Corporate Governance And Earnings Management Practices: Moderating Role Of Audit Committees

Abstract

Purpose- This paper investigates whether effective corporate governance eradicates the accrual earnings management practices while using the audit committee as moderating variable.

Design/methodology/approach– The data set consists of 1644 shariah-compliant non-financial firm-year observations from Hijrah Shariah Index Malaysia over the period 2008 to 2019. This study uses a two-step system generalize method of moment (2SYS-GMM) estimation techniques in which moderate variables are added into the model afterwards and earning management is measured from the modified jones model.  

Findings- Study findings verified that corporate governance mechanisms significantly constrain the practices of earnings management. The findings highlight that board size, board independence, board meetings, non-existence of a CEO duality plays a significant role to curb the practices of accrual earnings management. Moreover, the moderating effect of the audit committee size and the member's independence of the audit committee also has statistical negative and significantly assists in reducing the earning management activities in Shariah-compliant non-financial firms of Malaysia.

Research implications– Policymakers and regulators can use the study's findings to strengthen the board of directors' oversight responsibilities to increase corporate accountability and transparency and maintain shareholders' interests.

Originality/value – This study is distinctive on the grounds it explores the issue linking inward pressures from the owners and outer obligations from the investors regarding earning management phenomena. Previous studies, both locally and globally, had neither developed nor empirically tested the proposed model.