The impact of independent directors and independent audit committees on earnings quality reported by Indonesian firms

Abstract

PurposeThe purpose of this paper is to investigate whether independent directors and audit committees that are chaired by an independent director as required by the Jakarta Stock Exchange (JSX) affect the quality of reported earnings.Design/methodology/approachThe paper uses both total discretionary accruals (DA) and earnings response coefficient (ERC) as the proxies for earnings quality. It runs multivariate regressions to examine the improvements in earnings quality after the firms meet the JSX requirements.FindingsIt is found that both DA and ERC improve significantly after firms acquire independent directors and independent audit committees. Lower DA occurs in the first and second years after the firms meet the JSX requirements. There is an improvement in ERC in the first years after firms meeting the requirements.Research limitations/implicationsThe results suggest that independent directors and audit committees do improve earnings quality.Originality/valueThis is the first paper that compares the quality of earnings before and after firms acquire independent directors and independent audit committees. This methodology allows us to examine the impact of meeting JSX independence requirements on earnings quality. The findings contribute to the literature by showing the importance of having independent directors and an independent audit committee in order to improve earnings quality. These findings are specifically important for the capital market regulatory bodies, the shareholders, and the boards of directors, and for other users of financial reports in general.

Women in Board of Directors and Real Earnings Management: Accretive Share Buyback in Malaysia

“…Regarding control variables, the result also reported a negatively significant association between accretive share buyback (earnings management proxy) and board of directors independent (BIND) with t = -2.65 and coefficient at -2.1467, which is consistent with Siagian and Tresnaningsih (2011) and Xie et al (2003) who found effective role of the board independence in constraining earnings management. This empirical evidence hence supports the role of independent directors as an effective mechanism in monitoring managers' behaviours.…”

Earnings Quality and Market Values of Indonesian Listed Firms

“…() show that after the Asian crisis of 1995–96, the value relevance of earnings decreased dramatically. Siagian and Tresnaningsih () report that the introduction of independent board directors has increased the earnings response coefficients (consistent with increased relevance of earnings for the capital market). However, the change only appears to be temporary.…”

Internal and External Audit Attributes, Audit Committee Characteristics, Ownership Concentration and Earnings Quality: Evidence from Malaysia

“…Yang and Krishnan (2005);and Yunos (2011) find that audit committee independence is related to less discretionary accruals. Audit committee independence is also related to higher earnings quality (Bradbury, Mak & Tan, 2006;Garcia et al, 2012) and quality financial reporting (Agrawal & Chadha, 2005;Bedard & Johnstone, 2004;Klein, 2002;Siagian & Tresnaningsih, 2011). Some studies report an insignificant association between audit committee independence and earnings informativeness (Petra, 2007); discretionary accruals (Xie et al, 2003;Garcia et al, 2010;Adiguzel, 2013); and accrual quality (Baxter & Cotter, 2009).…”