Joon S. Yang
University of Minnesota, Duluth
Jagan Krishnan
Temple University
Abstract: We examine the association between characteristics of corporate audit committees and measures of quarterly corporate earnings management. While the literature has so far focused on managersÂ’ incentives to manipulate annual earnings numbers, managers also have incentives to manage quarterly earnings, due for example, to pressures to meet quarterly analyst forecasts. We examine the hypothesis that effective audit committees restrict managers' ability to engage in quarterly earnings management. We examine the following characteristics as proxies for the effectiveness of audit committees: their independence, number of meetings, stock ownership, outside directorships, tenure, and size.
Using a sample of 896 firm-year observations for the years 1996-2000, we find that, in keeping with a number of recent studies, audit committee independence is not associated with lower quarterly earnings management. Two important findings relate to the quality of directors on the audit committee. First, the number of outside directorships held by audit committee members is negatively associated with earnings management. Second, the average tenure of audit committee members is negatively associated with quarterly earnings management suggesting the possible positive effect of experience with the firm and its accounting. It should be noted that while the recent policy changes emphasize audit committee quality by requiring that one member be financially literate, we identify more general measures of quality that might result in better financial reporting.
Back to Program
