Audit committee features and earnings management

Purpose: Past studies have investigated the relationship between audit committee features and earnings management and reported mixed and inconclusive results. Some studies have found a significant relationship, while others have not. This study aims to explain these mixed results in the literature by dividing earning management into two groups: accrual and real earnings management (at three levels of sales, general and administrative costs, production costs and cash flows operation) and re-examining the relationship.

Design/methodology/approach: The statistical model used in this study is a multivariate regression model; further, the statistical technique used to test the hypotheses is panel data.

Findings: The findings show that both the audit committee members' financial expertise and the audit committee's size affect the accrual earnings management. However, the results show no meaningful relationship between the audit committee features and real-based earnings management at any levels of sales, general and administrative costs, production costs and cash flow operation. In addition, the findings suggest no meaningful relationship between the independence of the audit committee's members and accrual earnings management. In other words, not separating the earning management into 'accrual' and 'real' could be the critical factor for the reported mixed and inconsistent results in the literature.

Practical implications: The findings of the current study provide an important guideline for investors and stakeholders to separate 'accrual' from 'real' earning management and pay more attention to the importance of audit committee features to limit the opportunities of earnings management. Indeed, by understanding the relationship between audit committee features and earnings management, investors and stockholders can make appropriate decisions regarding the optimal choice of funds.

Originality/value: Dividing the earning management into two groups (accrual versus real) and re-examining its relationship with the audit committee features is new in this paper. Identifying one of the possible reasons for the past mixed and inconsistent results in the literature is also an incremental contribution provided by this study.