Study On The Effectiveness Of Financial Experts As Independent Directors On The Suppression Of Earnings Management

Independent director system originated from the common law countries such asEngland and America, was originally set up to solve the problems of "insider control"and "large shareholders expropriate the interests of small shareholders" in the listingcorporations, prevent the accounting fraud and irregularities and other issues, improveaccounting information quality. Since2001, China began to introduce and improve theindependent director system whose the original intention as well as the final goal is toplay a more supervisory role and protect the interests of small shareholders. However,we will find that, there are still many incidents of financial irregularities, and evensome independent directors have also been punished. So, whether the independentdirector system really do not play a supervisory role?Based on the principal-agent theory, asymmetric information theory, humancapital theory and signaling theory, the paper analyzes the responsibilities of China’sindependent directors and discusses the appointment situation of the financial expertsas independent directors. Eventually, using the2003-2012panel data from A shares ofChina’s listing corporation, the paper measures whether financial experts asindependent directors can effectively suppress earnings management of listedcompanies and further explores what types of financial experts can most effectivelysuppress earnings management.The result shows that: the financial experts as independent directors can suppressearnings management of listed companies; the non-school financial experts caneffectively suppress earnings management of listed companies, but others cannot; thesenior accountants and the certified public accountants can effectively suppressearnings management and the before play a more effective role. Overall, theindependent director system in China still needs further improvem ent: responsibilitiesof the independent directors need further clarity; qualification of independentdirectors need to be more stringent definition; training of independent directors needto be strengthened from the practical experiences; relevant environment to senioraccountant as an independent director needs to be further standardized.