Non-Executive Chairman, Audit Quality and Earnings Management

Aditi Shams

doi:10.5539/ijbm.v15n3p50

Abstract

The purpose of this paper is twofold, first, it examines the association of non-executive chairman and the quality of financial earnings and second, it examines the role of audit quality and non-executive chairman in earnings quality. This paper uses the modified jones model and the performance adjusted modified Jones model considering two cash flow methods of total accrual and perform regression analysis on the energy sector firms from the year 2010-2012. The study result does not find any significant association of earnings management and non-executive director and audit quality in the Australian context. This finding raises concerns regarding the effectiveness of such a corporate governance mechanism to maximize monitoring over the operation of the firm.

Highlights

Recent cases of inappropriate accounting practices in Australia have focused attention on the need for strong corporate governance mechanisms (Davidson et al 2005)
The examination of the association between internal governance structures and the practice of earnings management in Australian firms is motivated by- first, this paper extends the duality role of chairman and CEO to examine whether the non-executive chairman is associated with earnings management or not; secondly, audit quality has an important role to play in ensuring the accuracy and reliability of financial information and thirdly, these results will have important implications for the government, accounting standard setters and regulators
As this paper examines the association between executive chairman, audit quality, and earnings management, data regarding all the firms in ‘Energy Sector’ from the year 2010-2012 were collected resulting in a total of 293 firm-year observations

Summary

Introduction

Recent cases of inappropriate accounting practices in Australia have focused attention on the need for strong corporate governance mechanisms (Davidson et al 2005). This paper will examine the association of earnings management with chairman independence and audit quality, which are commonly referred to as internal and external governance mechanisms for good governance. The examination of the association between internal governance structures and the practice of earnings management in Australian firms is motivated by- first, this paper extends the duality role of chairman and CEO to examine whether the non-executive chairman is associated with earnings management or not; secondly, audit quality has an important role to play in ensuring the accuracy and reliability of financial information and thirdly, these results will have important implications for the government, accounting standard setters and regulators. The findings do not find evidence of an association between the non-executive chairman, external auditor quality and earnings of the firm. This result raises concerns regarding the effectiveness of the corporate governance mechanisms to control firm operation.

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