longer-term financing need.Design/methodology/approachThe authors examine all issuances of common stock, whether they are issued as seasoned equity offerings or whether as a reissuance of previously repurchased stock. They believe that the motivations for earnings management are similar for all these various stock-issuance events, which result in an increase in the number of outstanding common stock items.FindingsThe results of this paper reveal that those firms with less of a need for subsequent equity issuances are more likely to engage in “income- increasing” earnings management before their equity issuances. Conversely, equity issuers with more of a need for subsequent equity issuances would be more concerned about the potential impact of current earnings management on their future reported earnings and, therefore, would be less likely to manage earnings.Originality/valueThis paper contributes to the literature by extending the findings of the prior literature, showing that managerial discretion does not only affect the total magnitude of earnings management, but that it also impacts the timing of the earnings management activities. Insights gained from our research may contribute to the literature and enable a better understanding of firms’ financial reporting strategy from a longer-run view.

scholarly journals Board Committees, CEO Compensation, and Earnings Management

2009 ◽  
Vol 84 (3) ◽  
pp. 869-891 ◽  
Author(s):  
Christian Laux ◽  
Volker Laux
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Audit Committee ◽  
Ceo Compensation ◽  
Incentive Pay ◽  
Compensation Committee ◽  
Board Committees ◽  
Ceo Incentives ◽  
Ceo Pay ◽  
The Board Of Directors

ABSTRACT:We analyze the board of directors' equilibrium strategies for setting CEO incentive pay and overseeing financial reporting and their effects on the level of earnings management. We show that an increase in CEO equity incentives does not necessarily increase earnings management because directors adjust their oversight effort in response to a change in CEO incentives. If the board's responsibilities for setting CEO pay and monitoring are separated through the formation of committees, then the compensation committee will increase the use of stock-based CEO pay, as the increased cost of oversight is borne by the audit committee. Our model generates predictions relating the board committee structure to the pay-performance sensitivity of CEO compensation, the quality of board oversight, and the level of earnings management.

scholarly journals Diversity of Internal Governance and Financial Reporting Quality: Post-GFC of an Emerging Market

2019 ◽  
Vol 8 (2S2) ◽  
pp. 399-410
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Emerging Market ◽  
Reporting Quality ◽  
Emerging Economy ◽  
Board Diversity ◽  
Economic Reason ◽  
Listed Firms ◽  
Prior Literature ◽  
The Relationship

We examine whether wide-ranging board diversity reduce earnings management from the emerging market of Malaysia. We contribute to the prior literature in several ways. First, while previous literature are mainly focusing on the developing economy, our study is the first that examine the relationship between all-inclusive set of diverse board characteristics and earnings management from the emerging economy. Second, we concentrate to the post-GFC period, where we intentionally avoid the GFC, a situation where managerial opportunistic behaviour to engage in earnings management is more prevalent due to economic reason. Third, we cover the potential complementary or substitutive effects of board diversity characteristics on earnings management. Using 1400 listed firms in emerging market of Malaysia over the period of 2009-2015, in contrast to our prediction, our findings demonstrated that the relationship between board diversity characteristics and earnings management in the Malaysia is mixed. We therefore conclude that the diversity mechanism that work well in the developing countries might not necessarily compatible to the emerging economy such as Malaysia.

scholarly journals AN INVESTIGATION ON THE EFFECT OF AUDIT COMMITTEE ON FINANCIAL REPORTING QUALITY IN PRE AND POST IFRS ADOPTION: EVIDENCE FROM MALAYSIAN COMPANIES

2020 ◽  
Vol 8 (2) ◽  
pp. 25-35
Author(s):  
Citrawati Jatiningrum ◽  
Fauzi ◽  
Rita Irviani ◽  
Mujiyati ◽  
Shahanif Hasan
Keyword(s):  
Earnings Management ◽  
Empirical Evidence ◽  
Financial Reporting ◽  
Audit Committee ◽  
Audit Quality ◽  
Reporting Quality ◽  
Financial Reporting Quality ◽  
Ifrs Adoption ◽  
Significant Difference ◽  
The Relationship

Purpose of study: This study sought to investigate the effect of the audit committee on Financial Reporting Quality (FRQ), explicitly focuses on the period pre- and post-mandatory IFRS adoption in Malaysia. The Financial Reporting Quality in this study proxied by earnings management. Malaysian. Methodology: The sample study has covered 81 listed companies on Bursa Malaysia, with 567 observations, which examined the time of 2009 to 2015. The relationship was analyzed by statistical multiple regression linear methods and also examined the significance of differences between pre and post IFRS adoption by paired sample t-test. Result: The main finding reveals that the relationship between the audit committee and financial reporting quality after IFRS adoption in Malaysia has more significant. However, empirical evidence showed that the post period of mandatory IFRS evidently no significant difference level of earnings management practice. This result indicates that the IFRS adoption cannot reduce managerial discretion yet and the possibility for EM manipulation for Malaysian companies. Implication/Application: This finding has critical implications for regulators and policymakers, that the consequences of IFRS adoption do not increase the quality of financial reporting when EM practices still continue in the different forms. Novelty/Originality of this study: This study gives empirical evidence that there are differences in relationship level between audit quality and earnings management in the period before and after IFRS mandatory adoption in Malaysia companies.

scholarly journals Earnings management, audit committee effectiveness and the role of blockholders ownership: Evidence from UK large firms

2012 ◽  
Vol 1 (4) ◽  
pp. 100-116 ◽  
Author(s):  
Murya Habbash
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Audit Committee ◽  
Family Firms ◽  
Agency Problems ◽  
Audit Committees ◽  
Effective Control ◽  
Agency Conflicts ◽  
Controlling Shareholders

The existing literature documents that the quality of financial reporting is higher when firms have effective audit committees. However, recent studies find that audit committees are not effective in family firms where agency conflicts arise between controlling and non-controlling shareholders. This study extends the previous findings by investigating the effectiveness of audit committees in firms with similar agency conflicts when one owner obtains effective control of the firm. Compared to firms with a low level of block ownership, high-blockholder firms face less agency problems due to the separation of ownership and management, but more severe agency problems between controlling (blockholders) and non-controlling shareholders (minority shareholders). Using a unique hand-collected sample, this study tests the largest 350 UK firms for three years from 2005 to 2007, and shows that firms with effective audit committees have less earnings management. This study also documents that the monitoring effectiveness of audit committees is moderated in firms with high blockholder ownership. The results are not sensitive to the endogeneity test and hold for alternative specifications of both dependent and independent variables. Overall, these findings suggest that audit committees are ineffective in mitigating the majority-minority conflict compared to their effectiveness in reducing owners-managers conflicts. These conclusions, along with some recent similar evidence (e.g., Rose, 2009 and Guthrie and Sokolowsky, 2010), may raise doubts about the monitoring role of blockholders asserted by agency theorists and widely accepted in corporate governance literature.

scholarly journals An Investigation IFRS Adoption in Malaysia on The Relationship between The Audit Committee and Quality of Financial Statement

2018 ◽  
Vol 2 (2) ◽  
pp. 115-122
Author(s):  
Citrawati Jatiningrum ◽  
Fauzi Fauzi ◽  
Rita Irviani ◽  
Mujiyati Mujiyati ◽  
Shahanif Hasan
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Audit Committee ◽  
Financial Statement ◽  
Committee Meeting ◽  
Ifrs Adoption ◽  
Financial Expertise ◽  
The Relationship ◽  
Post Period

Audit committees are one of Corporate Governance (CG) mechanisms which are the significant factor in improving its role in inhibiting financial statement fraud (Choi, Jeon & Park, 2004; Habbash, 2010; Soliman & Ragab, 2014). Quality of the Financial Statement emphasised as being in compliance with accounting standards accepted in general, the disclosure scale, and reported numbers although this is not merely a task for the IFRS (Cascino & Gassen, 2010). In recent years, the issue of IFRS adoption in developed and developing countries have been a great deal of attention from many researchers. However, regarding the relationship between the Audit Committee and Quality of Financial Statement with IFRS requirements is still questioning. In fact, the results obtained from some previous researches are inconsistent. Therefore, the objectives in this study are aims to investigate whether post the mandatory IFRS adoption in Malaysia would limit earnings management practice in highlights of governance monitoring on the quality of financial reporting in this environment. This paper gives some evidence: 1) The effect of pre- and post IFRS adoption in Malaysia in the relationship between the Audit Committee and earnings management adoption. 2) examine the differences of the level earnings management on two periods of IFRS adoption in Malaysia. Quality of Financial statement in this study was measured by the level of earnings management with discretional accrual (DA) proxy. The audit committee variable measured by Audit Committee Independence (ACIND), Audit Committee Financial Expertise (ACFEX), Audit Committee Meeting (ACMEET), Audit Committee Size (ACSIZE) and control variable in this study using Board Size (BRDSIZE) and Firm Leverage (FRMLEV). The sample of this study including the two main time periods, there are pre-IFRS adoption and post-IFRS adoption. Using 81 listed companies in Malaysia as a sample, with 567 observations is analysed from 2009 to 2015 (7 years observations) with purposive judgement sampling selection. For seven years, a total of 567 observations is analysed. The pre- IFRS adoption period was tested from 2009 through 2011, and the post-IFRS adoption was tested from 2012 through the end of 2015. The findings in this study with multiplied regression analysis revealed that the hypothesis test in a period of pre- and post IFRS adoption ACFEX and FIRMLEV statistically were significance at 5% level. It means that Audit Committee Financial Expertise (ACFEX) have a significant effect on earnings management practise. According to the result found in the post IFRS adoption period, Audit Committee Meeting (ACMEET) is significant. It means that the frequency of audit committee meetings could be decreasing the level of discretionary accrual. The evidence also unveils both of ACIND and ACSIZE at 5 % level p-value is not significant. The most important result finding on pre- and post period of IFRS adoption in Malaysia provide evidence that based on the statistically significant was upward or the relation more significantly. However, this study also reported with paired sampled test analysis there was no significant difference between the level of earnings management in pre- and post period the adoption of IFRS in Malaysia at 5% level significance.  An important contribution this study has the impact on practices and has implications useful for regulators. The study provides empirical evidence that a relationship between the audit committee and earnings management in the case of IFRS adoption. In contributing to the strength of governance quality and FRQ need to be revisited, especially after mandatory IFRS adoption. Though the audit committee and audit quality are implicitly mentioned in the CG act, it is recommended that formulates specific rules relating to the quality of Financial Reporting. In this regard, it is suggested that company reports would be presented high quality in financial reporting to provide appropriate responses to recommendations made in the reports. Finally, these findings suggest that CG practices in Malaysian that have its own peculiar characteristics compared to other emerging economies.      

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