Age diversity of audit committee financial experts, ownership structure and earnings management: Evidence from China

Abstract

The extant literature has shown the impact of demographic characteristics such as gender of audit committee members on earnings management but ignored the importance of the board room's age diversity. Going beyond the prior literature, our study aims to examine how the age diversity of audit committee financial experts (ACFEs) influences the financial reporting quality of Chinese non-financial firms. We found a negative relationship between ACFEs' age diversity and earning management. Our findings also show that younger ACFEs mitigate earnings management as compared to older ACFEs. We further examined this relationship among state-owned enterprises (SOEs) and privately-owned enterprises in China and confirmed that the age diversity of ACFEs influences earnings management differently. However, younger ACFEs working in SOEs mitigates earnings management than their counterpart in privately-owned companies. Our result maintains its robustness after controlling for endogeneity and employing a different measure of earnings management. Our result has relevance for selecting financial experts and the overall composition of the audit committee, showing that including younger ACFEs will ensure more efficient control of firms' management. This finding is also relevant for policymakers, especially Chinese regulators, offering them insight into promoting audit committee effectiveness.

The impact of audit committee effectiveness on firms’ outcomes in China: a systematic review

“…co-ordination problems with other audit committee members on the board); and organisational (e.g. political connections of management and controlling shareholders) within the audit committee throughout their term so they can effectively perform their functions (Boivie et al , 2016; Komal et al , 2021; Namakavarani et al , 2021). …”

“…However, prior literature recommends the establishment of an audit committee in China to respond to regulatory pressure and its role to be ceremonial rather than monitoring and oversight (Alkebsee et al , 2022a; Alkebsee et al , 2022b; Lin et al , 2008; Wu et al , 2015; Huang and Chong, 2016). We believe there is a need to explore and understand the audit committee’s operations in practice within the Chinese context (Alkebsee et al , 2021; Cheng et al , 2021; Komal et al , 2021). The key focus of the research is on the extent of findings that may help policymakers and regulators in incorporating and implementing the regulatory rules for audit committees.…”

The impact of audit characteristics, audit fees on classification shifting: evidence from Germany

“…Extant literature has shown the relevance of audit committee financial expertise in mitigating earnings management (Chen and Komal, 2018;Komal et al, 2021). Consistent with the Blue Ribbon Committee, it is expected that the financial expertise of audit committee members will influence its effectiveness.…”

“…Financial earnings are of great interest to stakeholders of the company, as it empowers them to differentiate among low and high-performing companies and make effective financial decisions. However, previous studies pointed out that managers have an opportunity to use their discretion and manipulate reported earnings to gain personal benefits for themselves or the company (Leuz et al , 2003; Prior et al , 2008; Komal et al , 2021). Prior earnings management literature mainly used accrual and real earnings management (Peasnell et al , 2000; Roychowdhury, 2006; Zang, 2012; Assenso-Okofo et al , 2020).…”

Board monitoring and capital structure dynamics: evidence from bank-based economies

“…A board is assumed to be gender diverse if at least one female director is a board member (Adams and Ferreira 2009). Prior literature suggests that board gender diversity impacts the quality of its discussion and influences its monitoring ability (Campbell and Mínguez-Vera 2008;Gul et al 2011;Kao et al 2020;Komal et al 2021). Female board members bring different perspectives to the board (Frye and Pham 2018;Reguera-Alvarado et al 2017;Robinson and Dechant 1997) since they are not part of the 'old boys' club (Adams and Ferreira 2009).…”