Abstract
The purposes of this study are to shed light, on the one hand, on the effect of audit committee characteristics, namely independent members in audit committee, a financial expert in audit committee, frequency of meetings and audit committee size on financial reporting quality proxied by real earnings management. On the other hand, it aims to investigate the moderating role of audit quality in the relationship between audit committee characteristics and financial reporting quality. The objective is to contribute to the new evidence on the role of audit committee characteristics towards the financial reporting quality with audit quality as a moderator, particularly the appointment of Big 4 company. This study uses the ordinary least squares (OLS) regression to achieve the research purpose by evaluating the data collected from 90 public listed companies from 2010 to 2019 in the Dutch context. The results state that audit committee characteristics have a statistically significant relationship with real earnings management. However, the effect of audit committee meetings on abnormal operating cash flow and discretionary expenses is not significant. There is also evidence that audit quality positively moderates the audit committee and real earnings management links. Lastly, the findings of this study will help professional accountancy bodies and governments to highlight the relevance of earnings management in safeguarding trustworthy financial information, owners’ wealth and to enhance audit committee characteristics in improving audit quality, especially after the enforcement of the Dutch Corporate Governance Code in 2016.
Highlights
Corporate governance practice is starting to include the use of tools to monitor top management, in order to safeguard owners’ wealth and attract more foreign investments
Relating to the presence of a financial expert in audit committee (AC), the results reveal that the appointment of Big 4 company moderates the positive effect of the relationship between the presence of a financial expert in the AC and financial reporting quality (FRQ) via the three individual measures of real earnings management (REM), as reported in Column 1, 2 and 3 of Table 5
The purpose of this study is to investigate the effect of audit committee characteristics on FRQ proxied by real earnings management, having an important emphasis on the moderating role of audit quality in the links above
Summary
Corporate governance practice is starting to include the use of tools to monitor top management, in order to safeguard owners’ wealth and attract more foreign investments. Despite the widespread acknowledgement of the importance of audit quality, a gap exists in the empirical body of literature that examines the moderating effect of this factor It will help corporations improve the audit quality, and avoid financial reporting problems. The first Dutch Civil Code holds rules regarding financial reporting and disclosure for listed companies, which was adopted in 2003, and came into effect in 2004 It was amended in 2008 so as to get more transparency, accountability, fairness and responsibility. Continuing developments, globalization and overlaps with legislation pushed the Corporate Governance Monitoring Committee to issue a new code in 2016 at the request of the National Federation of Christian Trade Unions in the Netherlands This code, provides guidance for effective cooperation and management. The remainder of this study is being organized as per following order: Section 2 reviews the literature and provides hypotheses development, Section 3 describes the research procedures, such as data collection and analysis method, Section 4 presents the results from the statistical analyses, discusses the results and explain the theoretical implications and practical value of this study, Section 5 provides a conclusion, and outlines the limitation and future studies of this research
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