Abstract

http://ssrn.com/abstract=887512
 
 

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Audit Committee Financial Expertise, Competing Corporate Governance Mechanisms, and Earnings Management


Joseph V. Carcello


University of Tennessee, Knoxville - College of Business Administration

Carl W. Hollingsworth


Clemson University

April Klein


New York University (NYU) - Department of Accounting, Taxation & Business Law

Terry L. Neal


University of Tennessee

February 2006


Abstract:     
A prime objective of the Sarbanes-Oxley Act and recent changes to stock exchange listing standards is to improve the quality of financial reporting. We examine the associations between audit committee financial expertise and alternate corporate governance mechanisms and earnings management. We find that both accounting and certain types of non-accounting financial expertise reduce earnings management for firms with weak alternate corporate governance mechanisms, but that independent audit committee members with financial expertise are most effective in mitigating earnings management. Importantly we find that alternate corporate governance mechanisms are an effective substitute for audit committee financial expertise in constraining earnings management. Finally, we find either no association or a positive association between financial expertise and real earnings management. Our results suggest that alternate governance approaches are equally effective in improving the quality of financial reporting, and that firms should have the flexibility to design the particular set of governance mechanisms that best fit their unique situations.

Number of Pages in PDF File: 55

Keywords: earnings management, real earnings management, corporate governance, Sarbanes-Oxley

JEL Classification: G34, M41

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Date posted: March 5, 2006  

Suggested Citation

Carcello, Joseph V. and Hollingsworth, Carl W. and Klein, April and Neal, Terry L., Audit Committee Financial Expertise, Competing Corporate Governance Mechanisms, and Earnings Management (February 2006). Available at SSRN: http://ssrn.com/abstract=887512 or http://dx.doi.org/10.2139/ssrn.887512

Contact Information

Joseph V. Carcello
University of Tennessee, Knoxville - College of Business Administration ( email )
Department of Accounting & Business Law
601 Stokely Management Center
Knoxville, TN 37996-0560
United States
865-974-1757 (Phone)
865-974-4631 (Fax)
Carl W. Hollingsworth
Clemson University ( email )
101 Sikes Ave
Clemson, SC 29634
United States
April Klein (Contact Author)
New York University (NYU) - Department of Accounting, Taxation & Business Law ( email )
Stern School of Business
44 West 4th Street
New York, NY 10012
United States
Terry L. Neal
University of Tennessee ( email )
639 Stokely Management Center
Knoxville, TN 37996-0560
United States
865-974-2664 (Phone)
865-974-4631 (Fax)
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