Board Monitoring and Earnings Management: Do Outside Directors Influence Abnormal Accruals?

51 Pages Posted: 5 Jan 2001  

Ken V. Peasnell

Lancaster University - Department of Accounting and Finance

Peter F. Pope

London School of Economics & Political Science (LSE)

Steven Young

Lancaster University - Department of Accounting and Finance

Multiple version iconThere are 2 versions of this paper

Date Written: October 2000

Abstract

This paper examines whether the incidence of earnings management in the UK depends on board monitoring. We focus on two aspects of board monitoring: the role of outside board members and the audit committee. Results indicate that the likelihood of managers making income-increasing abnormal accruals to avoid reporting both losses and earnings reductions is negatively related to the proportion of outsiders on the board. Further tests indicate that this association is confined to firms where the separation of corporate ownership and decision control is greatest. In contrast, we find little evidence that outside directors influence income-decreasing abnormal accruals when pre-managed earnings are high. While we are unable to find evidence that the existence of an audit committee directly influences the level of earnings management (either income-increasing or income-decreasing), tests indicate that the monitoring role of outside directors in relation to income-increasing earnings management is more pronounced in cases where an audit committee exists. Our findings suggest that boards contribute towards the integrity of financial statements, as predicted by agency theory.

Keywords: Corporate governance; Boards of directors; Abnormal accruals; Earnings management

JEL Classification: M41, M43, M49, G34

Suggested Citation

Peasnell, Ken V. and Pope, Peter F. and Young, Steven, Board Monitoring and Earnings Management: Do Outside Directors Influence Abnormal Accruals? (October 2000). Available at SSRN: https://ssrn.com/abstract=249557 or http://dx.doi.org/10.2139/ssrn.249557

Kenneth V. Peasnell

Lancaster University - Department of Accounting and Finance ( email )

The Management School
Lancaster LA1 4YX
United Kingdom
+44 1524 593631 (Phone)
+44 1524 847321 (Fax)

Peter F. Pope (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

HOME PAGE: http://www.lse.ac.uk/accounting/facultyAndStaff/profiles/Pope.aspx

Steven Young

Lancaster University - Department of Accounting and Finance ( email )

The Management School
Lancaster LA1 4YX
United Kingdom
+441 5245-94242 (Phone)
+441 5248-47321 (Fax)

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