Do the effective board and the audit committee influence the earnings management?

Abstract

This study investigates whether the corporate governance mechanism has a relationship with earnings management of the listed firms in Sri Lanka. In particular, board size, board independence, CEO duality, audit committee size and audit committee independence represent the corporate governance mechanisms. In addition, three control variables have been employed in this study; firm size, firm growth and financial leverage. Data were obtained using content analysis on the annual reports of top 60 non-financial firms listed in the Colombo Stock Exchange. The earnings management is measured by the discretionary accruals based on the Modified Jones Model. The result of this study reveals that the CEO duality is the only one variable which has a significant negative relationship with earnings management. Therefore, the findings show that the CEO duality can provide effective monitoring on earnings management in Sri Lanka. But board size, board independence, and audit committee size and audit committee independence have insignificant relationship with earnings management in Sri Lankan firms. However, there is significant relationship between earnings management and leverage and firm growth. According to these findings, improving good governance and CEO Duality is important to avoid earnings management in Sri Lankan firms.