Article2012

Audit committee characteristics and earnings management in Malaysian Shariah-compliant companies

Hussain Khalifa Hussain · Bandar Baru Nilai · Mustafa Mohd Hanefah

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Auditing, Earnings Management, Governance Islamic Finance and Banking Studies Corporate Governance and Financial Management

Abstract

Using panel data regression for 270 Malaysian Shariah-compliant companies, this study investigates the effect of audit committee characteristics such as size of audit committee, number of independent non-executive directors, the number of accounting expertise, and the number of Muslim directors in audit committee on earnings management practice. In addition, some control variables such as company’s size, company’s leverage, company’s profitability and size of audit firm (Big4) were regressed. 810 observations were utilised to examine the relationships between the audit committee characteristics and earnings management using the Modified-Jones Model (1995). Furthermore, three panel data estimations namely Pooled OLS, Fixed and Random effects models were conducted. The results indicate that audit committee size has non-significant relationship with the discretionary accruals used as proxy for earnings management. Additionally, there is negative significant relationship with independent non-executive directors in audit committee. Regarding accounting expert’s role in mitigating earnings management practice, the results indicate that they are nonsignificantly related. As for the Muslims in audit committee, the result is not consistent with the expected role of Muslims against opportunistic behavior as non-significant relationship is found.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1995Detecting Earnings Management.2002Audit committee, board of director characteristics, and earnings management 2012Detecting Earnings Management 2003Earnings management and corporate governance: the role of the board and the audit committee 2002Culture, Corporate Governance and Disclosure in Malaysian Corporations 1995Corporate Governance: Some Theory and Implications 2005Audit Committees and Quarterly Earnings Management

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