Earnings Management and Corporate Governance: The Roles of the Board and the Audit Committee

32 Pages Posted: 22 Mar 2002  

Biao Xie

Southern Illinois University at Carbondale - Department of Finance

Wallace N. Davidson III

Southern Illinois University at Carbondale - Department of Finance

Peter J. DaDalt

University of Rhode Island - Area of Finance and Insurance

Multiple version iconThere are 2 versions of this paper

Date Written: July 5, 2001

Abstract

We examine the role of the board of directors, the audit committee, and the executive committee in preventing earnings management. Supporting an SEC Panel Report's conclusion that audit committee members need financial sophistication, we show that the composition of a board in general and of an audit committee more specifically, is related to the likelihood that a firm will engage in earnings management. Board and audit committee members with corporate or financial backgrounds are associated with firms that have smaller discretionary current accruals. Board and audit committee meeting frequency is also associated with reduced levels of discretionary current accruals. We conclude that board and audit committee activity and their members' financial sophistication may be important factors in constraining the propensity of managers to engage in earnings management.

Keywords: corporate governance, earnings management, boards of directors, board committees

JEL Classification: G34, M41, M43

Suggested Citation

Xie, Biao and Davidson, Wallace N. and DaDalt, Peter J., Earnings Management and Corporate Governance: The Roles of the Board and the Audit Committee (July 5, 2001). Available at SSRN: https://ssrn.com/abstract=304195 or http://dx.doi.org/10.2139/ssrn.304195

Biao Xie

Southern Illinois University at Carbondale - Department of Finance ( email )

Mailcode 4626
Carbondale, IL 62901-4626
United States
618-453-2459 (Phone)

Wallace N. Davidson III

Southern Illinois University at Carbondale - Department of Finance ( email )

Mail Code 4626
Carbondale, IL 62901-4626
United States
618-453-1429 (Phone)
618-453-5626 (Fax)

Peter J. DaDalt (Contact Author)

University of Rhode Island - Area of Finance and Insurance ( email )

7 Lippitt Road
Kingston, RI 02881-0802
United States
401-874-5489 (Phone)

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