Articlediamond2021

The effect of audit committee characteristics on financial reporting quality: The moderating role of audit quality in the Netherlands

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Auditing, Earnings Management, Governance Corporate Finance and Governance Corporate Governance and Financial Management

Abstract

The purposes of this study are to shed light, on the one hand, on the effect of audit committee characteristics, namely independent members in audit committee, a financial expert in audit committee, frequency of meetings and audit committee size on financial reporting quality proxied by real earnings management. On the other hand, it aims to investigate the moderating role of audit quality in the relationship between audit committee characteristics and financial reporting quality. The objective is to contribute to the new evidence on the role of audit committee characteristics towards the financial reporting quality with audit quality as a moderator, particularly the appointment of Big 4 company. This study uses the ordinary least squares (OLS) regression to achieve the research purpose by evaluating the data collected from 90 public listed companies from 2010 to 2019 in the Dutch context. The results state that audit committee characteristics have a statistically significant relationship with real earnings management. However, the effect of audit committee meetings on abnormal operating cash flow and discretionary expenses is not significant. There is also evidence that audit quality positively moderates the audit committee and real earnings management links. Lastly, the findings of this study will help professional accountancy bodies and governments to highlight the relevance of earnings management in safeguarding trustworthy financial information, owners’ wealth and to enhance audit committee characteristics in improving audit quality, especially after the enforcement of the Dutch Corporate Governance Code in 2016.

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References

1981Auditor size and audit quality 2003Earnings Management through Real Activities Manipulation 2003Earnings management and corporate governance: the role of the board and the audit committee 2008Accrual-Based and Real Earnings Management Activities Around Seasoned Equity Offerings 2005Does the Market Value Financial Expertise on Audit Committees of Boards of Directors?2009The Audit Committee Oversight Process*2002Audit Committee Effectiveness: A Synthesis of the Empirical Audit Committee Literature 2009Corporate Governance and Internal Control over Financial Reporting: A Comparison of Regulatory Regimes

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