Board Monitoring And Earnings Management-Do Outside Directors Constrain Abnormal Accruals?

Boards of directors are widely believed to play an important role in corporate governance; it is the highest internal control mechanism responsible for monitoring the action of top management. China introduced outside directors from abroad in 2001. Despite a lack of distinction between the responsibilities of inside directors and outside directors, the independence of outside directors could improve the board monitoring.Existing studies examined the board monitoring influences financial reporting process. Using a figure of speech that the financial information is a flower growing from the corporate governance. There is two methods influence the quality of financial information: financial statement fraud and earnings management. We examine whether the incidence of earnings management depends on board monitoring.We focus on three dimensions of board monitoring: board composition,board size and the leadship of board. This paper documents a significant cross-sectional association between the board monitoring and earnings management activity, using a large sample of Chinese firms. The analysis is based on a sample of 2758 firma-year observation over the period 2002-2004. First we report descriptive statistics for the explanatory variables, such as reported earnings, characteristic of board and earnings management.The conclusion can be arrived as followed: we report evidence of significant negative association between earnings management and the proportion of outside board members; earnings management is positively related to the position of CEO and chairperson are combined; the increase of board size can not decrease earnings management; the anticipation of smoothing earnings is strong in china. In a word, our results provide the first large-sample evidence that effective boards constrain earnings management.