Internal governance structures and earnings management

Davidson, Ryan, Goodwin-Stewart, Jenny and Kent, Pamela (2005) Internal governance structures and earnings management. Accounting & Finance, 45 2: 241-267. doi:10.1111/j.1467-629x.2004.00132.x

Author Davidson, Ryan
Goodwin-Stewart, Jenny
Kent, Pamela
Title Internal governance structures and earnings management
Journal name Accounting & Finance   Check publisher's open access policy
ISSN 0810-5391
Publication date 2005-07
Sub-type Article (original research)
DOI 10.1111/j.1467-629x.2004.00132.x
Volume 45
Issue 2
Start page 241
End page 267
Total pages 27
Editor R. Faff
Place of publication Oxford, U.K.
Publisher Wiley-Blackwell Publishing Asia
Collection year 2005
Language eng
Subject C1
720199 Macroeconomic issues not elsewhere classified
350104 Taxation
1501 Accounting, Auditing and Accountability
1502 Banking, Finance and Investment
350100 Accounting, Auditing and Accountability
350000 Commerce, Management, Tourism and Services
Formatted abstract
This paper investigates the role of a firm's internal governance structure in constraining earnings management. It is hypothesized that the practice of earnings management is systematically related to the strength of internal corporate governance mechanisms, including the board of directors, the audit committee, the internal audit function and the choice of external auditor. Based on a broad cross-sectional sample of 434 listed Australian firms, for the financial year ending in 2000, a majority of non-executive directors on the board and on the audit committee are found to be significantly associated with a lower likelihood of earnings management, as measured by the absolute level of discretionary accruals. The voluntary establishment of an internal audit function and the choice of auditor are not significantly related to a reduction in the level of discretionary accruals. Our additional analysis, using small increases in earnings as a measure of earnings management, also found a negative association between this measure and the existence of an audit committee.
© AFAANZ, 2005. Published by Blackwell Publishing.
Keyword Audit committee
Corporate governance
Earnings management
Internal audit function
Q-Index Code C1

Document type: Journal Article
Sub-type: Article (original research)
Collections: Excellence in Research Australia (ERA) - Collection
2006 Higher Education Research Data Collection
UQ Business School Publications
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Citation counts: Scopus Citation Count Cited 175 times in Scopus Article | Citations
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Created: Wed, 15 Aug 2007, 05:23:44 EST