Internal governance structures and earnings management

By R. Davidson, Jenny Goodwin-Stewart, P. Kent. 2005

885 citations recorded by the source corpus.

This paper investigates the role of a firm's internal governance structure in constraining earnings management. It is hypothesized that the practice of earnings management is systematically related to the strength of internal corporate governance mechanisms, including the board of directors, the audit committee, the internal audit function and the choice of external auditor. Based on a broad cross-sectional sample of 434 listed Australian firms, for the financial year ending in 2000, a majority of non-executive directors on the board and on the audit committee are found to be significantly associated with a lower likelihood of earnings management, as measured by the absolute level of discretionary accruals. The voluntary establishment of an internal audit function and the choice of auditor are not significantly related to a reduction in the level of discretionary accruals. Our additional analysis, using small increases in earnings as a measure of earnings management, also found a negative association between this measure and the existence of an audit committee.

Subfields: Accounting

View Paper: https://www.semanticscholar.org/paper/bd8278b408f6675530dc37d459211f83b9b64d1d

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In Accounting

1. Emma García‐Meca
2. Collins G. Ntim
3. G. Palaniappan
4. J. Stewart
5. Ebraheem Saleem Salem Alzoubi
6. P. Kent
7. Douglas F. Prawitt
8. David A. Wood

Citations in the corpus

• What Drives TBL Reporting: Good Governance or Threat to Legitimacy? (2008, background): “The board of directors generally delegates financial reporting and risk management responsibilities to the audit committee (Davidson et al. 2005; Kent and Stewart 2008), and management committees such as environmental and/or sustainable development committees are expected to interact with the audit…”
• Corporate Governance and Earnings Management: A Survey of Literature (2013, result): “Davidson, Goodwin-Stewart, and Kent (2005) provide evidence consistent with these findings: Australian firms with higher board independence have more incentive to manage earnings.”
• Determinants of corporate financial performance relating to board characteristics of corporate governance in Indian manufacturing industry: An empirical study (2017, background): “Fama (1980) argued that more NEDs on the board act as professional referees and work for value maximization of shareholders. The independent directors are invited onto the board for oversight on behalf of shareholders (Baysinger and Butler, 1985). Rosenstein and Wyatt (1990) also suggested that high”
• The use of internal audit by Australian companies (2006, background): “Independent directors are those non-executive directors who have no relationship with the firm beyond the role of director (NYSE and NASD, 1999; Davidson et al., 2005).”
• The Effect of Board Capital and CEO Power on Corporate Social Responsibility Disclosures (2016, neutral): “This area of research is largely premised on the agency theory argu-ment that independent directors effectively monitor and control firms (e.g. Klein 2002; Davidson et al. 2005).”
• Corporate Governance and Earnings Management: A Meta‐Analysis (2009, background): “Davidson et al. (2005) and Sánchez-Ballesta and García-Meca (2007b) do not find any significant relation.”
• Does Corporate Governance Influence Earnings Management in Latin American Markets? (2014, background): “Furthermore, several studies provide empirical evidence relating to the role of external directors on the constriction of EM, documenting that a higher proportion of external directors, will mean greater and better quality of financial information issued by firms, so reducing the chances of EM (Xie ”
• INTERNAL AUDIT QUALITY AND EARNINGS MANAGEMENT (2009, positive): “The Accounting Review July 2009 American Accounting Association et al. 2004). Using a larger sample and controlling for more corporate governance mechanisms, Larcker et al. (2007) find a mixed relation between proxies for corporate governance, including audit committee measures, and abnormal accrual”