The Influence of CEO Duality on the Relationship between Audit Committee Independence and Earnings Quality

AbstractThis study aims to investigate: (1) the relationship between audit commitee independence and earnings quality, and (2) the influence of CEO duality on this relationship. We posit that an independent audit committee is more effective in monitoring the quality of financial statements, hence independence is related to higher earnings quality. We also conjecture that the dual role of CEO and chairman would reduce the effectiveness of independent audit committees. Using a sample of 3,017 non-financial companies listed on Bursa Malaysia from 2005-2010, we find that earnings quality is positively associated with audit committee independence, but the relationship is weakened by the existence of CEO duality. Our results imply that when a CEO has excessive control over the decisions of the board of directors by holding the position of chairman, the monitoring function of independent audit committees to assure high quality of earnings in financial statements becomes ineffective