Audit committee characteristics and earnings management: evidence from Malaysia

Abstract

Purpose: Conflicts between managers and outside auditors may exist in choosing alternative accounting procedures. Since auditors are appointed by the firm, they are subject to dismissal if divergent opinions cannot be resolved. To a lesser extent, financial reports are often negotiated. In order to produce unbiased financial reports, audit committee members are appointed to act independently in order to resolve conflicts between the managers and outside auditors. This study aims to assess the effectiveness of some audit committee characteristics, i.e. the independence of members, size, frequency of meeting and knowledge of the members, to monitor management behavior with respect to their incentives to manage earnings. Design/methodology/approach: This paper uses discretionary accruals obtained from the established model as a signal of the presence of earnings management. Findings: The evidence shows that the presence of a fully independent audit committee reduces earnings management practices. It was also found that firms which had more knowledgeable audit committee members and held more audit committee meetings recorded fewer earnings management practices compared with other firms. Originality/value: This paper is different from prior studies, in that it makes a significant contribution towards enhancing one's knowledge in the interacting role of audit committee characteristics.