Unformatted text preview: nce on the committee of only independent directors who
26 meet more than twice a year. For the board of directors, we find that board size and
competence, as measured by the average experience as board members for the firm and with
other firms, are negatively associated with earnings management.
We also find characteristics whose effects are not the same on the likelihood of incomeincreasing and income-decreasing discretionary accruals. The proportion of short-term stock
options held by non-executive members of the audit committee seems to increase the
likelihood of positive earnings management but to decrease the likelihood of negative
earnings management, although the latter result is not significant. This result indicates that
this type of compensation for directors does not necessarily improve monitoring, but may
create incentives that reduce the quality of their control on financial statement reliability. At
the board level, we find that non-executive directors’ ownership stake in the firm is
negatively associated with negative earnings management whereas its association with
positive earnings management, although not significant, is positive. These two results raise
serious doubts about the overall effectiveness of using financial motivation to align the
interests of these directors with those of the shareholders. While these measures may be
appropriate for creating shareholder value, they may reduce the ability of non-executive
directors to monitor the reliability of financial statements.
While the results of this study seem to support the effectiveness of the reform called for
by various groups and enacted by the SEC and many Stocks Exchanges in reducing earnings
management, further research is needed to examine how boards of directors and audit
committees fulfill their financial reporting monitoring responsibilities. Additional research on
the effect of share option schemes and stocks ownership in the firm by non-executive
directors on the quality of the financial reporting monitoring is also called for. 27 7. References
Abbott, L. J., S. Parker, and G. F. Peters. 2000. The Effectiveness of Blue Ribbon Committee
Recommendations in Mitigating Financial Misstatements: An Empirical Study. Working
Becker, C., M. DeFond, J. Jiambalvo, and K. R. Subramanyam. 1998. The effect of audit on
the quality of earnings management. Contemporary Accounting Research 15 (Spring): 1-24.
Beasley, M. S. 1996. An empirical Analysis of the Relation Between the Board of Director
Composition and Financial Statement Fraud. The Accounting Review 71 (October): 433-465.
Bédard, J. and M. T. H. Chi. 1993. Expertise in Auditing, Auditing: A Journal of Practice &
Theory 12 (Supplement): 21-45.
Blue Ribbon Committee. 1999. Report and recommendations of the blue ribbon committee on
improving the effectiveness of corporate audit committees. New York Stock Exchange and
National Association of Securities Dealers (www.nyse.com).
Canadian Institute of Chartered Accountants. 1981. Audit Committees: A Research Study.
Toronto: Canadian Institute of Chartered Accountants.
Cadbury Committee. 1992. Report of The Committee on The Financial Aspects of Corporate
Governance. London: Gee.
Callaghan, S. R., P. J. Saly, and C. Subraniam. 2000. The Timing of Option Repricing.
Carcello, J. V. and T. L. Neal. 2000. Audit Committee Characteristics and Auditor Reporting.
The Accounting Review 75 (October): 453-467.
Committee on Corporate Governance. 1998. Final Report. London: Gee.
Coopers & Lybrand. 1995. Audit Committee Guide. New York, NY: Coopers & Lybrand.
Dalton, D. R., C. M. Daily, J. L. Johnson, and A. E. Ellstrand. 1999. Number of directors and
financial performance: A meta-analysis. Academy of Management Journal 42 (December):
Dechow, P. M., R. G. Sloan, and A. P. Sweeney. 1996. Causes and Consequences of
Earnings Manipulation: An Analysis of Firms Subject to Enforcement Actions by the SEC.
Contemporary Accounting Research 13 (Spring): 1-36.
28 Defond, M. L. and C. W. Park. 1997. Smoothing Income in Anticipation of Future Earnings.
Journal of Accounting and Economics 23 (July): 145-176.
Defond, M. L. and J. Jiambalvo. 1994. Debt Covenant Violation and Manipulations of
Accruals. Journal of Accounting and Economics 17 (January), 145-176.
DeZoort, F. T. and S. Salterio. 2001. The effects of corporate governance experience and
financial reporting and audit knowledge on audit committee members’ judgments. Auditing:
A Journal of Practice & Theory 21 (Fall): Forthcoming.
Fama, E. F. and M. C. Jensen. 1983. The Separation of Ownership and Control. The Journal
of Law and Economics 26 (June): 301-325.
Francis, J. R., E. L. Maydew, and H. C. Sparks. 1999. The Role of Big 6 Auditors in the
Credible Reporting of Accruals. Auditing: A Journal of Practice & Theory 18 (Fall): 17-34.
Gaver, J., K. Gaver and J. R. Austin. 1995. Additional Evidence on Bonus Plans and Income
Management. Journal of Accounting and Economics 19 (February): 3-28.
Gerety, M. and K....
View Full Document
This document was uploaded on 11/27/2013.
- Fall '13