Board Chairmen's Involvement in Audit Committees and Earnings Management Practices

Abstract

This study investigates the influence of the board chairman’s involvement in the audit committee (AC) (as a proxy of AC independence) on earnings management (EM) practices. We examine Bursa Malaysia listed firms with slight positive earnings for the years 2013 to 2015. Using ordinary least squares regression and the Modified Jones Model by Kasznik as a measure of accruals, this study reveals that an AC that includes its board chairman is associated with greater discretionary accruals and EM. Further, we categorise a board chairman’s involvement in an AC into two types: a board chairman who also serves as the AC chairman (hereafter termed board chairman duality) and a board chairman who sits in the AC as an ordinary member. We find that board chairman duality does not influence EM. However, ACs whose members include the board chairman are associated with EM practices. This study supports agency theory and the initiatives taken by policy-makers to deter board chairmen from serving on ACs. It also alerts policy-makers, firms and their stakeholders, as well as researchers to the importance of having an AC free from the involvement of its board chairman as this will enhance the committee’s effectiveness in curbing EM.