AUDIT COMMITTEE CHAIR’S LEGAL EXPERTISE AND REAL ACTIVITIES MANIPULATION: EMPIRICAL EVIDENCE FROM MALAYSIAN ENERGY AND UTILITIES SECTORS

Belal Ali Abdulraheem Ghaleb,Shaker Dahan Al-Duai,Abdulwahid Ahmed Hashed

doi:10.32479/ijeep.10258

Abstract

Recent studies claim that improvements in regulations and corporate governance law in different countries are restricting accrual-based earnings management and encouraging managers to shift to real earnings management (REM). However, it is not yet clear whether audit committee directors with legal expertise are associated with higher or lower REM. Thus, this study aims to investigate the relationship between the audit committee (AC) chair’s legal expertise and REM in the energy and utilities sectors in Malaysia. The study uses a sample of all energy and utilities companies listed on Bursa Malaysia between 2013 and 2018. Ordinary least squares (OLS) regression is applied to analyse the study data. The study finds that AC chairs with legal expertise are positively and significantly associated with REM, suggesting that they have not yet ceased REM practices. The findings add to the corporate governance and earnings management literature, and inform regulators and other readers of financial reports about the monitoring role of the AC chair.

Highlights

Earnings management is a strategy used by managers to achieve their targets
These results indicate that energy and utilities companies listed in the main market of Bursa Malaysia practise both upward and downward real earnings management (REM)
The results show that audit committee characterises (ACCAG, ACEXP, ACSIZE, and ACMEET) are negatively and significantly associated with REM, suggesting that the chair’s age, a large AC with more financial experts, and more frequent meetings can mitigate managers’ opportunistic behaviour

Summary

Introduction

Earnings management is a strategy used by managers to achieve their targets. Researchers classify earnings management practices into two types: Accrual earnings management (AEM) and real earnings management (REM) (Cohen et al, 2008; Cohen et al, 2019; Roychowdhury, 2006). Several studies report that companies, for various reasons, prefer to manage earnings through REM rather than through AEM (Cohen et al, 2008; Enomoto et al, 2015). This preference for REM is a result of mandatory adoption of the IFRS, tighter accounting standards, high-quality audit scrutiny, and passage of the Sarbanes-Oxley (SOX) Act that restricted managers in using AEM.

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