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内部治理结构与盈余管理外文文献及翻译

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内部治理结构与盈余管理

瑞安戴维森，珍妮古德温-斯图尔特，帕梅拉肯特

本文探讨了公司的内部治理结构对盈余管理的约束作用。这是假设盈余管理系统地涉及到公司内部治理机制的各个方面的前提下进行的研究，研究包括董事会的力量，审计委员会，内部审计职能的变化与外部审计师的选择四个方面。基于横截面模型以2000年末在澳大利亚上市的434家公司为样本，将可控性应计利润作为衡量盈余管理的水平，发现董事会及审计委员会的非执行董事的人数越多盈余管理的可能性越低。内部审计职能和审计机构的选择与盈余管理没有显著的相关性。我们进一步分析还发现，利用收入的增加作为盈余管理的替代变量时，盈余管理和审计委员会的存在具有负相关关系。

关键词：审计委员会；公司治理；盈余管理；内部审计职能

1 前言

最近在澳大利亚及海外的操纵会计行为的案件表明公司治理机制的重要性，强有力的公司治理涉及到与公司绩效水平监测的一个适当的平衡(Cadbury,1997)。在本论文中，我们以澳大利亚的公司治理为例探索治理机制与盈余之间的关系，因此，我们的重点是治理的监督作用。我们研究的是独立的董事局（ShleiferandVishny，1997），独立委员会主席，一个有效的审计委员会（MenonandWilliams，1994年），内部审计（Clikeman，2003年）和外部审计师的选择使用（贝克尔埃塔尔，1998；弗朗西斯埃塔尔，1999）对盈余管理产生的影响。在此之前的研究已经调查了治理机制可以减少欺诈性财务报告的产生（比斯利，1996; Dechowetal，1996年）。这些研究认为有效的治理机制和真实的财务报告与违反一般公认会计原则（GAAP）呈负相关关系。不过，相对较新的研究领域是公司治理与盈余管理。Peasnell等（2000）研究表明盈余管理与董事会的独立性是负相关的，而另一些研究发现审计委员会与盈余管理之间存在显着的关系（Chtourouetal.2001; Xieetal，2001）。澳大利亚公司内部治理结构和盈利管理实践检验是具有前提条件的，而Peasnell使用的数据主要是研究美国的。因此，本文探讨的内部治理与盈余管理之间的关系是在一个较少监管和自愿选择的治理体制环境下进行的（VonNessen，2003年）。在澳大利亚，在本研究中（2000年）的时间点上，上市公司不要求有一个具有审计职能

的内部审计委员会。

此外，企业监管者青睐以原则为基础的治理方法，而不是一个以规则为基础的方法（澳大利亚，2003年）。虽然在英国存在着类似的做法，Peasnelletal（2000）只研究盈余管理与外部董事在董事会的比例，以及审计委员会的存在关系。我们通过额外研究检验审计委员会规模、开会频率及独立审计人员人数对盈余管理的影响。我们也研究董事会的独立性，研究首席执行官和董事会主席的角色分离对盈余管理产生的影响、研究董事长与总经理职务的分离与盈余管理相关。本文的一项贡献是将内部审计作为一种管理机制列入很可能导致盈余管理水平下降的因素之中。虽然人们越来越重视内部审计在公司治理中发挥的作用，但之前的盈余管理研究没有将其纳入变量中。澳大利亚是一个理想的环境来研究这个问题，因为有证据表明，在澳大利亚很多上市公司没有内部审计职能，而报告表明内部审计的应用与公司规模、公司治理完善程度及风险管理相关。

我们的实证研究使用可控性应计项目来衡量盈余管理，证明盈余管理水平较低是与非执行董事在董事会的比例有关。我们还发现当审计委员会中大部分成员为非高管时盈余管理程度较低，当审计委员会中只有少数为非高管时其与盈余管理不相关。我们的研究结果不支持盈余管理与内部审计相关，也不支持是否使用五大会计师事务所的人员进行审计与是否存在盈余管理两者存在相关性。进一步测试，使用收入的变化代表盈余管理的变化，表明审计委员会与收益管理措施相关。这些结果具有重要的现实意义，因为各国政府、监管机构和标注制定者更加关心企业管制事宜。

本文的其余部分分为四节。第2部分介绍该项研究的理论背景和发展的假说。第3节概述了研究的假设。第4节研究报告的结果。第5节最后讨论了研究结果的影响，突出潜在的限制，并为未来的研究指明方向。

2理论背景和假设

2.1盈余管理

披露真实的会计信息是公司治理的核心，因为它能确保利益相关者行使其权利，同时保护他们的利益（经合组织，1999）。不过，盈余管理，被定义为扭曲一个公司真正的财务执行情况，它可能掩盖地下交易削弱公司检测机制（场埃塔尔，2001）出版的研究和实证测试了各种盈余管理发生的动机，大致包括代理成本、信息不对称和外部因素影响非缔约方。然而，我们主要关心的是某些公司治理结构限制盈余管理，而不是具体的鼓励盈余管理出现的措施。虽然我们试图控制两个普遍应用盈余管理的动机：即，避免违反债

务契约（DefondandJiambalvo，1991,1994）和避免政治成本，（WattsandZimmerman，1978；琼斯，1991年; Jiambalvo，1996年）。我们的方法是以董事会作为企业的代表性部分而不是确定一个强烈的带有盈余管理动机的子集。这样的公司往往是针对具体情况的子集（例如最近的经营模式的转变，敌意收购或新的资金筹集），而这些情况有可能是我们研究的内部治理机制的内生变量。

2.2内部治理结构

一个企业的内部治理结构包括建立监督和影响公司管理行为的职能和程序。设立这些机制的目的在于保持财务报表的可信度和规范性（Dechow等，1995）本文研究的是董事会董事，审计委员会，内部审计职能和外部审计师的选择对盈余管理的影响。

2.2.1董事会

法玛和詹森（1983年）认为董事会是公司治理结构中最重要的控制机制，因为它是内部治理结构的核心。从监督财务的角度，一个有效的董事会应该确保管理层作出的会计选择及其产生的影响的有效性。

从机构的角度看，董事会独立性是董事会发挥其有效的监督机制的保证（比斯利，1996；Dechow等，1996）。董事会独立性是指董事会中与公司执行董事没有任何关联的非执行董事所占的比重。独立董事是指不参与该公司的业务活动，作为一个局外人监督董事会董事（汉拉汉等人，2001）的假设：那些非主管上级的监测能力可以归结为激励，以维持在外部劳动力市场上的声誉。

目前出版的文献支持澳大利亚和国际公司治理准则，这些准则承认非执行董事的监督作用的重要性。这些文章建议董事会的组成方面的最佳做法是，至少一个非执行董事或独立董事占多数。这是经过研究的证据，如比斯利（1996年）认为，董事会独立董事的存在降低了财务报表舞弊的可能性，以及Dechow等（1996）报告认为，企业具有较大比例的非执行董事不太可能违反美国公认会计准则。基于这些发现，Peasnell和Chtourou 等（2000）预测，董事会的独立性可能与盈余管理负相关。然而他们并没有通过实证分析美国公司盈余管理与董事会独立性之间存在关系。因此，我们提出了如下假设：：盈余管理与董事会的独立性是负相关的

0,1

另一个重要特点是董事会是否有一个主席和首席执行长（CEO）的角色分离。然而亚瑟和泰勒（1993）指出，当CEO也是董事会主席时，董事会的执行能力及监测作用会

被削弱[10]。行政总裁被委任为主席一职可能导致权力的集中（比斯利，1996年）和可能的利益冲突，使公司治理结构水平下降。因此，我们提出了如下假设：

2,0

:盈余管理与行政总裁和董事会主席“两职合一”负相关

2.2.2 审计委员会

为了更有效地履行其职责，董事会可以委派董事会委员会的职责。就监督管理的财政自由裁量权而言，审计委员会确保保持公司财务报表的可信性从而最大限度的保障股东权利。这是因为审核委员会为财务报告提供了专门的监测。

在澳大利亚，政府的经济改革计划公司法（审计改革和公司信息披露）（澳大利亚联邦，2004年）提出了世界500强上市公司强制配置审计委员会的法案。此外，澳大利亚证券交易所（ASX）在2003年修订的上市规则中要求任何公司包括涉及标准普尔指标的上市公司，在其财政年度开始时具有审计委员会。然而，在2000年，没有规定上市公司必须具有审计委员会，只规定没有审计委员会的上市公司应在年度报告公司治理中披露这种情况原因。之前发表的文献表明审计委员会的有效性取决于委员会的独立性及会议的频率和大小。如果审计委员会成员也是该公司高管，则审计委员会是无法有效运行的。无论是公开发表的文献还是公司治理的报告都显示，审计委员会应完全是由非执行董事或独立董事组成。这是通过研究审计委员会独立性、活跃程度与财务报表舞弊的发生频率得出的结论。与此相反，克莱因（2002年）的报告发现，审计委员会中独立董事越多，盈余管理越差；当审计委员会完全由独立董事担任时，盈余管理与其没有关系。为了有效地监督管理财务权限，审计委员会将审阅财务报告，同时促进董事会、内部审计委员会与外部进行信息的交流。然而，科恩等人发现内部审计师的存在可以减少外部审计师与管理层的冲突。因此，审计委员会需要被激活使其有效地履行其职责，审计委员会通过在财政年度内举行委员会会议，增加开会次数可以提高其执行能力。研究发现，审计委员会开会频率与盈余管理呈负相关，美国证券交易委员会将可控性应计利润作为衡量盈余管理的标准。一些企业管理报告建议，审计委员会应至少包括三名成员。一个有效的审计委员会为公司提供了对盈余管理进行约束的方法。因此，我们提出了如下假设：

H盈余管理与有效的审计委员会负相关。

2.2.3内部审计职能

除了审计委员会，企业可以自愿建立内部审计职能，以补充其现有的内部管治架构。

内部审计委员会可以提高公司风险管理，控制公司治理的进程和有效性，为公司提供了一个保证和咨询服务。审计工作的目标是与财务报告的审计委员会的监督职责对齐，内部审计将有利于审计委员会的有效运作。内部审计是为了改善公司内部治理流程而产生的。虽然传统内部审计的重点是控制和操作风险，但越来越多的文献表明应将重点集中于盈余管理和不恰当的财务报告。前安然公司副总裁认为，内部审计人员应寻求警告标志，如高级管理人员的不当压力，以满足盈利目标和补偿安排，可能会鼓励员工操纵盈余，以获得经济奖励。内部审计人员不仅要积极参与检测盈余管理，同时应采取积极的态度参与管理董事及财务过程。他们认为，审计委员会应积极参与管理不当收入的检测，从而提供有效意见。这些参数表明，内部审计职能的存在应与盈余管理水平较低有关。因此，提出以下假设：

H盈余管理与内部审计存在负相关

2.2.4 外部审计

一个公司的审计人员的选择是公司内部治理机制的一部分，可能与盈余管理相联系。研究数据表明，大型会计师事务所被认为比小型会计师事务所执行高品质稽核。然而诸如美国和澳大利亚安然公司的例子可能并非如此，大公司更注重财务报告，小公司更注重监控过程。大型审计公司有更多的资源和知识检测盈余管理，但是他们也有更大的动力保护自己的名声来巩固自己的客户群。过去的研究表明，5大会计师事务所审计的公司盈余管理水平低于没有聘用5大的公司。因此，我们预计选择5大审计师的公司不太可能进行盈余管理。因此，提出以下假设：

：盈余管理与使用5会计师事务所审计人员负相关。

3 研究设计

本文选取2000年在澳交所上市的434家上市公司作为样本，采用琼斯横断面分析法进行分析。为了验证我们的假设，本文运用两次回归模型，一次用于计算可控性应计利润，第二次用于检验盈余管理与内部治理间的关系。我们还进行额外的测试，使用替代变量代替因变量和自变量的数目。

3.1样本选取

我们的初始样本包括568个公司，其数据可以在公司网站或数据库中找到。财务资料和有关的董事会及审计委员会的资料可以在年报中查询。然而，年度报告有关内部审计

的披露使用不是强制，因此，内部审计信息的获得可以从以下三种方法中选择一种：第一种方法是从昆士兰/毕马威中心联合主办的商业咨询取证数据库中获得相关数据；第二种方法是研究该公司的年度报告披露信息；最后，当这些公司不包括在数据库中或年度报告没有提及内部审计的，只能直接接触企业。文章排除了产业分类和治理结构或财务信息不完全的企业，行业分类从全球行业分类标准（GICS ）中获得, 最终获得本文的需要的434家上市公司样本。

3.2变量检测

3.2.1盈余管理

目前出版的文献中有几种盈余管理的方法，包括变更会计政策，改变可控性应计利润降低利润或盈利的微小变化。本文以可控性应计利润作为衡量盈余管理程度的指标。

企业盈利分为两个部分：一部分是已经实现的现金流入的盈利，即经营活动产生的现金净流量(Cash From operations ，CFO)，另一部分则是没有实现现金流入的盈利，由于这部分是按权责发生制原则确认的，但没实现现金流入，故称之为总体应计利润(Total Accruals, TA)。由于现金流量是企业实实在在发生的，企业难以对其进行操纵，因此假定盈余管理只能通过应计利润进行，但并不是全部的总体应计利润都能进行操纵。在总体应计利润各组成项目中，有些是按照现行会计规范强制处理的结果，有些则是利用现行会计选择的余地调剂、操纵的结果。因此，按照总体应计利润的可控程度又将其分为可控性应计利润(Discretionary Accruals, DA)和非可控性应计利润(Non-discretionary Accruals ，NDA)两部分。考察可控性应计利润的异常波动成为判别是否存在盈余管理的主要分析方法。研究的主要思路是根据估计期间的数据(假定不存在盈余管理)利用数学模型来预测非可控性应计项目，从而计算出可控性应计项目的值，通过统计分析，作为判断盈余管理是否存在的依据。

（1）回归参数的估计

1,-t i A TA

= a 11,1-t i A +a 21,,-?t i t i A REV +a 31,,-t i t i A PPE +t ε （3-1）

式中：A 1,-t i 表示公司 i 第 t-1 年末的总资产；

t i REV ,?为公司 i 在第 t 年和第 t-1 年的主营业务收入的差额； t

i REC ,?为公司 i 在第 t 年和第 t-1 年的应收账款净额的差额；

PPE

t i,

i公司第t年的固定资产；

式中各变量除以期初总资产是为了消除公司规模的影响

(2)非可控性应计利润的计算

运用得出的各参数估计值，代入下列模型计算出研究样本公司的以资产计量的非可控性应计利润。

NDA

t i,/A

t i,

α+

α（REC

REV?

?）/ A

t i,

αPPE

t i,

/ A

t i,

（3-2）

其中1α、2α、3α分别为a

1、a

、a

的估计值

NDA

t i,

：i公司第t年的非可控性应计利润（3）总应计利润

t i,= NI

t i,

—CFO

t i,

是公司 i 第 t 年净利润

CFO

t i,

是公司 i 第 t 年经营活动现金流量净额

(4)可控性应计利润的计算

根据研究样本公司的非可控性应计利润 NDA和总体应计利润 TA，计算可控性应计利润DA：

t =TA

-NDA

t i,

研究样本公司i第t年的应计利润总额

本文主要研究盈余管理和公司治理结构变量之间的关系，因此对于盈余管理的方向暂不予考虑，将可控性应计利润取绝对值，作为盈余管理的最终度量。

3.2.2公司内部治理结构变量

在本文的模型中，董事会独立性是通过两个虚拟变量衡量的。董事会大多数由非执行董事组成则取1，否则为0。如果董事会主席和首席执行官角色是分开的就取1，否则取0。一些非执行董事并非完全独立于管理层，因为他们除了董事之外可能还在公司扮演其他角色。因此，我们剔除那些在公司担任其他职务的董事。一些公司的信息披露不足，因此，我们只选择其中一些资料和报告都齐全的公司进一步进行分析。

如果一个公司在报告期内已经设立审计委员会则虚拟变量取1，否则为0。如上所述，审计委员会独立性不同，我们的模型就不同。为了测试内部审计职能的假设，当公司有自己的内部审计职能时虚拟变量取1，否则取0。同样的，当公司使用5大会计师事务所进

行审计时虚拟变量取1，否则取0。

3.2.3控制变量

众多学者的研究表明，若不控制影响盈余管理行为的其他因素，将不利于实证分析的正确性。因此，本文借引入一些能够对盈余管理产生影响的控制变量。

SIZE ：年初总资产的对数。加入此变量用于控制公司规模对盈余管理的影响。通常，大公司的管理层拥有更广阔的空间来进行盈余管理行为。DEBT ：资产负债率。公司的债务契约限制通常会对盈余管理行为产生影响，当公司面临较高的违约风险时，容易通过盈余管理行为来避免财务危机，而资产负债率通常作为债务契约中重要的限制性指标。

3.3回归模型

以下模型是用来检验前文所提出的假设：

DA=α+β1BDIND+β2INDCHAIR+β3AC+β4ACIND+β5ACMEET

+β6ACSIZE +β7IAF+IG5

4研究结果

通过多因素分析，可以得出一下结论：

1.本文的假设1（a ）成立，董事会独立性与盈余管理负相关。但是假设1（b ）不成立，即独立董事与盈余管理没有关系。这可能是由于当董事会本身独立于管理层时之外时董事会主席只能行使有限的监督权。

2.对于假设2，我们没有找到可控性应计利润与审计委员会独立性或审计委员会本身之间的关系。但发现审计委员会中非行政人员的增多会导致盈余管理下降。这一结论与克莱的研究结果一致，独立董事在审计委员会中比重增大时盈余管理会相应减少，但一个完全独立的审计委员会与盈余管理没有关系。

3.我们没有找到盈余管理与内部审计之间的关系或者使用5大会计师事务所与盈余管理之间的关系。虽然两个系数与假设一致为负但并不十分显著，因此我们认为假设3和假设4不成立。

4.在模型的七个控制变量中，有四个与盈余管理有显著相关关系。盈余管理与净收入的变化、净收入有显著关系。同时，盈余管理与企业规模、与市场相关的股权激励负相关。但我们没有发现大股东持股比例与盈余管理存在关系。

5.总结

通过本文的研究可以发现，盈余管理与董事会中独立董事比例存在负相关关系，证明了假设1（a）。研究结果并不支持假设1（b），即独立董事与盈余管理没有关系。对于假设2，考察审计委员会的存在和具体的审计委员会特征与盈余管理之间的关系。所有这些在模型一中都不被支持，其中审计委员会独立性是通过委员会中独立董事的比例进行衡量的。然而模型2发现审计委员会独立董事比例与盈余管理之间存在相关关系。进一步分析，以收入的增加替代盈余管理，发现审计委员会的存在与盈余管理相关。任何主要模型及额外模型得出的结论都不支持假设3和假设4。

本研究结果对那些尽量减少盈余管理方法及提高财务质量的人们来说具有重要作用。同时也暗示出应基于会计信息披露质量来优化公司内部治理结构的重要性。今后应加强对审计委员会的监督，强化公司内部审计职能，使其发挥更大的成效以减少盈余管理。

当然本文得出的结果受到一定的条件限制。以可控性应计利润作为盈余管理的替代指标是有据可查的，但是结果表明可控性应计利润并不能很好的代替盈余管理。文中对就业的措施的限制是为了强化内部控制的机制，对于独立董事更精细的分类能更好的提供董事会职能的信息。同样，目前的研究受到审计委员会代理缺乏有效性的限制。审计委员会的规模和开会的频率并不能很好的代替审计委员会应有的效率。因为我们只专注于企业是否使用内部审计，因此对于内部审计的检验也具有局限性。一个更精确的检验方法可以审查一个公司的内部审计地位、职能及其在公司治理中发挥的作用。更详细的内部审计信息需要通过更详细的调查获得，这需要对公司治理措施进行进一步的改进同时需要澳大利亚交易所的支持。

附录B

Internal governance structures and earnings

management

RyanDavidson ,JennyGoodwin-Stewart ,PamelaKent

Abstract

This paper investigates the role of a firm's internal governance structures constraint in earnings management. It is hypothesized that the practice of earnings management is systematically related to the strength of internal corporate governance mechanisms,including the board of directors ,the audit committee,the internal audit function andthe choice of external auditor. Based on a broad cross-sectional sample of 434 listed Australian firms,for the financial year ending in 200,a majority of non-executive directors on the board and on the audit committee are found to be significantly associated with a lower likelihood of earnings management,as measured by the absolute level of discretionary accruals. The voluntary establishment of an internal audit function and the choice of audit are not significantly related to a reduction in the level of discretionary accruals. Our additional analysis,using small increases in earnings as a measure of earnings management,also found a negative association between this measure and the existence of an audit committee.

Key words:Audit Committee;Corporate Governance;Earnings Management;Internal audit function

1 Introduction

Recent cases of inappropriate accounting practices,both in Australia and overseas,have focused attention on the need for strong corporate governance mechanisms. Strong governance involves balancing corporate performance with an appropriate level monitoring(Cadbury,1997). In the present paper,we explore the relationship between governance mechanisms and earnings management by firms in Australia and,hence,our focus is on the monitoring role of governance. The mechanisms we examine are an independent board of directors(ShleiferandVishny,1997),an independent board chair person,an effective audit committee(MenonandWilliams,1994),the use of internal audit(Clikeman,2003)and the choice of external auditor(Becker etal.,1998;Francis etal.,1999).

Prior research has investigated the role of governance mechanisms reducing fraudulent financial reporting(Beasley,1996;Dechowetal.,1996;Jiambalvo,1996).These studies have established a negative relationship between effective governance mechanisms and financial reporting decisions that are in breach of Generally Accepted Accounting Principles(GAAP). However,a relatively new area of research is the association between corporate governance and earnings management. Peasnell et al(2000) document that earnings management is negatively associated with the independence of the board of directors,while other studies find significant relationships between audit committee characteristics and earnings

management(Chtourouetal.,2001;Xieetal.,2001;Klein,2002a). The examination of the association between internal governance structures and the practice of earnings management in Australian firms is motivated by several factors. With The Exception of Peasnell et al.(2000),which uses data,existing research is predominantly US based. Therefore,we explore whether the internal governance-earnings management relationship holds in an institutional environmen where corporate governance is less regulated and choice of governance mechanisms is voluntary(V onNessen,2003). In Australia,at the time of the present study(2000),listed companies were not required to have an audit committee or an internal audit function. Furthermore,corporate regulators favour principles-based approach to governance rather than a rules-based approach(ASX,2003). Although a similar approach exists in the UK,Peasnelletal.(2000)examine only the relationships between earnings management and the proportion of outside directors on the board and the existence of an audit committee. We extend this research by exploring the effect of additional audit committee variables such as size and frequency of meetings as well as the independence of members. We also extend board independence to examine whether the separation of the chief executive and board chair roles is associated with earnings management. A further contribution is the inclusion of internal audit as a governance mechanism that is likely to be associated with a reduction in the level of earnings management. While there has been increasing emphasis on the role played in governance by internal audit,no prior earnings management studies have included this variable. Australia is an ideal setting to examine this issue as evidence suggests that many listed companies in Australia do not have an internal audit function. Goodwin and Kent(2003)report that the use of interna l audit is associated with the size of the company and its commitment to strong corporate governance and risk management.

Our principal tests,using absolute discretionary accruals to measure earnings management,suggest that a lower level of earnings management is associated with the presence of non-executive directors on the board. We also find a negative association between earnings management and audit committees comprising a majority of non executives,but no relationship between earnings management and committees comprised solely of non-executives. Our results do not support a relationship between earnings management and the use of internal auditor the choice of a Big 5 auditor. Additional testing,using small positive changes in earnings as an indication of earnings management,suggests that audit committees are associated with this measure of earnings management.These results have important practical implications because of the heightened interest in corporate governance matters from governments,regulators and standard setters.

The remainder of the paper is divided into four sections. Section 2 provides the theoretical background for the study and develops the hypotheses.Section 3 outlines the research method used to test the hypotheses. It also discusses the measurement of earnings management through the estimation of discretionary accruals.Section 4 reports the present study's results. Section 5 concludes by discussing the implications of the research findings,highlighting potential limitations and considering future areas for research.

2 Theoretical background and hypotheses

2.1Earnings Management

The preparation and disclosure of true and fair financial information is central to corporate governance,as it provides stakeholders with a foundation to exercise their rights,in order to protect their interests(OECD,1999). However,earnings management,defined as the practice of distorting the true financial performance of (a) company' (SEC,1999,p.3),effectively weakens this monitoring mechanism as it might conceal poor underlying performance. The published literature has developed and empirically tested a variety of motivations for earnings management to occur(Fields etal.,2001). These fall broadly within the categories of agency costs,information asymmetries and externalities affecting non-contracting parties. However,we are primarily concerned with the extent to which certain corporate governance attributes limit the opportunity to manage earnings,rather than specific incentives for earnings management to occur. Although we attempt to control for two widely documented motives for earnings management;namely,avoiding breaching debt covenants(DefondandJiambalvo,1991,1994) and avoiding political costs(WattsandZimmerman,1978;Jones,1991;Jiambalvo,1996), our approach is to examine a board cross-section of firms rather than identifying a specific subset with strong incentives to engage in earnings management. Such subsets of firms are often context specific(e.g. recent managerial change,hostile takeover or new capital raising)and these contexts are likely to be endogenous to the internal governance mechanisms we examine.

2.2 Internal governance structure

The internal governance structure of a firm consists of the functions and processes established to oversee and influence t he actions of the firm’s management.The role of these mechanisms in relation to financial reporting is to ensure compliance with mandated reporting requirements and to maintain the credibility of a firm’s financial statements(Dechow et al.,1995).The mechanisms that we examine in the present study are the board of directors,the audit committee,the internal audit function and the choice of external auditor.

2.2.1 Board of directors

Fama and Jensen(1983a,b)recognize the board as the most important control mechanism available because it forms the apex of a firm’s internal governance structure.In terms of monitoring financial discretion,an effective board of directors should ascertain the validity of the accounting choices made by management and the financial implications of such decisions(NYSE,2002).

From an agency perspective,the ability of the board to act as an effective monitoring mechanism is dependent upon its independence from management(Beasley,1996;Dechow et al.,1996).Board independence refers to the extent to which a board is comprised of non-executive directors who have no relationship with the firm beyond the role of director. A non-executive director is defined as a director who is not employed in the company’s business activities and whose role is to provide an outsider’s contribution and oversight to the board of directors(Hanrahan et al.,2001).A non-executive director who is entirely independent from management is expected to offer shareholders the greatest protection in monitoring management (Baysinger and Butler,1985).Fama and Jensen(1983a,b)posit that the superior monitoring ability of non-executives can be attributed to the incentive to maintain their reputations in the external labour market.

The published literature is supported by Australian and international corporate governance guidelines,which recognize the importance of the monitoring role of non-executive directors(AIMA,1997,1995;OECD,1999;NYSE,2002;ASX,2003;StandardsAustraliaInternation al,2003;Bosch Committee,1995;Cadbury Committee,1992).These guides suggest that best practice with respect to board composition is,at least,a majority of non-executive or independent directors.This is supported by research evidence such as Beasley(1996),who finds that the presence of independent directors on the board reduces the likelihood of financial

statement fraud,and Dechow et al.(1996),who report that firms with a greater proportion of non-executive directors are less likely to be subject to Securities and Exchange Commission(SEC)enforcement actions for violating US GAAP.Based on these findings,both Peasnell et al.(2000)and Chtourou et al.(2001)predict that board independence is also likely to be associated with a reduction in earnings management.While Peasnell et al.(2000)find empirical support for their prediction with respect to UK firms,Chtourou et al.(2001)fail to find an association between earnings management and board independence for a sample of US firms.Despite these conflicting results,we hypothesize a negative association between board independence and earnings management.Therefore,we test the following hypothesis: H1(a):Earnings management is negatively associated with the independence of the board of directors.

Another important characteristic of boards is whether there is a separation of the roles of the chairperson and the Chief Executive Officer(CEO).While Arthur and Taylor(1993)point out that the underlying economic determinants of separating these roles are not well understood,corporate governance guidelines assume that a board’s ability to perform a monitoring role is weakened when the CEO is also the chairperson of the board(e.g.Cadbury Committee,1992;ASX,2003;Standards Australia International,2003).The appointment of the CEO to the position of chair can lead to a concentration of power(Beasley,1996)and possible conflicts of interest,resulting in a reduction in the level of monitoring.This leads to the following hypothesis:

H1(b):Earnings management is negatively associated with the separation of the roles of CEO and board chair.

2.2.2Audit committee

In order to more efficiently perform their duties,boards of directors might delegate responsibilities to board committees.In relation to monitoring the financial discretion of management,it is the audit committee that is likely to provide shareholders with the greatest protection in maintaining the credibility of a firm’s financial statements.This is because of the specialized monitoring of financial reporting and audit activities provided by the audit committee.

In Australia,the Government’s Corporate Law Economic Reform Program(Audit Reform and Corporate Disclosure)Act 2004(CLERP 9)(Commonwealth of Australia,2004)proposes mandatory audit committees for the Top 500 listed companies.Furthermore,the Australian Stock Exchange(ASX)amended its listing rules in 2003 to require any company that was included in the Standard and Poor’s 500/ASX .All Ordinaries Index at the beginning of its financial year to have an audit committee during that year.In addition,in March 2003,the ASX Corporate Governance Council released a best practice guide that recommends that all companies have an audit committee(ASX,2003).However,in the year 2000,there was no requirement mandating audit committees.The only rule in place was that listed company with no audit committee should disclose the reasons for this in a corporate governance statement in the company’s annual report.

Prior published literature indicates that the effectiveness of an audit committee is dependent,in part,on the extent to which the committee is independent,its frequency of meetings and its size. It is contended that audit committees are unable to function effectively when members are also executives of the firm(Lynn,1996;BRC,1999).Both the published literature and governance reports suggest that audit committees should consist exclusively of non-executive or independent directors(e.g.Menon and Williams,1994;BRC,1999;ASX,2003).This is supported by research that demonstrates a relationship between audit committee independence and a higher degree of active oversight and a lower incidence of financial statement fraud

(Jiambalvo,1996;McMullenandRaghundan,1996;Wright,1996).

In contrast,however,Klein(2002a)reports a negative relation between earnings management and a majority of independent directors on the audit committee,but finds no meaningful relationship between earnings management and an audit committee comprised solely of independent directors.

To effectively monitor the financial discretion of management,the audit committee is expected to review the financial reporting process,as well as to facilitate a flow of information among the board of directors,the internal and external auditors, and management(McMullen and Raghundan,1996).However,both Cohen et al.(2000)and Gibbins et al.(2001)report that external auditors are sceptical of the role that audit committees play in reducing conflicts between auditors and management. Hence,to effectively discharge their responsibilities,audit committees need to be active(Collier,1993;Hughes,1999)and to be of sufficient size.

Audit committee activity has been operationalized through the number of committee meetings held during the financial year,with the expectation that the more often a committee meets,the more likely it is to carry out its responsibilities.Studies have found that the frequency of audit committee meetings is negatively associated with both earnings management,as measured by discretionary current accruals(Xie et al.,2001),and the likelihood of enforcement action by the SEC.With regard to size,several corporate governance reports have proposed that the committee should consist of at least three members.

The existence of an effective audit committee provides a firm with an added layer of governance,which is expected to constrain earnings management behaviour.This leads to the following hypothesis.

H2:Earnings management is negatively associated with the presence of an effective audit committee.

2.2.3Internal audit function

In addition to the audit committee,firms can voluntarily establish an internal audit function to supplement their existing internal governance framework.If established, this function provides firms with an assurance and consulting service,which can improve the effectiveness of their risk management,control,and governance processes(IIA,1999).An internal audit function is also expected to facilitate the operation and effective functioning of the audit committee,as the goals of the audit function are closely aligned with the financial reporting oversight responsibilities of the audit committee(Scarbrough et al.,1998;Goodwin and Y eo,2001;Goodwin,2003).The formation of an internal audit function is endorsed by governance reports(NYSE,2002)and prior literature(Collier,1993;Goodwin and Kent,2003)as a means of improving internal governance processes.

Although traditionally internal audit has focused more on controls and operational risks,there has been increasing emphasis in the professional literature on the need to also focus on earnings management and inappropriate financial reporting(Eighme and Cashell,2002;Martin et al.,2002;Rezaee,2002;Clikeman,2003;Hala,2003).Sherron Watkins,former Enron vice president,believes that internal auditors should look for warning signs such as undue pressure from senior management to meet earnings targets and compensation arrangements that might encourage employees to manipulate earnings in order to receive financial rewards(Hala,2003).Clikeman (2003)argues that internal auditors should not only be actively involved in detecting earnings management,but that they should take a proactive approach to educating managers and directors about the dangers of the practice.Eighme and Cashell(2002) regard the role of internal audit in detecting earnings management as being a complementary one to that of external audit.They believe that both should be actively involved in the detection of inappropriate earnings management,thereby providing two unrelated opinions to the audit committee.

These arguments suggest that the presence of an internal audit function should be associated with a lower level of earnings management.Accordingly,the following hypothesis is proposed.

H3:Earnings management is negatively associated with the presence of an internal audit function.

2.2.4External audit

The choice of a firm’s auditor is another internal govern ance mechanism that is likely to be associated with earnings management.Research evidence suggests that the large audit firms are perceived to perform higher quality audits than smaller audit firms(DeAngelo,1981).While examples such as Enron in the USA and HIH in Australia might suggest otherwise,the large firms are considered to be more effective monitors of the financial reporting process compared to smaller firms.Krishnan(2003)argues that, not only do the large audit firms have more resources and expertise to detect earnings management,but they also have a greater incentive to protect their reputation because of their larger client base.Past studies demonstrate that clients of Big 5 auditors report lower levels of earnings management than clients of non-Big 5 auditors(Becker et al.,1998;Francis et al.,1999)[6]. Therefore,we expect that firms that choose a Big 5 auditor are less likely to engage in earnings management.This gives rise to the following hypothesis:

H4:Earnings management is negatively associated with the use of a Big 5 auditor.

3 Research design

The present study involves a cross-sectional analysis of 434 firms listed on the ASX for the financial year ending in 2000.To test our hypotheses,we use two primary models which regress absolute discretionary accruals on a set of governance and control variables.The two models differ only in their measure of audit committee independence.We also conduct additional tests,using alternative measures of both the dependent variable and a number of independent variables.

3.1.Sample selection

Our preliminary sample of 568 firms comprised companies for which annual reports were available either on the Connect database,on company websites or in hard copy.Financial information and information pertaining to boards of directors and audit committee characteristics were obtained from disclosures made in annua reports.However,annual report disclosure concerning the use of internal audit is not mandatory.Therefore,this information was obtained by one of three methods. The first method involved consulting the University of Queensland/KPMG Centre for Business Forensics database. The second method involved examining annual report disclosures.The final method involved directly contacting firms,which were either not included on the database or whose annual reports made no mention of an internal audit function.

To arrive at the final sample,exclusions were made on the basis of industry classification and insufficient governance or financial information.For the purpose of industry classification,the Global Industry Classification Standard(GICS)was adopted. Firms were classified according to the 59 GICS industries and,consistent with prior research,industries with less than 8 firms were eliminated.Firms in the financial sector were also excluded because of their unique working capital structures (Klein,2002a)and the added layer of governance imposed through regulation(Barnhart et al.,1994).Those firms with missing financial or governance information were also excluded,as were firms with extreme values for discretionary accruals. After these exclusions were made,the sample for the study was limited to

434 firms in 24 industries.

3.2.Measurement of the variables

3.2.1.Earnings management

The published literature has developed several tests of earnings management,including the assessment of accounting policy changes(Healy,1985;Sweeney ,1994),specific accounting transactions(McNichols and Wilson,1988),discretionary accruals(Jones,1991)and small profits or small changes in earnings(Holland and Ramsay ,2003).The present study uses discretionary accruals as the primary measure of earnings management while we also use small profits and small changes in earnings in our additional analysis.

Earnings management research has been dominated by studies that have followed the general discretionary accruals framework proposed by McNichols and Wilson (1988).This framework partitions accruals into non-discretionary and discretionary components on the assumption that a high level of discretionary accruals(DA) suggests that a firm is engaging in earnings management.The most frequently used method to decompose accruals is the modified-Jones model(Dechow et al.,1995). This model assumes that the non-discretionary component of total accruals(NDA) is a function of the change in revenues adjusted for the change in receivables and the level of property ,plant and equipment,which drive working capital requirements and depreciation charges,respectively .

We use the cross-sectional version of the modified-Jones model(DeFond and Jiambalvo,1994;Becker et al.,1998;Bartov et al.,2000).Under this model,the level of discretionary accruals for a particular firm is calculated as the difference between the firm’s total accruals and its non-discretionary accruals(NDA),as estimated with equation: (1)1,-t i A TA

= a 11,1-t i A +a 21,,-?t i t i A REV +a 31,,-t i t i A PPE +t ε （3-1）

where:

TA t i , =total accruals for firm i in industry j in year t,

t i REV ,?=change in revenue for firm i in industry j between year t-1 and t,

t i REC ,?= the change in receivables for firm i in industry j between year t-1 and t.

PPE t i , =gross property,plant and equipment for firm i in year t,

(2) NDA t i ,/A t i ,= 1α+2α（REC REV ?-?）/ A t i ,+3αPPE t i ,/ A t i , (3-2)

The 2α coefficient(change in revenues)is predicted to be positive,as changes

in revenues are expected to be positively related to changes in working capital accounts.The expected sign on 3α (property,plant and equipment)is negative,as the

level of fixed assets is expected to drive depreciation expenses and deferred taxes(Klein,2002a).Having estimated non-discretionary accruals(NDA)from

equation(bove,the amount of discretionary accruals(DAC)for firm i in industry j for year tis calculated as the residual value from equation(3-3):

t =TA

-NDA

t i,

(3-3)

We use a cash-flow approach to estimate total accruals as this is considered superior to the balance sheet approach(Hribar and Collins,2002).This approach involves ded ucting the cash flow from operations obtained from the statement of cash flows from the amount of net income(before extraordinary items)from the income statement.

3.2.2.Corporate governance variables

In our primary models,board independence is measured by two dummy variables,the first taking a value of 1 if the board of directors is comprised of a majority of non-executive directors and otherwise,and the second variable taking avalue of if the roles of the chairperson and CEO are separated and 0 otherwise.We acknowledge that some non-executive directors are not entirely independent from management as they might have a relationship with the firm in addition to their role as a director.Therefore,we attempt to refine this measure by eliminating those non-executive directors who are reported to have engaged in transactions with the company. Because inadequate disclosure by some companies results in a smaller sample,we test this measure on the subset of companies for which this information is available and report the results in our additional analysis.

The existence of an audit committee is identified by a dummy variable with a value of if the firm has an audit committee operating during the year and otherwise.As noted,our models differ in their measure of audit committee independence(ACIND).In model 1,ACIND is a dummy variable taking the value of 1 when the committee is comprised entirely of non-executive directors and 0 otherwise.In model 2,ACIND takes the value of 1 when the committee is comprised of a majority of non-executive directors and 0 otherwise.

Other indicators of audit committee effectiveness,activity and size,are measured by the number of committee meetings held during the year(ACMEET),and the number of directors assigned to the audit committee(ACSIZE),respectively.To test the internal audit function hypothesis,a dummy variable is employed,taking a value of 1 if the firm has its own internal audit function or it outsources its internal audit activities,and 0 otherwise.Similarly,a dummy variable is used to test the external audit hypothesis,with a value of 1 when the firm uses a Big 5 auditor and 0 otherwise(BIG5).

3.2.3.Control variables

We control for the effect of possible confounding factors(Bartov et al.,2000) by including in our models variables that prior studies have found to be associated with earnings management or governance variables.To control for the existence of concentrated shareholdings that might improve monitoring(Agrawal and Knoeber,1996;Peasnell et al.,2000),we include a variable defined as the percentage of shares held by the largest substantial shareholder(SUBSH).15 Leverage(LEV), measured as the ratio of total liabilities to total assets,captures the incentives to practice earnings management when close to debt covenant violations(Beasley and Salterio,2001;Klein,2002a).The absolute change in earnings has been found to be positively associated with earnings management(Klein,2002a)and we measure this by the absolute change in net income between the current and prior periods scaled by total assets(ABSCH).We include the log of total assets(SIZE)to control for the effect of size as this has been found to be negatively associated with earnings management and positively associated with audit committee and board independence and the use of internal audit(Bartov et al.,2000;Klein,2002a;Goodwin and Kent,2003).Following Klein(2002a,b),absolute current

earnings(ABSNI),measured by the absolute value of net income before extraordinary items scaled by total assets,is also included;16 as is the market to book ratio(MKT),measured by market capital- ization divided by the book value of shareholders’equity.Klein(2002b)finds this latter variable to be related to board and audit committee independence.Finally,to alleviate the concern that the modified Jones model provides biased estimates of discretionary accruals when firms experience extreme earnings performance(Dechow et al.,1995),we include a control variable for extreme performance(EXTP).This variable takes a value of 1 if the firm is within either the top or bottom 10 per cent of the sample for performance(measured by net income divided by total assets),and 0 otherwise.

3.3.Regression models

where DA is the absolute value of discretionary accruals,as measured by thecross-sectional modified-Jones model and the remaining variables are as previously defined.

4 Results

Recall that the ability of the board of directors to monitor the financial discretion of management is expected to be a function of its independence,measured by board and chairperson independence. This provides support for Hypothesis 1a that earnings management is negatively associated with board independence.However,Hypothesis 1b is not supported as there is no evidence of a negative relationship between an independent board chair(INDCHAIR) and earnings management in either model.This result might be attributable to the limited additional oversight provided by a non-executive chairperson when the board itself is predominantly independent from management.The second hypothesis relates to the audit committee and its role in detecting and preventing earnings management.In model 1,we do not find any association between the level of discretionary accruals and the existence of an audit committee (AC),the committee’s independence(ACIND)or its effectiveness(ACMEET and

ACSIZE).Model 2,however,finds a negative association between areduction in earnings management and a majority of non-executives on the committee. These results are consistent with those of Klein(2002a)who finds that a majority of independent directors on the audit committee is related to a reduction in earnings management,but that an entirely independent committee has no meaningful relation with earnings management.We do not find an association between earnings management and the existence of an internal audit function(IAF)or the use of a Big 5 auditor in either model.Although both coefficient are negative as predicted,neither is statistically significant and, therefore,we do not find support for Hypothesis 3 or Hypothesis 4.Of the seven control variables included in the models,five are statistically significant.Earnings management is strongly associated in the predicted direction with the absolute change in net income(ABSCH),absolute net income(ABSNI)19 and leverage(LEV).It is also negatively associated with firm size(SIZE)and positively associated with market to book ratio of equity(MKT).However,we do not find an association between the proportion of shares held by a substantial shareholder (SUBSH)or extrem performance(EXTP).

Several additional tests are performed to ascertain the credibility of the initial analysis.The first set of tests,comprising three iterations,repeats the regression models with alternative definitions of board and audit committee independence.Iteration 1 uses the proportion of non-executive directors on the board as the measure of independence.The coefficient is negative and significant in both models,supporting the relationship between board independence and earnings management. Iteration 2 examines audit committee independence in the same manner as iteration1,with substantively similar results to those reported.Iteration 3 attempts to refine the measure of independence by removing those non-executive directors with related party transactions.As a result of inadequate disclosures,our sample is reduced to 420 firms.Our results are qualitatively similar to those reported for model 1,with board independence significant at p=0.050.However,the measure of audit committee

independence for model 2(a majority of independent directors on the committee)is not significant in this iteration.

We also examine the sensitivity of audit committee meetings(ACMEET)and audit committee size(ACSIZE)to specific cut-offs.First,we substitute ACMEET with a dummy variable taking the value of 1 if the audit committee met at least twice during the financial year,and 0 otherwise.We then repeat the analysis with three meetings per year as the cut-off.The coefficients are consistent with the original models.We also apply a similar dummy variable to ACSIZE,taking a value of 1 if the audit committee is comprised of at least three directors and 0 otherwise.However,the results are not sensitive to this cut-off point.

Final tests of robustness pertain to industry classification.To address the co ncern raised in Wells(2002)that the estimation of discretionary accruals for‘Gold’firms is potentially biased,because of the nature of their operations,the main regression models are re-estimated in two ways.The first involves including a dummy variable, taking the value of one if the firm is classified in the GICS subindustry‘Gold’,and zero otherwise.The second approach involves eliminating all Gold firms from the sample.The findings from both approaches are qualitatively similar to the original results.

Our analysis focuses on absolute discretionary accruals as a proxy for earnings management.This measure is non-directional,capturing both upwards and downwards earnings management.Therefore,we conduct additional tests that focus only on upwards earnings management.First,we re-run our prior tests using signed discretionary accruals as the dependent variable.Although we obtain qualitatively similar results for the control variables,none of the corporate governance variables are statistically significant.

5.Conclusion

The significant negative relationship between earnings management and the presence of a board comprised of a majority of non-executive directors provides support for Hypothesis 1a.21 The findings do not support Hypothesis 1b concerning an association between an independent chairperson and earnings management.With respect to Hypothesis 2,which investigates the relation between the existence of an audit committee and specific audit committee characteristics and earnings management, none of the proposed variables are supported by model 1,where audit committee independence is measured as all committee members being non-executives.However,model 2 does find support for an association between an audit committee comprising

a majority of non-executives and a reduction in earnings management.22 Our additional analysis,using small increases in earnings as a possible measure of earnings management,finds a relation between the existence of an audit committee and the dependent variable.Neither Hypothesis 3 relating to the internal audit function nor

Hypothesis 4 relating to the choice of a Big 5 auditor are supported in our primary model or any of our additional testing. The results of the present study have implications for regulators

who are concerned to minimize opportunities for earnings management and to improve financial reporting quality.There are also implications for companies seeking to strengthen their corporate governance with respect to financial reporting.In particular,therewould appear to be scope for strengthening the effectiveness of audit committees and making greater use of internal audit as mechanisms to reduce earnings management.

The results and implications of the present study are subject to several limitations, most of which suggest the need for further research.Problems associated with the use of discretionary accruals as a measure of earnings management are well documented (Klein,2002a).The fact that our alternative measure,small increases in earnings, gives differing results might indicate that our measures are not good proxies for earnings management.A second limitation relates to the measures employed to test the strength of the internal governance mechanisms.A more refined classification of director independence might provide a more informative measure of board monitoring ability.Similarly,the present study is limited by the lack of suitable proxies to operationalize audit committee effectiveness.The proxies adopted in the present study,particularly audit committee size and the frequency of committee meetings, might not be powerful enough measures of audit committee effectiveness.Other characteristics such as the financial expertise of members,the existence of an audit committee charter or the number of meetings with the external auditor might be better measures of effectiveness.The internal audit measure also has limitations as we focus only on whether a company uses internal audit.A more refined measure could examine the status of internal audit within the firm,the role that the function plays in corporate governance and its interaction with the audit committee.While more detailed internal audit information would need to be obtained by survey,refinements to the other governance measures are likely to become more readily available as a result of CLERP 9 and the ASX best practice recommendations.