Board characteristics, external auditing quality and earnings management Evidence from the Tunisian banks

Board characteristics, external auditing quality and earnings management Evidence from the... Purpose – The purpose of this paper is to examine the impact of board characteristics and external audit quality on earnings management among major Tunisian banks over the period 2003‐2007. Design/methodology/approach – Multivariate regressions are employed to test the effect of board structure and external audit quality on discretionary provisions as a proxy for earnings management. Findings – Results indicate that among the characteristics of the board, CEO duality is associated with higher levels of discretionary provisions. However, the presence of directors affiliated to the largest shareholder tends to constrain earnings management practices. The results reveal also that a co‐audit belonging to the BIG 4 provides incentives to manage earnings while the capacity of the external auditor to disclose reservations impacts negatively the manager's discretion. Practical implications – First, it is not desirable to appoint a co‐audit both belonging to the BIG 4. Second, the presence of affiliated directors reduces the discretionary practices except in cases where directors are affiliated to families. In this case, banks should strengthen the presence of independent directors. Finally, the delineation of the leeway left in the Tunisian accounting standards would provide more transparent financial information. Originality/value – This study contributes to the literature on governance and its impact on earnings management among Tunisian banks by introducing two variables that have not been tested before which are affiliated directors and co‐audit. The paper will be of value to banks willing to comply with the Governance Good Practice Guide adopted recently in Tunisia. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Accounting in Emerging Economies Emerald Publishing

Board characteristics, external auditing quality and earnings management Evidence from the Tunisian banks

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Publisher
Emerald Publishing
Copyright
Copyright © 2014 Emerald Group Publishing Limited. All rights reserved.
ISSN
2042-1168
DOI
10.1108/JAEE-10-2011-0046
Publisher site
See Article on Publisher Site

Abstract

Purpose – The purpose of this paper is to examine the impact of board characteristics and external audit quality on earnings management among major Tunisian banks over the period 2003‐2007. Design/methodology/approach – Multivariate regressions are employed to test the effect of board structure and external audit quality on discretionary provisions as a proxy for earnings management. Findings – Results indicate that among the characteristics of the board, CEO duality is associated with higher levels of discretionary provisions. However, the presence of directors affiliated to the largest shareholder tends to constrain earnings management practices. The results reveal also that a co‐audit belonging to the BIG 4 provides incentives to manage earnings while the capacity of the external auditor to disclose reservations impacts negatively the manager's discretion. Practical implications – First, it is not desirable to appoint a co‐audit both belonging to the BIG 4. Second, the presence of affiliated directors reduces the discretionary practices except in cases where directors are affiliated to families. In this case, banks should strengthen the presence of independent directors. Finally, the delineation of the leeway left in the Tunisian accounting standards would provide more transparent financial information. Originality/value – This study contributes to the literature on governance and its impact on earnings management among Tunisian banks by introducing two variables that have not been tested before which are affiliated directors and co‐audit. The paper will be of value to banks willing to comply with the Governance Good Practice Guide adopted recently in Tunisia.

Journal

Journal of Accounting in Emerging EconomiesEmerald Publishing

Published: Feb 25, 2014

Keywords: Earnings management; Governance; Banks; Tunisia; Affiliated directors; Co‐audit

References

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