Corporate governance and earnings management

This research investigates the role of corporate governance in constraining the magnitude of earnings manipulations. Prior research has indicated that there are a number of factors that contribute to the overall effectiveness of corporate governance in an organisation. Using data collected from New Zealand listed companies, this study analyses the effect that the independence of the board directors and independence of audit committees plays in constraining the amount of earnings management. The results from this research show that independent board of directors are more effective at monitoring the discretionary choices of management. The results from this research add to the prior literature on earnings management and corporate governance.UnpublishedBartov, E., F. A. Gul, and J. S. L. Tsui, (2001). Discretionary-accruals models and audit qualifications, Journal of Accounting and Economics 30(3), 421–452. Beasley, M.S., (1996). An empirical analysis of the relation between the board of director composition and financial statement fraud. The Accounting Review 71, 443–465. 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, 1–24. Beneish, M.D. (2001). Earnings management: A perspective. Managerial Finance, 27(12), 3-17. Bernard, V. L., and D. J. Skinner, (1996). What motivates managers’ choice of discretionary accruals? Journal of Accounting and Economics 22, 313–325. Coakes, S.J., and Steed, L. (2002), SPSS: Analysis Without Anguish. Australia. John Wiley & Sons Australia Ltd. Davidson, R., Goodwin-Stewart, J., and Kent, P., (2005). Internal Governance Structures and Earnings Management, Accounting and Finance, 45, 241-267. Dechow, P. M., R. G. Sloan, and A. P. Sweeney, (1995). Detecting earnings management, The Accounting Review 70, 193–225. Dechow, P. M., R. G. Sloan, and A. P. Sweeney, (1996). Causes and consequences of earnings manipulation: an analysis of firms subject to enforcement by the SEC, Contemporary Accounting Research 13, 1–36. Dechow, P.M., Skinner, D.J., (2000). Earnings management: reconciling the views of accounting academics, practitioners, and regulators. Accounting Horizons 14, 235–250. Defond, M.L., and K.R. Subramanyam, (1998). ‘Auditor Changes and Discretionary Accruals’, Journal of Accounting and Economics, 25, (1), 35–67. Defond, M.L.,and C.W. Park (1997). ‘Smoothing Income in Anticipation of Future Earnings’, Journal of Accounting and Economics, 23(2), 115–39. Guay, W., Kothari, S., Watts, R., (1996). A market-based evaluation of discretionary accrual models. Journal of Accounting Research 34, 83–105. Healy, P.M., Wahlen, J.M., (1999). A review of the earnings management literature and its implications for standard setting. Accounting Horizons 13, 365–383. Holland, D., and A. Ramsay, (2003). Do Australian companies manage earnings to meet simple earnings benchmarks? Accounting and Finance 43, 41–62. Jones, J. (1991). ‘Earnings Management During Import Relief Investigations’, Journal of Accounting Research, Vol. 29, No. 2 (Autumn), pp. 193–228. Kasznik, R., (1999). On the association between voluntary disclosure and earnings management. Journal of Accounting Research, 37, 57–81. Klein, A., (2002a). Audit committee, board of director characteristics, and earnings management, Journal of Accounting and Economics 33, 375–400. Klein, A., (2002b). Economic determinants of audit committee independence, The Accounting Review, 77, 435–452. Lind,D.A., Marchal, W.G., and Mason, R.D., (2002). Statistical Techniques in Business and Economics. New York. McGraw Hill McNichols, M., and P. Wilson, (1988). Evidence of earnings management from the provision for bad debts, Journal of Accounting Research 26(Supplement), 1–31. Nelson, M.W., Elliott, J.A., and Tarpley, R.L., (2003). How are earnings managed? Examples from auditors. Accounting Horizons: Quality of Earnings, 17, 17. NZX, (2003a). NZX Corporate Governance Best Practice Code, retrieved 14/9/2005 from: http://www.nzx.com/regulation/govt_securities_legislation/best_practice_code NZX, (2003b). NZX Listing Rule Amendments – Commentary, retrieved 14/9/2005 from: http://www.nzx.com/regulation/govt_securities_legislation/amendments_commentary Peasnell, K.V., Pope, P.F. & Young, S, (2005). Board Monitoring and Earnings Management: Do Outside Directors Influence Abnormal Accruals? Journal of Business Finance and Accounting, 32(7)&(8), 1311-1346. Scarbrough, D. P., D. V. Rama, and K. Raghunandan, (1998). Audit committee composition and interaction with internal auditing: Canadian evidence, Accounting Horizons 12, 51–62