The effect of corporate governance and audit practices on reducing earnings management in the UK

Shen, Jia (2020) The effect of corporate governance and audit practices on reducing earnings management in the UK. [Dissertation (University of Nottingham only)]

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The study investigates earnings management of the UK listed companies and the role of corporate governance and audit in reducing earnings management. While top managers are supposed to act in the best interest of the shareholders and other stakeholders of the company, they have their own interests and as insiders they have more information about the company. This is known as the principal-agent problem that leads to agency costs, involving manipulation of the company financial statements, also known as ‘books cooking’ or ‘earnings management’. There were quite a number of corporate scandals leading to loss of shareholder value, as well as to other significant losses to the company stakeholders in the aftermath of earnings management. This study contributes towards decreasing the problem of earnings management by exploring how corporate governance and audit quality could contribute towards lower earnings management. For the purpose of the analysis, data on FTSE350 companies is used, including their historic financial statements information and also their board of directors’ data. Earnings management is proxied by discretionary accruals, which are changes in accruals that are not related to the extent of company operations. Regression analysis is then used to evaluate the effect of corporate governance and audit quality on earnings management.

Obtained results suggest negative relation between the size of the board and discretionary accruals, as well as negative relation between quality of audit and discretionary accruals. Also, the analysis suggests that among Big4 auditors not all audit companies deliver similar quality of the audit. The stronger negative impact on earnings management is evidenced for Deloitte and KMPG. Other relevant variables are those regarding negative impact of leverage on earnings management and positive effect of being part of FTSE100 on earnings management. Profitability and revenue growth might be contributing to higher discretionary accruals, while age has slight negative impact on it.

Item Type: Dissertation (University of Nottingham only)
Depositing User: Shen, Jia
Date Deposited: 14 Apr 2023 10:40
Last Modified: 14 Apr 2023 10:40

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