The Impact of Audit Committee on Earnings Management: The Relevance of Malaysian Code of Corporate Governance 2007

Abstract

This study aims to determine whether there is any significant association between the audit committee effectiveness and earnings management as a proxy of earnings quality of financial reporting before and after MCCG Revised 2007. Sample data of total 96 Public Listed Company's on Bursa Malaysia in total number of year observation is 570 for six years which are three years before MCCG Revised 2007(2004-2006 and three years after MCCG Revised 2007. The study finds that, there are insignificant association between audit committee effectiveness and earnings management throughout selected period before and after MCCG Revised 2007. However, from all five audit committee characteristics used as variable in this study, only one out of five characteristics of audit committee effectiveness which is higher proportion of audit committee with financial expertise is negatively and significantly associated with earnings management. This study is important as it provides additional knowledge about the impact of audit committee effectives of good corporate governance on reducing EM. Future study can include other measures of earnings quality models such as real earnings management as more accurate result can be captured, and it can be differentiated with other methods. Future research should consider other factors that may compromise the effectiveness of audit committee in performing their role on mitigating the EM activities. For examples, future research may consider the presence of inside directors and management of the company to compromise the audit committee members to perform their role effectively.