The Earnings Management Of A Firm Dependent & Independent Variables - 3025 Words

The Earnings' Management Of A Firm: Dependent & Independent Variables (Research Paper Sample) Content: How the Household Ownership Controls the Association between the Financial Knowledge of the Audit Committee and the Earnings’ Management Name Institutional Affiliation How the Household Ownership Controls the Association between the Financial Knowledge of the Audit Committee and the Earnings’ Management Abstract The current study offers an empirical evidence on the way the household’s ownership controls the association that exists between the financial knowledge of the audit committee and the earnings’ management based on a sample of 44 manufacturing companies that are registered with the Amman Stock Exchange (ASE) from 2012 to 2016. From the results of the study, there is a negative relationship between the financial knowledge of the audit committee and the earnings’ management. The results also show that a financial professional on the committee of audit plays an important duty of alleviating the earnings management. In addition, the study shows a positive relationship influence of the financial knowledge of the audit committee and the household ownership regulation on the earnings management when the financial profess ional of the audit committee works together with the household ownership. This relationship suggests that the rise in the number of the members of the audit committee with financial knowledge to curb earnings management, is unlikely to become significant if the organizations are in the control of the family. The findings have implications on the decision makers in Jordan because they emphasize on how to enhance sound company governance principles and try to alleviate the companies’ earnings management in Jordan. Keywords: financial knowledge, Earnings management, Jordan, Audit committee, Family Ownership. Introduction The audit committee is among the key components in the company’s governance structure that helps to monitor and control the management (Arun, Almahrog, & Aribi, 2015). Experts consider the audit committee as the board of managements’ sub-committee that enables the official communication between the external auditor, the internal monitoring system, and the board. In addition, the experts consider the audit committee as the most essential sub-committee of any firm's management board. According to Ugrin, Odom, and Ott (2014), the audit committee guards the business's financial integrity and can enhance the financial reporting quality through reviews of the financial reports as they represent the board (Azeez, 2015). The regulators have become interested to know the efficiency of the audit committees in monitoring the financial reporting of companies while responding to the key accounting scandals in America. According to Chen and Komal (2018), among the impor tant developments meant to enhance the efficiency of the quality of audit committees concentrates on the audit committee members’ financial knowledge, with several studies declaring that the audit committee financial expertise (ACFE) is among the essential factors in audit committee’s efficiency. Chen and Komal asserts that, in 1999, there was a recommendation from the BRC that all the audit committee members ought to be financially knowledgeable with an accounting or associated knowledge of financial management. In addition, the Sarbanes-Oxley Act (2002) requires that the audit committee should have a member who is a professional in finance. Furthermore, earlier research works assert that the audit committee members’ financial knowledge plays a critical part in limiting the earnings’ management practices. According to Zalata et al. (2018), many countries now require some audit committee members to possess the financial knowledge. Earlier research works show that the styles of ownership differ considerably across the nations especially the Asian countries with many publicly traded companies concentrating and mainly regulated a few people and relatives (Holderness, 2017). According to Leung, Richardson, and Jaggi (2014), it is evident that agency problems among the shareholders who are both majority and minority may dominate the companies that families control, hence, have a great motivation to steal the firms’ properties as they seek individual interests by sacrificing the minority investors. Consequently, involving the companies’ governance instruments such as the audit committee financial expertise (ACFE) to offer the optimum monitoring is required such that to reduce the agency problems arising in the companies families control and lessen the EM practices in order to safeguard the wealth of the minority stockholders from being stolen. The current study’s findings will add value to the prevailing works, since , several Arab businesses are those that the families own and control. Therefore, various nations that have exclusive characteristics of the ownership concentration, legal environment, and household dealings can use the results of this study (Martin, Campbell, & Gomez-Mejia 2016). Additionally, the current research adds to the literature by offering the understanding and new insights to examine the association between the audit committee financial expertise (ACFE) and EM that the families’ ownership control (FOC) influences in the context of Jordan. The current study is organized in numerous sections as follows: literature review and hypothesis development on ACFE, FOC, and EM. Then, follows the methodology and sample data. Lastly, a summary and discussion of the results and discussion, and conclusions. Literature Review and Hypothesis Development Effect of FOC on the Association among the ACFE and EM According to Lin et al. (2015), the audit committee's major duty is oversee ing the companies’ procedures of auditing and financial reporting and, therefore, the members ought to have adequate know-how in order to comprehend the matters that the audit committees discuss or investigate. Numerous research works have found positive association among the efficiency of the audit committees and the financial knowledge of the members especially their abilities to make sure that there is a good quality procedure of financial reporting and complying with the associated guidelines. Earlier studies have offered sufficient proof of the significance of the audit committee financial expertise in limiting the EM practices. According to Gaynor, Kelton, Mercer, and Yohn (2016), the financial knowledge of the audit committees improves the probability to detect the material misstatements, which the audit committee gets informed about and is corrections done in time. Abbott, Daugherty, Parker, and Peters (2016) assert that the number of the members of the audit committe e who have the accounting knowledge is positively related to the financial reporting quality of enhancing the financial reports’ value. In addition, Gonzalez and Garcia-Meca (2014) assert that the EM is minimized with the members of the audit committee that include a member or more who have the experience in financial or corporate issues. Sun, Lan, and Liu (2014) found out that corporations with audit committee members that are famous for having the competence, experience, and financial knowledge rarely practice the EM as likened to other Malaysian businesses. Soliman and Ragab (2014), found similar findings Egyptian firms while Elijah and Ayemere (2015) found similar results in Nigerian companies. Furthermore, Kankanamge (2016), found similar findings in Sri Lanka while Zalata et al. (2018) found the same in America. The experimental evidence and the regulatory concern in Jordan recommended that to enhance the audit committee’s decisions and performance requires the p ossession of the appropriate know-how and understanding, largely in auditing and accounting. The Jordanian Corporate Governance Code of 2009 (JCGC) calls for all the audit committees to hire one or more audit committee members with the appropriate and current financial know-how. As a result, the audit committees, which have high financial know-how degrees are most likely to limit EM in Jordan. According to Hamdan et al. (2013) the audit committee financial expertise, which is among other features of the audit committees of the companies that are registered with the ASE, limits the EM practices to enhance the reported earnings’ quality. Abdullah, Percy, and Stewart (2015), assert that in spite of the evidence of the efficiency of the audit committee financial expertise in discouraging the EM practices, earlier studies submit that the kind of ownership structure greatly affects the company’s governance mechanisms’ efficiency. Abdullatif et al. (2015) findings conf irmed the same suggestions where the household ownership in Jordan dominates, hence, restricting the audit committees to do their responsibilities. Ndofor, Wesley, and Priem (2015) asserts that the agency problems in companies are influential EM practices’ sources mostly in the developing marketplaces, which have highly concentrated ownership. In such markets, the agency conflict is normally between the conflicting interests of the minority and controlling stockholders instead of the problem being between the company owners and the executives in the ownership situations, which are dispersed. Nevertheless, the agency conflicts are very severe in the companies owned by families because the owners might have both the capability and a motivation to get individual benefits meant for the minority stockholders, hence, increasing the level of the EM practices. Therefore, although there is an agreement that concerns the efficiency of the audit committee financial expertise in limiting the EM practices, FOC might influence the efficacy of the audit committee in the sense that the audit committee might become not fully efficient in alleviating the EM. According to Saleem Salem Alzoubi (2016), there is no study that has evaluated the influence of the including FOC on the relationship between the audit committee financial...