Board and audit committee effectiveness in the post-ASX Corporate Governance Principles and Recommendations era

Abstract

Purpose The purpose of this paper is to contribute to the corporate governance literature by examining the aggregate effect of board and audit committee characteristics on earnings management practices, particularly in the period following the introduction of the second edition of the Australian Securities Exchange (ASX) Corporate Governance Principles and Recommendations. Design/methodology/approach This paper begins by embarking on an extensive review of extant empirical research on boards of directors and audit committees. Then, the paper reports on the use of a quantitative analysis approach to specify the relationship between board and audit committee characteristics (introduced by the ASX Corporate Governance Council) and the level of absolute discretionary accruals as a proxy for earnings management. Findings The findings suggest that greater compliance with board and audit committee principles is linked to lower earnings management, indicating that deliberate structuring of boards and audit committees is an effective approach for enhancing a firm’s financial reporting quality and providing support for the efficacy of the second edition of principles and recommendations related to boards and audit committees suggested by the ASX Corporate Governance Council. Practical implications This study significantly extends the literature and has notable implications for financial reporting regulators, as the findings regarding the monitoring role of boards and audit committees should be beneficial for future revisions of corporate governance principles and recommendations. Originality/value This study focuses on the aggregate effect of board characteristics recommended by the Australian Corporate Governance Council on earnings management practices, and the results support the effectiveness of the board and audit committee characteristics recommended by the ASX Corporate Governance Council. New directions for future improvements to the principles and recommendations are identified.

The Impact of Audit Committee Effectiveness on Audit Quality: Evidence From the Middle East

“…The information gap resulting from the separation of corporate ownership and management necessitated forms of control and monitoring both internally and externally (Young, 2000;Weir et al, 2002): internally through the board of directors and its committees, and externally through the report of the external auditors as well as through market control (Safari, 2017;Ali et al, 2018). Recent well-known international corporate failures and collapses, following the global financial crisis of the last decade, have urged global professional bodies for inclusive regular restructuring and reform of the systems of internal control and governance, emphasising the role of auditors and stressing the importance of audit quality (Kilgore et al, 2014).…”

Audit Committee Characteristic and Earnings Management: Evidence Based on Indonesian Firms

“…Different results are obtained by Al-Thuneibat, Al-Angari, and Al-Saad (2016) revealed that EM practices were not significantly affected by the AC, internal audit and the board of directors. However, AC independent and internal audits have a negative direction on EM practices Other research conducted in Australian stock exchange by Safari (2017) shows that a high level of compliance with board and AC principles influences lower EM practices. Kazemian and Mohd, (2015) stated that agency theory is the basis for EM practice because there is a separation of ownership and control so that the manager will use financial statements that are in line with manager needs.…”

The Effect of Audit Committee Characteristics on Audit Quality: The Moderating Role of Internal Audit Function

“…AC size is importance as for an AC to be properly functioning in organisation the adequate manpower is required to ensure all matters and issues are being resolved including any of the issues arising from the internal control and financial reporting (SCM, 2017). Prior research into the effects of the ACs on the audit quality has returned mixed results (Akhtaruddin & Haron, 2010;Al-Okaily & Naueihed, 2019;Martinov-Bennie, Soh, & Tweedie, 2015;Safari, 2017).…”