The Effect of the Board Composition and its Monitoring Committees on Earnings Management: evidence from Spain

Abstract

We test whether corporate governance mechanisms promoted by best practice codes are effective in constraining earnings manipulation for a Spanish sample of quoted companies during the period 1999-2001. In particular, we analyse the association between earnings management and two key aspects of corporate governance: board composition and the existence of board monitoring committees. Our results show that board composition significantly determines earnings manipulation practices. However, the main role in constraining such practices is not played by independent directors, as UK and US based research suggests, but by institutional directors. No correlation is found between the existence of an independent audit committee and earnings management measures. Finally, the existence and composition of a nomination committee affects the role of independent directors in constraining earnings manipulation. Copyright (c) 2007 The Authors; Journal compilation (c) 2007 Blackwell Publishing Ltd.

The effectiveness of the audit committee in Spain: implications of its existence on the auditor’s opinion

“…In fact, previous evidence obtained for the Spanish case seems to support this latter view by highlighting the ineffectiveness of ACs which were set up during the voluntary period (Fuentes Barbera et al 2005;García Osma and Gill de Albornoz 2007;Pucheta and De Fuentes 2007). However, companies that created their ACs after the enactment of the the Financial System Reform Law (2002) have been forced to comply with a series of requirements regarding the composition of the AC and the functions to be carried out.…”

“…However, other studies have not shown any connection between the quality of the financial information and the existence of an AC or with its structure and workings (Fuentes Barbera et al 2005). Similarly, other studies have arrived at the conclusion that the presence of an independent AC does not affect the quality of accounting information (García Osma and Gill de Albornoz 2007) and that neither the existence nor the composition of the AC have an influence on the tendency to receive qualified opinions in the audit reports (Pucheta and De Fuentes 2007). Analysing the period during which it has been compulsory to set up ACs, a similar conclusion is reached that there is not a significant association between AC and earnings quality (Monterrey Mayoral et al 2008).…”

“…The independence of board members is considered to be a major factor in ensuring that an effective supervisory role is played by the board of directors and its delegated committees. The main corporate governance codes recommend that the majority, or even all AC members be independent and several studies have found evidence of a direct relationship between the independence of the AC and the efficacy of this control mechanism (Abbott and Parker 2000;Carcello and Neal 2003;Abbott et al 2004;Anderson et al 2004;Lin et al 2006;Rodríguez Gutiérrez 2006;García Osma and Gill de Albornoz 2007;Pucheta and De Fuentes 2007;Monterrey Mayoral et al 2008). Thus, we have included the AC's composition in our study and this variable has been measured using the percentage of independents (IND), executives (EXE) and large shareholders' representatives (DOM) present on the committee.…”

Board Monitoring, Management Contracting and Earnings Management: An Evidence from ASX Listed Companies

“…Prior studies (Klein, 2002a;Peasnell, Pope & Yong, 2005;Osma & Noguer, 2007) have examined some key elements of boards' monitoring activities, such as the proportion of outside board members, and the structure of the board and its committee. These key elements affect the strength of the boards' monitoring activities.…”

Corporate Governance, Family Ownership and Earnings Management: Emerging Market Evidence

“…It is expected that the more independent the board of directors is, the less earnings manipulation will be possible for the managers (Chtourou et al, 2001;Davidson et al, 2005;Osma, & Naguer, 2007;Peasnell et al, 2005). However, considering family businesses, there arise some specific and characteristic agency issues, such as the owning family's pursuit of its own economic interests; its pursuit of its own non-economic interests; the parental tendency to act upon altruistic motives; and the different nuclear family units' pursuit of their own interests (Bammens, Voordeckers, & Gils, 2011).…”