Audit committee characteristics and earnings management practices

Abstract

This study revisits the effectiveness of the audit committee independence and expertise in preventing earnings management practices. Studies in other countries that have relatively stricter regulations showed the audit committee independence was effective to prevent earnings management. Arguably, the practice may be different in Indonesia whose regulation is considerably more lenient. On the other hand, studies related to audit committee expertise is rarely done in Indonesia. This study utilized two of the earnings management models namely the Modified Jones Model and the Performance-Adjusted Modified Jones Model. This study was limited to Indonesian listed manufacturing companies from 2009 to 2011. Consistent for both earnings management models, the results show that audit committee independence is effective to prevent earnings management. However, the results showed that audit committee expertise did not affect earnings management practices. Although only approximately 39 percent of the audit committee members in Indonesian listed manufacturing companies were independent, the existence of those independence members enabled the audit committee to effectively conduct its monitoring role, especially in preventing earnings management. Nevertheless, accounting and/or financial expertise might not determine the effectiveness of the audit committee’s monitoring role.

Supervisory Function And Earnings Quality: Gender Analysis

“…A. Setiawan et al, 2020;Siagian and Siregar, 2018). However, these results are not in line with other studies that did not find the effect of the audit committee on earnings quality; this result is generally thought to be due to the lack of audit committee supervision as well as the lack of power the audit committee has in overseeing management so that it cannot carry out its functions optimally (Dewi and Mita, 2019;Halim, 2022;Kawedar et al, 2021;Nelwan and Tansuria, 2019;Savka, 2019).…”

“…The absence of a significant effect of the audit committee on earnings quality is thought to be due to not only the lack of supervisory function carried out by the audit committee but also the lack of power possessed by the audit committee in supervising management so that its function does not run well (Dewi & Mita, 2019;Halim, 2022;Kawedar et al, 2021;Nelwan & Tansuria, 2019;Savka, 2019).…”

Royal Family Members and Corporate Governance Characteristics: The Impact on Earnings Management in UA

“…Oradi and Izadi (2020) found that audit committee independence minimises the firm's ability to restate financial statement. Furthermore, Nelwan and Tansuria (2019) argued that an independent audit committee is an effective tool to constrain managers' misbehaviour. As mentioned earlier, the Code of Corporate Governance in UAE stipulates that the audit committee shall consist of at least three members, and at least two of them should be independent members.…”

“…In this model, a number of control variables are included because most prior literature finds these variables have an effect on earnings management (Nelwan & Tansuria, 2019;Alhadab et al, 2020;Mnif & Cherif, 2020). These control variables include firm size, firm profitability and firm leverage.…”

“…Such alternative methods may strengthen the findings of the study. Forth, although earnings management is a broad concept, the current study used discretionary accruals as a proxy of earnings management following Nelwan and Tansuria (2019) and Kapkiyai et al (2020). Future studies may apply other proxies as an indicator of earnings management, such as real earnings management.…”