The role of audit committees in decreasing earnings management: Korean evidence

Abstract

The several accounting scandals that have occurred recently in the USA suggest the importance of well-functioning audit committees. This study examines how the characteristics of audit committees – independence, competency and activity – are related to earnings management. The data used in the analyses are collected from the Korean stock market during the period 2000-2001. The empirical results demonstrate that the independence and competency of the audit committee are associated with the earnings management of a firm. Specifically, the committee members' shareholdings are positively associated with earnings management, while the presence of professors or the employees of financial institutions on the committee is negatively associated with earnings management. However, the activity measure of the committee is not significantly related to earnings management. These results suggest several important implications for regulatory bodies on the composition of audit committees.