Earnings management and corporate governance in the UK: The role of the board of directors and audit committee

Abstract

This thesis investigates whether the corporate governance has an effect on the level of earnings management (as measured by income-increasing and income-decreasing discretionary current accruals). In particular, we examine the relationship between characteristics of the board/audit committee and earnings management with a sample of large, publicly-traded UK firms. We find that the independence of the board from management is negatively related to the level of income-increasing earnings management. The average tenure of non-executive directors and the board meeting frequency also contribute to a reduction in the level of earnings management. In contrast, we find little evidence that the independence and financial expertise of audit committees constrain the level of earnings management, and only the audit committee meeting frequency shows negative association with income-decreasing earnings management. Our findings suggest that the board of directors and audit committee may constrain earnings management activities, and provide implications researchers and regulators.