| This study examines the association between characteristics of corporate audit committees and measures of quarterly corporate earnings management. Recent accounting problems surrounding prominent companies such as Enron Corporation and WorldCom have raised new concerns about the role of corporate governance, and the audit committee in particular, in the financial reporting process. At the same time, curbing corporate earnings management is another policy goal (Levitt 1998). Audit committees are expected to play an important role in monitoring managers' tendencies to manage their earnings numbers. What constitutes an effective audit committee in preventing earnings management is now a critical question for future policy changes.; The current study extends prior work in two ways. First, this study uses a measure of earnings management that is based on quarterly rather than annual discretionary accruals. Previous work in the auditing area has relied entirely on annual discretionary accruals (Klein 2000; Parker 2000; Chtourou, Bedard, and Courteau 2001; Xie, Davidson, and DaDalt 2001). However, fraudulent financial reporting often begins with quarterly misstatements (Beasley, Carcello, and Hermanson 1999), suggesting that if audit committees are to be effective, they should focus on managements' quarterly financial statements. Several non-auditing studies suggest that management may engage in quarterly, as opposed to annual, earnings management (e.g., Han and Wang 1998; Rangan 1998). Annual accruals do not show the effects of earnings management behavior in interim quarters if they are adjusted for in the fourth quarter of a given year. |
