Earnings management and the board's audit committee: The pre and post Sarbanes-Oxley experience

• Main Author: Barriga, Ramiro D
• Format: Dissertation
• Language: English
• Published: ProQuest Dissertations & Theses 01.01.2010
• Subjects: Accounting; Boards of directors; Earnings management; Financial disclosure; Fraud; Occupational psychology; Scandals; Social research; Stock exchanges
• ISBN: 9781109551013; 1109551010

The accounting scandals of 2001 within "Corporate America" have spurred far-reaching legislation toward protecting the interests of investors. The Sarbanes-Oxley (SOX) Act of 2002 and new corporate-governance rules established by the New York Stock Exchange (NYSE; NYSE Corporate, 2004) have served to strengthen public trust in corporate financial reporting. The governance rules require audit committees (ACs) to discuss and review the risk-assessment and hedging strategies of the firms they audit. The financial knowledge of those participating on such committees, as well as of all board members, is also addressed. This current study was guided by 10 research questions related to the characteristics of the corporate AC and the practice of earnings management (EM). Implementing the methodology outlined by Yang and Krishnan (2005), annual data, rather than quarterly data, were collected to examine industry changes since introduction of the SOX Act and new corporate-governance rules of the NYSE. The findings reveal that the mandate of one financially experienced member on an AC significantly mitigates EM. Other AC characteristics, such as independence, number of meetings, stock ownership, external directorships, tenure, firm size, number of directors, and Board size, produced no significant effect on EM either before or after passage of the SOX Act. This study also reveals that the composition of the AC does not affect the likelihood of financial-statement deceit, and the majority of the characteristics of these committees have no effect on EM. The results of this research provide empirical evidence of the relationships among the AC characteristics studied. The investigation makes a significant contribution to literature focused on EM by addressing the differential effects of EM before and after passage of the SOX Act of 2002. The study also raises the question of the substantive nature of the corporate-governance mandates of the Act and the new corporate governance rules established by the NYSE. This research concludes that this collective body of legislation had no effect upon the likelihood of EM practice throughout the accounting industry.