Audit Committee Effectiveness, Audit Quality and Earnings Management: An Empirical Study of the Listed Companies in Egypt

Mohammed Soliman,Aiman A Ragab

doi:10.2139/ssrn.2315355

Abstract

The role of audit committees and audit quality in ensuring the quality of corporate financial reporting has come under considerable scrutiny due to recent high-profile earnings management cases in the world. The purpose of this paper is to examine the association between the audit committee effectiveness, audit quality and earnings management practices of more active 50 Egyptian companies listed on the Egyptian Stock Exchange of the non-financial sector during the period 2007-2010. After controlling for size, leverage and cash flow from operation activities, the results of univariate and multivariate analyses indicated that audit committees independence; experience of audit committee members; audit committee meetings; and audit quality have significant negative association with discretionary accruals as a proxy for earnings management. On the other hand, no significant relationship is found between audit committees size and the level of discretionary accruals. This paper is important because it offers useful information that is of great value to policy makers, academics and other stakeholders. Keywords : Audit Committee Effectiveness, Audit Quality, Earning Management, Egypt

Highlights

The end of the 1990s and the beginning of 21st century have witnessed a series of corporate accounting scandals across the United States and Europe
The purpose of this paper is to examine the association between the audit committee effectiveness, audit quality and earnings management practices of more active 50 Egyptian companies listed on the Egyptian Stock Exchange of the nonfinancial sector during the period 2007-2010
With regard to audit committees size, the results indicate that the mean size for audit committee at 4.69 members consistent with Raghunandan & Rama (2007)

Summary

Introduction

The end of the 1990s and the beginning of 21st century have witnessed a series of corporate accounting scandals across the United States and Europe. At the core of these scandals was usually the phenomenon of earnings management (Goncharov, 2005). Earnings management has been a great and consistent concern among practitioners and regulators and has received considerable attention in the accounting literature. It has been argued that earnings management masks the true financial results and position of businesses and obscures facts that stakeholders ought to know (Loomis, 1999). The effectiveness of audit committees has been a subject of increasing interests due to increased concerns about the quality of corporate financial reporting process caused by recent accounting scandals. Abbott et al, (2004) report that an audit committee that is independent, meets at least four times a year, and includes at least one member with financial expertise is negatively associated with the occurrence of earnings management

Objectives

Results

Conclusion