The impact of corporate governance on controlling discretionary accrual: A study of impacts on earnings management based on FTSE350, UK

Abstract

While the interests of shareholders contradict with the interests of the managers, agency problem appears. However, the principle of the agency theory is to establish the relationship between the shareholders and managers; and this paper relies on the involvement of corporate governance who can resolve the issues between earnings management and the underlying causes of the earnings management based on the FTSE350, UK. This study has considered the performance matched discretionary accruals to measure the magnitude of the discretionary accruals by considering OLS regression model. The findings of this paper reveal the mixed results as board independence , non-executive director’s fees and block holder have significant impact whereas Board Meeting, the presence of female in the board and board size do not have significant impacts on controlling discretionary accruals. In terms of the estimation of discretionary accruals, there are various models identified in the past. Hence, it is recommended that the models have to be tested and compared regularly to identify the most significant one; to conduct research for a particular market. On the other hand, identifying most effective models to calculate the value of discretionary accruals is quite crucial as most of the researchers are still using Modified Jones’s Model (1995).