Voluntary Audit Committee Characteristics, Incentives, and Aggressive Earnings Management: Evidence from New Zealand

Abstract

This study provides initial evidence on the association between voluntary audit committee characteristics, incentives and aggressive earnings management in New Zealand. Our results suggest audit committees comprising independent (non‐executive) directors reduce (increase) the likelihood of aggressive earnings management. Financial expertise is associated with a lower likelihood of aggressive earnings management but only when the expertise is held by independent directors. Greater stock ownership by non‐executive and executive directors serving on the audit committee increases the risk of aggressive earnings management. However, stock ownership by independent directors reduces this risk. Our results show that independent directors serving on other boards are associated with a lower likelihood of aggressive earnings management. Results relating to the New Zealand audit committee regulatory guidelines show that only majority independent directors on the audit committee are associated with the likelihood of aggressive earnings management. We raise potential implications for policy makers in New Zealand.