Audit Committee Attributes and Earnings Management: Evidence from Nigeria

Authors

  • Afensimi Elijah DEPARTMENT OF ACCOUNTING UNIVERSITY OF BENIN
  • Ibadin Lawrence Ayemere DEPARTMENT OF ACCOUNTING, AMBROSE ALLI UNIVERSITY, EKPOMA EDO STATE

DOI:

https://doi.org/10.18533/ijbsr.v5i4.737

Keywords:

Audit committee financial expertise, audit committee independence, earnings management.

Abstract

Using the agency theoretical framework, the  study postulates that audit committee attributes can impact significantly, constraining accrual-based distortion of financial reporting credibility and thus improve the quality of financial reporting. To assess our arguments, audit committee size, audit committee financial literacy, audit committee attendance at meetings, audit committee independence and audit meetings frequency of meeting were regressed on financial reporting quality measured by discretionary accruals. The findings for the full sample and negative discretionary accruals sample confirm our expectation that audit committee characteristics have a constraining effect on earnings management. Specifically, audit committee financial expertise, audit committee size, audit committee independence and diligence showed an inverse and significant relationship with earnings management. This is in tandem with theoretical expectations and suggest that increases in these variables we exert a declining influence on earnings management. The study concludes that there is the need for companies to focus on attributes that strengthen the effectiveness of their audit committees.

References

Abbott, L., Park, Y. & Parker, S. (2000). The effects of audit committee activity and independence on corporate fraud. Managerial Finance, 26 (11), 55-67.

Abbott, L., S. Parker, & G. Peters. (2004) .Audit committee characteristics and restatements. Auditing: A Journal of Practice and Theory 23 (1): 69-87.

Abbott, L.J., Parker, S, Peters, G.F. & Raghunandan, K. (2003). The association between audit committee characteristics and audit fees. A Journal of Practice and Theory, 22 (2), 17-32.

Baxter (2002). Audit committees and financial reporting quality. Unpublished Ph.D thesis, University of Southern Queensland,

Beasley, M. S. (1996). An empirical analysis of the relation between the board of director composition and financial statement fraud. Accounting Review, 71(4), 443-465.

Bedard, J., S. M. Chtourou, & L. Courtean (2004). The effect of audit committee expertise, independence, and activity on aggressive earnings management. Auditing: A Journal of Practice and Theory 23 (September): 13-35.

Bergstresser, D., & Philippon, T. (2006). CEO incentives and earnings management. Journal of Financial Economics, 80(4) 511–529.

Birkett, L., (1986). The provision of other services by auditors: Independence and pricing issues, Accounting and Business Research, 24(94) 99-108.

Blue Ribbon Committee (BRC), (1999), Report and Recommendations of the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees. Stamford, CT: BRC.

Bradbury, M (1990). The Incentives for voluntary audit committee formation. Journal of Accounting and Public Policy, 9 (1), 13-36.

Cheng, H. & S. Warfield (2010). Client importance, non-audit services, and abnormal accruals. The Accounting Review. 78(4) 931-955.

Choi, J. J., Jeon, S. W., & Park, S. S. (2007). The value of outside directors: Evidence from corporate governance reform from Korea. Journal of Financial and Quantitative Analysis, 42(4), 941–962

Dechow, P., Sloan, R., & A. Sweeney. (1995). Causes and consequences of earnings manipulation: an analysis of firms subject to enforcement actions by the SEC. Contemporary Accounting Research 13:1-36.

Dellaportas, S., Gibson, K., Alagiah, R., Hutchinson, M., Leung, P., & Van Homrigh, D. (2005), Ethics, Governance & Accountability, a Professional Perspective, JohnWiley & Sons Australia Ltd, Milton, Qld.

Fama, E. (1980). Agency problems and the theory of the firm. Journal of Political Economy 88(2): 288-307.

Fama, E. F., & Jensen, M. C. (1983). Separation of ownership and control. Journal of Law and Economics, 26(2), 301-325.

Goodwin, J. (2003). The relationship between the audit committee and the internal audit function: evidence from Australia and New Zealand. International Journal ofAuditing, 7,263-278.

Greene, W. (2003). Econometric analysis, 5th edition, New York: McGraw-Hill

Healy, P.M. & J.M. Wahlen (1999). A review of the earnings management literature and its implications for standard setting. Accounting Horizons. 13, (4) 365-383

Ittonen, K, Miettinen, J & Vähämaa S. (2007). Does female representation in audit committees affect audit fees? Department of Accounting and Finance University of Vaasa, Finland

Iturriaga, F. J. L. & P. S. Hoffiman (2005). Managers discretionary behavior, earnings management and internal mechanisms of corporate governance: Empirical evidence from Chilean firm. Corporate Ownership and Control, 3,(1) 17-29

Jensen, M & Meckling, W. (1976). Theory of the firm: Managerial behavior, agency costs, and ownership structure. Journal of Financial Economics, 3,(6) 305-360.

Jones, J. J. (1991). Earnings management during import relief investigations, Journal of Accounting Research 29, 193-228.

Kalbers, LP & Fogarty, T. J. (1998). Organizational and economic explanations of audit Committee Oversight. Journal of Managerial Issues, 10 (2), 129-150.

Klein, A., (2002a). Audit committee, board of director characteristics, and earnings management. Journal of Accounting and Economics, 33 (3), 375–400.

Klein, A., (1998): Firm performance and board committee structure. Journal of Law and Economics, Vol. 41, ( 1) 275-303.

Lin, P., and li, H., & Yang E (2006). The auditor’s going-concern decision: Some UK evidence concerning independence and competence, Journal of Business Finance & Accounting, 20(2),213-228.

Murya, G. (2010).Audit committee characteristics and restatements. A Journal of Practice and Theory 23 (1): 69-87.

Oaikhenan, H. E & Udegbunam, R. I. (2004). Modern Statistics for economics and business, Benin City: Henans Publishers.

Rahman, R. & Ali, F. (2006). Board, audit committee, culture and earnings management: Malaysian evidence. Managerial Auditing Journal, vol. 21, no. 7, pp. 783-804.

Saleh, E. Iskandar . S & Rahmat A. (2007). Audit committee characteristics and earnings management: evidence from Malaysia, The Asian Review of Accounting, 15 (2): 147-163.

Thinggaard, F. and Kiertzner, K. (2008). Determinants of audit fees: Evidence from a small capital market with a joint audit requirement. International Journal of Auditing, 12, 141 – 158.

Uwuigbe, O. (2011). Corporate governance and financial performance of banks: a study of listed banks in Nigeria. A Thesis In The Department Of Accounting, Submitted to the School of Postgraduate Studies Covenant University, Ota, Ogun State.

Vafeas, N. (2005) Board meeting frequency and firm performance, Journal of Financial Economics, 53, 113-142.

Van der Zahn, M. and Tower, G. (2004). Audit committee features and earnings management: further evidence from Singapore. International Journal of Business Governance and Ethics, 1(2) 233-257.

Xie, B., Davidson, W., & DaDalt, P.J., (2003). Earnings management and corporate governance: the role of the board and the audit committee. Journal of Corporate Finance, 9, 295-316.

Yang, J. S., & Krishnan, J., (2005). Audit committees and quarterly earnings management. International Journal of Auditing, 9, 201-209. 70

Zain, M. (2005). The impact of audit committee and internal audit attributes on internal audit contribution to financial statement audit and audit fees: Perceptions of Malaysian Internal auditors. Unpublished thesis.

Downloads

Published

2015-05-01

Issue

Section

Article