Abstract
Accounting scandals and corporate failures, like Enron, WorldCom and Toshiba, have driven the regulators to look into the importance and role of the audit committee (AC) in the practicing of real earnings management (REM). This study investigates the impact of AC characteristics, i.e., size, expertise, meetings and independence, on REM using a sample of 721 firm-year observations of firms listed on the Amman Stock Exchange (ASE) for the 2011 to 2017 period. Interestingly, the results reveal that AC expertise, AC independence and AC meetings have a negatively significant relationship with the level of REM; while there is no relationship between REM and AC size. The findings from the current study can help regulatory bodies and policymakers in instituting policies and strategies with regards to the credibility of financial reports in Jordan. Future studies may consider the effect of other AC characteristics, like AC quality, AC members’ ownership and AC members’ remuneration on REM.
Highlights
Substantial evidences from the series of corporate events, such as bond issuance (Pae and Quinn, 2011); seasonal equity offerings (Cohen and Zarowin, 2010); Initial Public Offerings (IPOs) (Kamel, 2012); and corporate scandals, which occurred in the recent past, have signified that managers do manipulate earnings
The impact of audit committee (AC) characteristics on real earnings management (REM) is investigated in this study
The observations are from year 2011 to 2017 for each industrial and Services Company listed on the Amman Stock Exchange (ASE)
Summary
Substantial evidences from the series of corporate events, such as bond issuance (Pae and Quinn, 2011); seasonal equity offerings (Cohen and Zarowin, 2010); Initial Public Offerings (IPOs) (Kamel, 2012); and corporate scandals, which occurred in the recent past, have signified that managers do manipulate earnings. It is indicated that earnings reports are manipulated to increase managers’ compensation if companies’ performance is aligned with managers’ personal benefits, job security, capital market pressure and window dressing, to influence stock valuation and for tax benefits (Healy and Wahlen, 1998). This practice is referred to as earnings management (EM). EM can be categorized into accrual earnings management (AEM) and real earnings management (REM). AEM encompasses the activities within the constraints of the GAAPs, to cover or disguise the real accounting income of a firm (Dechow and Skinner, 2000). Compared to AEM, REM has received relatively little attention in the literature
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