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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
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