The role of the audit committee in improving earnings quality: The case of industrial companies in GCC
|Title:||The role of the audit committee in improving earnings quality: The case of industrial companies in GCC|
Vol. 13, No 2, 2020
Published date: 06-2020 (print) / 06-2020 (online)
Journal of International Studies
ISSN: 2071-8330, eISSN: 2306-3483
College of Business and Finance, Ahlia University, Manama, Bahrain
|Keywords:||earnings quality, audit committee, industrial firms, GCC|
|JEL classification:||G30, M42, O16|
We examine three audit committee characteristics, including the audit committee independence, the size of audit committee, audit committee diligence/meetings to identify if any of these characteristics differentially impact earnings’ quality. The sample included 23 industrial firms from the Gulf Cooperation Council (GCC) financial markets during the period of 2014-2018. To achieve this goal, the study measures earnings quality using DeAngelo (1981) model and accrual accounting. By using the panel fixed-effect regression, our analysis reveals that bigger audit committees with more independence are more likely to be associated with earnings quality in GCC industrial firms. We also find that the audit committee diligence/meetings have no impact on earnings quality.
1. Abdelghany, K. (2005) Measuring the quality of earnings. Managerial Auditing Journal, 20(9), 1001-1015.
2. Abdel-Meguid, A., Fernando, G., Schneible Jr, R., & Suh, S. (2019). Differential interpretations and earnings quality. Accounting Horizons, 33(2), 59-73.
3. Ahmed, A.S., & Duellman, S. (2007). Accounting conservatism and board of director characteristics: an empirical analysis. Journal of Accounting and Economics, 43(2–3), 411–437.
4. Al-Sharif, I. (2008). Quality of earnings and their relationship to corporate governance: An Empirical Study on the Industrial Sector Firms Listed at Amman Stock Exchange. Arab Academy for Banking and Financial Sciences, unpublished Ph.D dissertation.
5. Altamuro, J. and Beatty, A. (2009). How Does Internal Control Regulation Affect Financial Reporting? SSRN Electronic Journal, 49(1-2), 58-74.
6. Ammer, M.A., & Ahmad-Zaluki, N.A. (2017). The role of the gender diversity of audit committees in modelling the quality of management earnings forecasts of initial public offers in Malaysia. Gender in Management, 32(6), 420-440. https://doi.org/10.1108/GM
7. Baioco, V., & Almeida, J. (2015). Effects of the audit committee and the fiscal council on earnings quality in Brazil. Revista Contabilidade & Finanças, 28(74), 229-248.
8. Baxter, P., & Cotter, J. (2009). Audit committees and earnings quality. Accounting and Finance, 49(1), 267-290.
9. Beekes, W., Pope, P. & Young, S. (2004). The link between earnings timeliness, earnings conservatism and board composition: evidence from the UK. Corporate Governance: An International Review, 12(1), 47–59.
10. Beyer, A., Guttman, I., & Marinovic, I. (2019). Earnings Management and Earnings Quality: Theory and Evidence. The Accounting Review, 94(4), 77-101.
11. Carcello, J., & Neal, T. (2003) Audit Committee Independence and Disclosure: Choice for Financially Distressed Firms. Corporate Governance, 11(4), 289-299.
12. Carcello, J., Hollingsworth, C., & Klein, A. (2006). Audit Committee Financial Expertise, Competing Corporate Governance Mechanisms, and Earnings Management, SSRN Electronic Journal. DOI: 10.2139/ssrn.887512
13. Cho, H., & Song, B. (2017). Politically Connected Audit Committees, Earnings Quality and External Financing: Evidence from Korea. Asia-Pacific Journal of Financial Studies, 46, 609-634.
14. DeAngelo, L. (1981). Auditor size and audit quality. Journal of Accounting and Economics, 3(3), 183-199.
15. Dechow, P., & Dichev, I. (2002). The Quality of Accruals and Earnings: the Role of Accrual Estimation Errors. Accounting Review, 77, 35-59.
16. Dechow, P., & Schrand, C, (2004). Earnings Quality, The Research Foundation of CFA Institute. Charlottesville, Virginia, United States.
17. Du, K., Huddart, S., Xue, L., & Zhang, Y. (2019). Using a hidden Markov model to measure earnings quality. Journal of Accounting and Economics. https://doi.org/10.1016/j.jacceco.2019.101281
18. Farinha, J. and Moreira, A. (2007). Dividends and Earnings Quality: The Missing Link?, Working Paper, University of Porto.
19. Felo A, Krishnamurthy, F., & Solieri S. (2003). Audit Committee Characteristics and the Perceived Quality of Financial Reporting an Empirical Analysis, Working Paper, School of Graduate Professional Studies, Malven, www.ssrn.com.
20. Francis, J. LaFond, R., & Schipper, K. (2004). The Market Pricing of Earnings Quality, Working Papers, Duke Fuqua School of Business.
21. Gujarati, D. N. (2015). Basic Econometrics. New York, NY: McGraw-Hill.
22. Hamdan, A. (2020). Audit committee characteristics and earnings conservatism in banking sector: empirical study from GCC. Afro-Asian Journal of Finance and Accounting, 10(1), 1-23.
23. Hamdan, A., & Mushtaha, S. (2011). The Relationship Between Audit Committee Characteristics and Type of Auditor’s Report: An Empirical Study on the Public Shareholding Industrial Companies Listed at Amman Bourse. The Arab Journal of Accounting, 14(1), 109
24. Hamdan, A., Mushtaha, S., & Al-Sartawi, A. (2013). The Audit Committee Characteristics and Earnings Quality: Evidence from Jordan. Australasian Accounting Business and Finance Journal, 7(4), 51-80.
25. Huang, H. (2005). The Effects of Audit Committee Characteristics on Investors Perception of Financial Reporting, Working Paper: Florida International University.
26. Huynh, Q. L. (2019). Reputation to the vicious circle of earnings quality and financial performance. Economics and Sociology, 12(2), 361-375. doi:10.14254/2071-789X.2019/12-2/22.
27. Karajeh, A.I.S. (2019). Voluntary disclosure and earnings quality: evidence from ownership concentration environment. Management Research Review, 43(1), 35-55.
28. Khuong, N. V., Liem, N. T., & Minh, M. T. H. (2020). Earnings management and cash holdings: Evidence from energy firms in Vietnam. Journal of International Studies, 13(1), 247-261.
29. Lara, J., Osma, B., & Penalva, F. (2009). Accounting Conservatism and Corporate Governance. Review of Accounting Studies, 14(1), 161-201.
30. Larcker, F., & B. Tayan, B. (2011). Corporate governance matters: A closer look at organizational choices and their consequences (Pearson Education, Inc., FT Press, Upper Saddle River, NJ).
31. Li, V. (2019). The effect of real earnings management on the persistence and informativeness of earnings. The British Accounting Review, 51, 402-423
32. Lin, J. and Yang, J. (2006). The Effect of Audit Committee Performance on Earnings Quality. Managerial Auditing Journal, 21(9), 921-933.
33. Lobanova, O., Barua, A., Mishra, S., & Prakash, A.J. (2019). Earnings informativeness in dual-class firms: An empirical investigation of the earnings quality and the information environment. Review of Accounting and Finance, 18(3), 399-431.
34. McMullen, D., & Raghunandan, K. (1996). Enhancing Audit Committee Effectiveness. Journal of Accounting, 182(2), 79-81.
35. Ohlson, J., & Feltham, J. (1995). Valuation and clean surplus accounting for operating and financial activities. Contemporary Accounting Research, 11(2), 689–731.
36. Pucheta-Martínez, M. C., & De Fuentes, C. (2007). The Impact of Audit Committee Characteristics on the Enhancement of the Quality of Financial Reporting: an empirical study in the Spanish context. Corporate Governance: An International Review, 15, 1394-14
37. Qaraqish, S. (2009). The Effect of Audit Committee Characteristics on Earnings Quality an Empirical Study on the Industrial Sector Firms Listed at Amman Stock Exchange. Arab Academy for Banking and Financial Sciences. unpublished dissertation.
38. Rahman, R., & Ali, F. (2006). Board, Audit Committee, Culture and Earning Management: Malaysian Evidence. Managerial Auditing Journal, 21(7), 783-804.
39. Rezaee, Z., & Tuo, L. (2019). Are the Quantity and Quality of Sustainability Disclosures Associated with the Innate and Discretionary Earnings Quality?. Journal of Business Ethics, 155, 763-786.
40. Rezaee, Z., Dou, H., and Zhang, H. (2020). Corporate social responsibility and earnings quality: Evidence from China. Global Finance Journal. https://doi.org/10.1016/j.gfj.2019.05.002
41. Saleh, N. Iskandar, T., & Rahmat, M. (2007). Audit Committee Characteristics and Earning Management: Evidence from Malaysia. Asian Review of Accounting, 15(2), 147-163.
42. Schipper, K. and Vincent, L. (2003). Earnings Quality. Accounting Horizons, 17, 97-110.
43. Silva, P. (2019). Corporate governance, earnings quality and idiosyncratic crash risk during the 2007–2008 financial crisis. Journal of Multinational Financial Management, 51, 61-79.
44. Sloan, R. (1996). Do stock prices fully reflect information in accruals and cash flows about future earnings? The Accounting Review, 71(3), 289–315.
45. Suprianto, E., Rahmawati, R., Setiawan, D., & Aryani, Y.A. (2019). Controlling generation of family firms and earnings management in Indonesia: The role of accounting experts of audit committees. Journal of International Studies, 12(3), 265-276.
46. Tee, C., & Rassiah, P. (2020). Ethnic board diversity, earnings quality and institutional investors: evidence from Malaysian corporate boards. Accounting and Finance. https://doi.org/10.1111/acfi.12485
47. Teitel, K., & Machuga, S. (2010). The Interaction of Audit Firm Quality and the Mexican Code of Best Corporate Practices on Earnings Quality. Review of Business Research, 10(1), 32-40.
48. Vo, X., & Chu, T. (2019). Do foreign shareholders improve corporate earnings quality in emerging markets? Evidence from Vietnam. Cogent Economics and Finance, 7(1), 1698940
49. Wang, M., Lee, M., & Chuang, J. (2016). Relations among audit committee establishment, information transparency and earnings quality: evidence from simultaneous equation models. Quality and Quantity: International Journal of Methodology, 50(6), 2417-2431.
50. Yoon, B., Kim, B., & Lee, J. (2019). Is Earnings Quality Associated with Corporate Social Responsibility? Evidence from the Korean Market. Sustainability, 11(5), 1-20.
51. Zalata, A., Ntim, C., Aboud, A., & Gyapong, E. (2019). Female CEOs and Core Earnings Quality: New Evidence on the Ethics Versus Risk-Aversion Puzzle. Journal of Business Ethics, 160, 515-534.
52. Zhang, M. (2019). Conditional pricing of earnings quality. Finance Research Letters, 30, 306-313.