Audit committee quality and cosmetic accounting: an examination in an emerging market
Abstract
Purpose
The literature on the influence of audit committees (AC) and cosmetic accounting (CA) is scarce. AC plays a unique and vital role in boosting earnings reliability in countries with weaker application of accounting standards or weaker legal protection for investors. AC, therefore, are considered to be one of the essential tools available to directors in supervising management decisions regarding financial reporting. This paper aims to examine the influence of AC characteristics (ACC) on CA and how this relationship is moderated by the audit fee.
Design/methodology/approach
This study used probit regression to analyze 1,218 firm-year observations of listed companies in Tehran Stock Exchange from 2014 to 2020.
Findings
The results show that AC financial accounting expertise, AC independence, female AC membership and AC tenure were negatively related to CA. The negative relationship is highly pronounced when a firm incurs higher audit fees, and audit fees moderate the relationship between ACC and CA. Results for the robustness checks show that only AC independence was significant, and the results of other characteristics were not significant.
Research limitations/implications
This research was conducted in an Iranian setting where the formation of ACs is on the verge of regulation; therefore, the data used for the study only contains the seven-year period of ACs’ statutory activity. In addition, a lack of consensus on the precise measures of an AC’s effectiveness could be considered as a restrictive factor.
Originality/value
The findings provide an initial insight into the effect AC on CA and moderating effect of audit fee on the relationship between ACC and CA.
Keywords
Acknowledgements
The authors are grateful to the three anonymous reviewers for their time and efforts. The authors would also like to thank the Journal editor-in-chief, Professor Eweje Gabriel, for his support and assistance.
Disclosure statement: No potential conflict of interest was reported by the authors.
Citation
Daryaei, A.A., Balani, A. and Fattahi, Y. (2024), "Audit committee quality and cosmetic accounting: an examination in an emerging market", Corporate Governance, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/CG-05-2023-0181
Publisher
:Emerald Publishing Limited
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