CEO power, audit committee effectiveness and earnings quality

Abstract

PurposeThe purpose of this study is to establish the relationship between chief executive officer (CEO) power, audit committee effectiveness and earnings quality in regulated firms in Uganda.Design/methodology/approachThe authors employed cross-sectional and correlational research designs, based on a sample of 136 regulated firms in Uganda. Data were collected using a questionnaire survey from Chief Finance Officers and Chief Audit Executives. Data were analyzed using a Statistical Package for Social Sciences and Partial Least Squares Structural Equation Modeling.FindingsResults indicate that CEO power causes negative variances in earnings quality. The results also reveal that audit committee effectiveness positively relates relatively similarly with earnings quality. In addition, CEO power and audit committee effectiveness are negative and significantly related. The results further indicate that CEO power and earnings quality are mediated by audit committee effectiveness.Research limitations/implicationsCEO power creates an opaque accounting environment which may leave the stakeholders unable to evaluate the true economic reality of the firm. Audit committee effectiveness is an important enabler for reporting high-quality earnings even in the presence of a powerful CEO.Originality/valueThis study contributes toward a methodological stance of using perceptions to understand earnings quality in regulated firms in Uganda. This is probably the first study that has specifically explored earnings quality using only the fundamental qualitative characteristics of accounting information (as proxies) as enshrined in the Conceptual Framework for Financial Reporting 2018 particularly in Uganda since Her adoption of International Financial Reporting Standards in 1998. Second, the indirect effect of audit committee effectiveness and CEO power is tested.

Audit Committee Effectiveness and Earnings Quality: Perception-based Evidence from Uganda

“…Studies (see, Kalembe et al [27]; Mardessi, [1]; Makhlouf, [18]; Jaggi & Leug, [28]) that investigated the relationship between audit committee effectiveness and earnings quality are scarce. For instance, Makhlouf [18] concludes that audit committee characteristics such as independence, financial expertise, and female members mitigate earnings manipulation.…”

“…For instance, Makhlouf [18] concludes that audit committee characteristics such as independence, financial expertise, and female members mitigate earnings manipulation. Kalembe et al [27] revealed that audit committee effectiveness is positively related to earnings quality. Further, Jaggi, & Leung [28] reported that audit committees play a significant role in constraining earnings management in Hong Kong.…”