Accrual management and the independence of the boards of directors and audit committees

The recent revelation of the misleading audited accounts of several big companies in the US has heightened public concern about the integrity of a firm’s financial reporting processes. The management of the accounts is commonly known as accrual management as it is effectively accomplished through m...

Full description

Bibliographic Details
Main Authors: Abdullah, Shamsul Nahar, Mohd Nasir, Norita
Format: Article
Language:English
Published: The International Islamic University Malaysia 2004
Subjects:
Online Access:https://repo.uum.edu.my/id/eprint/1755/1/Shamsul_Nahar_Abdullah%2C%2C%2C.pdf
_version_ 1825739857666768896
author Abdullah, Shamsul Nahar
Mohd Nasir, Norita
author_facet Abdullah, Shamsul Nahar
Mohd Nasir, Norita
author_sort Abdullah, Shamsul Nahar
collection UUM
description The recent revelation of the misleading audited accounts of several big companies in the US has heightened public concern about the integrity of a firm’s financial reporting processes. The management of the accounts is commonly known as accrual management as it is effectively accomplished through manipulation of discretionary accruals. A firm’s internal corporate governance systems should be able to constrain the extent of earnings being managed. To this end, this paper investigates one important aspect of the internal corporate governance, namely the independence of the board of directors and the audit committee. It is argued that the extent to which the board and the audit committee are independent of management determines their ability to constrain the management of discretionary accruals. Using data from the Kuala Lumpur Stock Exchange (KLSE) non-financial Main Board listed companies in 1998 evidence showed that neither board independence nor the audit committee independence effectively constrained the accrual management level. The interactive effects of board independence and audit committee independence were also found to be insignificant. Evidence in this paper, therefore, casts doubt that the independence of boards and the audit committee can lead to high quality accounting information, which is thereby useful to users.
first_indexed 2024-07-04T05:16:48Z
format Article
id uum-1755
institution Universiti Utara Malaysia
language English
last_indexed 2024-07-04T05:16:48Z
publishDate 2004
publisher The International Islamic University Malaysia
record_format eprints
spelling uum-17552010-12-06T01:20:08Z https://repo.uum.edu.my/id/eprint/1755/ Accrual management and the independence of the boards of directors and audit committees Abdullah, Shamsul Nahar Mohd Nasir, Norita HF5601 Accounting The recent revelation of the misleading audited accounts of several big companies in the US has heightened public concern about the integrity of a firm’s financial reporting processes. The management of the accounts is commonly known as accrual management as it is effectively accomplished through manipulation of discretionary accruals. A firm’s internal corporate governance systems should be able to constrain the extent of earnings being managed. To this end, this paper investigates one important aspect of the internal corporate governance, namely the independence of the board of directors and the audit committee. It is argued that the extent to which the board and the audit committee are independent of management determines their ability to constrain the management of discretionary accruals. Using data from the Kuala Lumpur Stock Exchange (KLSE) non-financial Main Board listed companies in 1998 evidence showed that neither board independence nor the audit committee independence effectively constrained the accrual management level. The interactive effects of board independence and audit committee independence were also found to be insignificant. Evidence in this paper, therefore, casts doubt that the independence of boards and the audit committee can lead to high quality accounting information, which is thereby useful to users. The International Islamic University Malaysia 2004 Article PeerReviewed application/pdf en https://repo.uum.edu.my/id/eprint/1755/1/Shamsul_Nahar_Abdullah%2C%2C%2C.pdf Abdullah, Shamsul Nahar and Mohd Nasir, Norita (2004) Accrual management and the independence of the boards of directors and audit committees. IIUM Journal of Economics and Management, 12 (1). pp. 1-31. ISSN 1394-7680 http://www.iium.edu.my/enmjournal/121art3.pdf
spellingShingle HF5601 Accounting
Abdullah, Shamsul Nahar
Mohd Nasir, Norita
Accrual management and the independence of the boards of directors and audit committees
title Accrual management and the independence of the boards of directors and audit committees
title_full Accrual management and the independence of the boards of directors and audit committees
title_fullStr Accrual management and the independence of the boards of directors and audit committees
title_full_unstemmed Accrual management and the independence of the boards of directors and audit committees
title_short Accrual management and the independence of the boards of directors and audit committees
title_sort accrual management and the independence of the boards of directors and audit committees
topic HF5601 Accounting
url https://repo.uum.edu.my/id/eprint/1755/1/Shamsul_Nahar_Abdullah%2C%2C%2C.pdf
work_keys_str_mv AT abdullahshamsulnahar accrualmanagementandtheindependenceoftheboardsofdirectorsandauditcommittees
AT mohdnasirnorita accrualmanagementandtheindependenceoftheboardsofdirectorsandauditcommittees