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

55 Pages Posted: 8 Oct 2008  

Joseph V. Carcello

University of Tennessee

Carl W. Hollingsworth

Clemson University

April Klein

New York University (NYU) - Department of Accounting

Multiple version iconThere are 2 versions of this paper

Date Written: 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.

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

Suggested Citation

Carcello, Joseph V. and Hollingsworth, Carl W. and Klein, April, Audit Committee Financial Expertise, Competing Corporate Governance Mechanisms, and Earnings Management (February 2006). NYU Working Paper No. APRIL KLEIN-6. Available at SSRN: https://ssrn.com/abstract=1280676

Joseph V. Carcello (Contact Author)

University of Tennessee ( email )

Department of Accounting & Information Management
629 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

New York University (NYU) - Department of Accounting ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012
United States

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