The relationship between characteristics of the audit committee and a bank's earnings management

Abstract

The regulator has tended to make the setup of an audit committee mandatory in recent years (Yu, 2007; Xue, 2013). Therefore, it is necessary to understand how each characteristic of an audit committee affects financial misreporting. Based on data from Taiwan banks from 2008 to 2012, this study uses the discretionary loan loss provision expense as the proxy for a bank's earnings management (Kanagaretnam et al., 2010) and examines whether the audit committee decreases a bank's tendency to manipulate its earnings. The empirical results indicate that when an audit committee is comprised of more members, the meeting frequency or the average attendance rate is higher, or the average tenure is shorter, the bank's discretionary loan loss provision is less manipulated. The study makes contributions in the following way. First, it is the first to systematically examine the relationship between characteristics of an audit committee and a bank's earning management behavior. Second, the regulator may take into account the characteristics documented in this study as a benchmark when evaluating the soundness of a bank's audit committee.