The Relation between Audit Committee Characteristics and Earnings Management: Evidence from Firms Listed on the Egyptian Stock Market

Abstract

Audit committees have drawn more attention globally during the past 20 years. The audit committee, one of the core elements of corporate governance systems, is a powerful tool for regulating and overseeing management. It could have a big impact on how internal firm-board monitoring decisions are made. This study seeks to identify the unique contributions made by each proxy and to provide compelling evidence that demonstrates how an Audit Committee mechanism affects Earnings Management. This paper aims to investigate how the audit committee's characteristics affect earnings management in Egypt. Using a sample of 80 non-financial Egyptian companies listed on the Egyptian Stock Exchange for the eight financial years from 2012 to 2019. Audit Committee characteristics are represented by Audit Committee independence, Audit Committee size, the frequency of Audit Committee meetings, Audit Committee expertise, and Audit committee gender. Discretionary accruals are used as a proxy for Earnings Management. Panel data regression was used in the archival modeling study. Using a multiple regression model to test the relationship among the variables, the results provide evidence that Audit Committee Size, Audit Committee Expertise and Audit Committee Gender have a significant negative relationship on Earnings Management. Also, there is no significant relationship between Audit Committee Meetings and Earnings Management. Audit Committee Independence has a positive and significant relationship with Earnings Management. This study offers numerous recommendations to the regulatory authorities in Egypt on how to improve and strengthen the internal governance systems of businesses, particularly the Audit Committee.

The effect of corporate governance on earnings management moderated by political connection

“…The results of this research strengthen the agency theory that corporate governance, one of which is audit committee expertise, can limit managers from managing earnings. The results of this research also support the research of Mardjono and Chen (2020) and Galal et al (2022) that audit committee experts or audit committee members with experience in financial institutions do effective monitoring to reduce earnings management. It indicates that when the audit committees understand financial reports and have the knowledge, experience, and abilities in finance, they reduce real earning management more effectively.…”

“…The audit committee can carry out its duties more effectively if it understands the company's financial statements and has the knowledge, experience, and capabilities in accounting and finance. Mardjono and Chen (2020), Manurung andSyafruddin (2020), andGalal et al, 2022) revealed that audit committees with financial or accounting educational backgrounds and audit committee members with experience in financial institutions could reduce earnings management. Based on this explanation, the research hypotheses were put forward as follows:…”

“…Nevertheless, previous research on the effect of independent commissioner performance and audit committee expertise gives inconsistent results. Some previous research found that the independent board of commissioners and audit committee expertise can reduce earnings management (Mardjono & Chen, 2020;Manurung & Syafruddin, 2020;Mardessi & Fourati, 2020;Shaqila, 2021;Galal et al, 2022). Meanwhile, another research uncovered that an independent board of commissioners and audit committee expertise could not reduce earnings management (Rucita & Sanjaya, 2021;Handayani & Ibrani, 2020;Marcelina, 2020;Dewi & Mita, 2019).…”