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Audit committee quality and cosmetic accounting: an examination in an emerging market

Audit committee quality and cosmetic accounting: an examination in an emerging market The literature on the influence of audit committees (AC) and cosmetic accounting (CA) is scarce. AC plays a unique and vital role in boosting earnings reliability in countries with weaker application of accounting standards or weaker legal protection for investors. AC, therefore, are considered to be one of the essential tools available to directors in supervising management decisions regarding financial reporting. This paper aims to examine the influence of AC characteristics (ACC) on CA and how this relationship is moderated by the audit fee.Design/methodology/approachThis study used probit regression to analyze 1,218 firm-year observations of listed companies in Tehran Stock Exchange from 2014 to 2020.FindingsThe results show that AC financial accounting expertise, AC independence, female AC membership and AC tenure were negatively related to CA. The negative relationship is highly pronounced when a firm incurs higher audit fees, and audit fees moderate the relationship between ACC and CA. Results for the robustness checks show that only AC independence was significant, and the results of other characteristics were not significant.Research limitations/implicationsThis research was conducted in an Iranian setting where the formation of ACs is on the verge of regulation; therefore, the data used for the study only contains the seven-year period of ACs’ statutory activity. In addition, a lack of consensus on the precise measures of an AC’s effectiveness could be considered as a restrictive factor.Originality/valueThe findings provide an initial insight into the effect AC on CA and moderating effect of audit fee on the relationship between ACC and CA. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Corporate Governance Emerald Publishing

Audit committee quality and cosmetic accounting: an examination in an emerging market

Daryaei, Abbas Ali; Balani, Afshin; Fattahi, Yasin
Corporate Governance , Volume 24 (5): 26 – Aug 20, 2024
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References (140)

Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
1472-0701
eISSN
1472-0701
DOI
10.1108/cg-05-2023-0181
Publisher site
See Article on Publisher Site

Abstract

The literature on the influence of audit committees (AC) and cosmetic accounting (CA) is scarce. AC plays a unique and vital role in boosting earnings reliability in countries with weaker application of accounting standards or weaker legal protection for investors. AC, therefore, are considered to be one of the essential tools available to directors in supervising management decisions regarding financial reporting. This paper aims to examine the influence of AC characteristics (ACC) on CA and how this relationship is moderated by the audit fee.Design/methodology/approachThis study used probit regression to analyze 1,218 firm-year observations of listed companies in Tehran Stock Exchange from 2014 to 2020.FindingsThe results show that AC financial accounting expertise, AC independence, female AC membership and AC tenure were negatively related to CA. The negative relationship is highly pronounced when a firm incurs higher audit fees, and audit fees moderate the relationship between ACC and CA. Results for the robustness checks show that only AC independence was significant, and the results of other characteristics were not significant.Research limitations/implicationsThis research was conducted in an Iranian setting where the formation of ACs is on the verge of regulation; therefore, the data used for the study only contains the seven-year period of ACs’ statutory activity. In addition, a lack of consensus on the precise measures of an AC’s effectiveness could be considered as a restrictive factor.Originality/valueThe findings provide an initial insight into the effect AC on CA and moderating effect of audit fee on the relationship between ACC and CA.

Journal

Corporate Governance – Emerald Publishing

Published: Aug 20, 2024

Keywords: Audit committee; Cosmetic accounting; Audit fee; Iran

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