The IUP Journal of Accounting Research and Audit Practices:
Do Corporate Governance Characteristics Constrain Earnings Management? – The Role of Board, Audit Committee and Ownership Structure in Indian Corporate Sector

Article Details
Pub. Date : Oct, 2019
Product Name : The IUP Journal of Accounting Research and Audit Practices
Product Type : Article
Product Code : IJARAP11910
Author Name : Deepa Mangala and Isha
Availability : YES
Subject/Domain : Finance
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No. of Pages : 26

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Abstract

Corporate governance ensures adoption of fair accounting practices and transparency in financial reporting system. It defines the accountability of managers and acts as a deterrent to earnings management. The present paper examines the relationship of corporate governance characteristics (board, audit committee and ownership structure) with earnings management in India. The study examines earnings management practices of BSE 500 index companies for five financial years from 2012-13 to 2016-17. Discretionary accruals are used as a proxy for earnings management, calculated with the help of cross-sectional modified Jones model by Dechow et al. (1995). The results of panel data regression suggest that attendance of board meetings by independent directors and presence of women directors on board significantly reduce earnings management. Concentrated promoters’ shareholding positively and significantly influences earnings management. The paper further strives to investigate the influence of independence of audit committee on earnings management with firm’s profitability as a moderating variable. The results reveal that audit committee independence is more effective in constraining earnings management in firms with high profitability than their less profitable counterparts. The findings of the study give useful insight for regulators, policymakers and company boards in taking appropriate measures to increase the quality of financial reports.


Description

In the result-oriented business world, earnings management is adopted by companies to achieve their ultimate targets. Earnings are managed to equate actual accounting figures with predetermined numbers. Companies with good earnings prospects command higher share price in the market than those with poor earnings projections. Therefore, managers strive to maintain the earnings figures (Ajit et al., 2013). Managers prefer either stability in accounting figures or would like to move earnings as per their discretion (positive and negative) through exploitation of flexibility in the accounting system. Accounting figures are cooked using earnings management techniques like big bath, cookie jar reserves and revenue and expense recognition, etc., so as to fool the ultimate users. It is tough for individual investors to identify such anomalies as they are not much aware about the complicated accounting laws and regulations.


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