Independent Audit Committee Characteristics and Real Earnings Management: Evidence after the Sarbanes-Oxley Act

Abstract

This study examines whether independent audit committee characteristics are associated with real earnings management. We measure real earnings management using abnormal cash flows from operations, abnormal discretionary expenses, or abnormal production costs. Based on a sample of 2,887 firm-year observations for years 2005 to 2007, we document that audit committees with accounting financial expertise or long board tenure are more effective in constraining real earnings management through overproduction. We find partial evidence that audit committees with block shareholdings, accounting financial expertise, long board tenure, or large committee size can more effectively constrain real earnings management through reduction of discretionary expenditures. Generally, we do not find evidence on the relationship between audit committee characteristics and real earnings management through sales manipulation.