Audit committee chairman characteristics and earnings management: The influence of family chairman

Abstract

Purpose

The purpose of this paper is to examine the influence of the characteristics of audit committee chairman (ACC) (tenure, age, gender, ethnicity, accounting expertise and directorship) on earnings management (EM) practices.

Design/methodology/approach

The Jones model and modified Jones model by Dechow et al. (1995) were used to determine the discretionary accruals (DA) of 288 Malaysian listed firms with lowest positive earnings for the years 2013‒2015.

Findings

The results of the ordinary least squares regression indicate that only tenure, gender and ethnicity of the ACC are associated with DA. A further test was conducted by dividing firms into two groups: firms whose boards are chaired by a family member and firms whose boards are chaired by a non-family member. The results reveal that it is possible for firms whose boards are chaired by family members to cause the corporate governance (CG) mechanisms, particularly the audit committee, to lose their effectiveness in overcoming the EM problem. In addition, robustness tests were conducted by using panel data regression, where the results were found to be similar to the original regression results.

Originality/value

This study alerts policymakers, firms and their stakeholders, as well as researchers, regarding the importance of having an independent board chairman, who has no relationship with any directors or major shareholders, as this may hinder the effectiveness of CG mechanisms in curbing EM, especially in emerging countries, such as Malaysia, where it is very difficult to stop members of the family from becoming board directors.

Citation

Al-Absy, M.S.M., Ku Ismail, K.N.I. and Chandren, S. (2019), "Audit committee chairman characteristics and earnings management: The influence of family chairman", Asia-Pacific Journal of Business Administration, Vol. 11 No. 4, pp. 339-370. https://doi.org/10.1108/APJBA-10-2018-0188