Audit Committee Characteristics and Earnings Management: Evidence from India

Abstract

Earnings management is perceived to be a pervasive phenomenon, spread across companies and industries. It distorts earnings quality and portrays an incorrect picture of a firm’s financial performance. Accounting frauds in companies originate from a culture of widespread earnings management. Audit committees are a popular corporate governance tool to improve the credibility of financial statements. The study, evidently the first of its kind in India, seeks to examine the effectiveness of audit committees in constraining earnings management in Indian companies. Secondary data is collected for a sample of 130 companies listed on the BSE and studied for a three-year period 2013-2015. Univariate correlations, multivariate linear regression, and logistic regression models are used to conduct empirical analysis. Evidence suggests significant impact of audit committee size, multiple directorships of audit committee members and frequency of audit committee meetings on earnings quality. Other audit committee characteristics are not found to have a significant impact on the level of earnings management. Findings of the study throw up useful insights for regulators and company boards to evaluate the efficacy of board audit committees and implement additional governance measures to help preserve the integrity of financial statements.