Earnings management and the role of the audit committee: an investigation of the influence of cross-listing and government officials on the audit committee
This paper extends research on the corporate governance practices of transitional economies by examining whether the ability of the audit committee to constrain earnings management in Chinese firms is associated with the listing environment and the presence of government officials on the audit committee. Despite considerable regulatory reforms by the Chinese Securities Regulatory Commission, there remain incentives for Chinese firms to manage earnings. However, government initiatives to encourage domestic firms to cross-list on the Hong Kong Stock Exchange are accompanied by improved governance. We find that the expertise and independence of the audit committee for cross-listed (CL) Chinese firms are associated with lower abnormal accruals, our measure of earnings management. Both domestic only listed firms and CL Chinese firms appoint government officials as independent members on the audit committee. However, due to the political connection between government officials and the controlling shareholder (the State), these appointments can severely mitigate audit committee independence. Subsequently, we find a significant and positive association between audit committee independence and experience and earnings management when there are government officials on the audit committee.
KeywordsAudit committee Earnings management Corporate governance Cross-listing
JEL ClassificationM41 M42 M48 G34
First we would like to thank the editor for his assistance and the two anonymous reviewers for their comments and guidance. We would also like to thank Lawrence Gordon, Ferdinand Gul, Tom Smith, Stephen Cox, David Tan, the participants at the 2009 Asian Finance Association International Conference, Brisbane Australia and the participants at the 2009 Accounting and Finance Association of Australia and New Zealand Conference, Adelaide, Australia for their helpful comments.
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