Board of Directors' Governance Challenges and Earnings Management
Journal of Accounting & Organizational Change, Vol. 5, No. 3, 2009
Posted: 27 Aug 2008
Date Written: August 26, 2008
Abstract
Purpose - This study examines the relationship between corporate governance and earnings management in U.S. context and provides further insights on the effects of board of directors' characteristics on earnings management. The study uses a sample of three groups of U.S. firms; where firms with relatively high negative, firms with relatively high positive and those with low levels of discretionary accruals in the year 2004 are examined. Descriptive statistics, univariate analysis, multivariate analysis, board of directors' characteristics and possible relationships between corporate governance variables and earnings management proxy provide the basis for discussion. The findings indicate that firms with annually elected boards, small size boards, 100% independent nominating committees and 100% independent compensation committees have more negative discretionary accruals. However, firms with 75% to 90% independent board or firms with a board size of between 9 and 12 have higher positive discretionary accruals.
Research Implications - Certain board characteristics may be important factors associated with constraining the propensity of managers to engage in earnings management.
The study's major contributions to the existing literature are its findings that income-increasing and income-decreasing discretionary accruals have a different relationship with corporate governance practices and its expansion of the scope of corporate governance from board independence and audit committee independence to other corporate governance characteristics. This study provides evidence that supports U.S. regulators' initiatives that stronger corporate governance mechanisms provide greater monitoring of the financial accounting process and may be important factors in improving the integrity of financial reporting.
Keywords: Board of directors, Compensation committee, Corporate governance, Earnings management, Nominating committee
JEL Classification: C12, C31, G30, M41
Suggested Citation: Suggested Citation