Board Monitoring and Earnings Management Do Outside Directors Influence Abnormal Accruals推荐.pdfVIP

Journal of Business Finance Accounting , 32(7) (8), September/October 2005, 0306-686X Board Monitoring and Earnings Management: Do Outside Directors Influence Abnormal Accruals? K.V. PEASNELL, P.F. POPE AND S. YOUNG* Abstract: This paper examines whether the incidence of earnings manage- ment by UK firms depends on board monitoring. We focus on two aspects of board monitoring: the role of outside board members and the audit commit- tee. Results indicate that the likelihood of managers making income-increasing abnormal accruals to avoid reporting losses and earnings reductions is negatively related to the proportion of outsiders on the board. We also find that the chance of abnormal accruals being large enough to turn a loss into a profit or to ensure that profit does not decline is significantly lower for firms with a high proportion of outside board members. In contrast, we find little evidence that outside directors influence income-decreasing abnormal accruals when pre-managed earnings are high. We find no evidence that the presence of an audit committee directly affects the extent of income-increasing manipulations to meet or exceed these thresholds. Neither do audit commit- tees appear to have a direct effect on the degree of downward manipulation, when pre-managed earnings exceed thresholds by a large margin. Our find- ings suggest that boards contribute towards the integrity of financial state- ments, as predicted by agency theory. Keywords: corporate governance, boards of directors, abnormal accruals, earnings management * The authors are from Lancaster University. They gratefully acknowledge the helpful comments of the anonymous referee and those of Steve Lim, Gilad Livne, Scott Richardson, Lakshmanan Shivakumar, Judy Tsui, and seminar participants at Bristol, U.C. Dublin, Dundee, Glasgow, Lancaster, London