The Number of Accounting Experts on the Audit Committee and Real Earnings Management
Date Issued
2010
Date
2010
Author(s)
Wu, Hsin-Yi
Abstract
Board of directors is the main governance mechanism of a company. The main purpose of audit committee is to ensure the quality of financial statements. After the Enron Corp., several high-profile accounting scandals occurred; the expertise of audit committee has received much attention. The Taiwan Securities and Exchange law requires at least one of the audit committee members to be an accounting or financial expert, which came into effect in 2007, hoping to reinforce the operation efficiency of audit committee by their experience. A growing number of firms are appointing multiple accounting experts to their audit committees. This move implies that boards of directors, managers, and shareholders believe that additional accounting expertise can contribute greater monitoring by the audit committee.
Managers have altered their means of earnings management from accruals to real activities since the issuance of Sarbanes-Oxley Act. This study uses companies with established audit committee from 2007 to 2009 as the research observations, and follows the research model developed by Roychowdhury (2006) to capture the level of real earnings management. The measures of audit committee’s financial expertise are based on Defond et al. (2005); audit committee members are classified into three categories: accounting financial experts, non-accounting financial experts, and non-financial experts. This study investigates the relationship between the number of accounting experts on the audit committee and real earnings management.
The empirical results indicate that having two or more accounting experts on the audit committee constrain abnormal operating cash flow, abnormal production cost, and abnormal discretionary expenses relative to committees with one accounting expert. The finding suggests that having multiple accounting experts on the audit committee may constrain more real earnings management.
Subjects
Audit Committee
Accounting Experts
Financial Experts
Real Earnings Management
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