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Effective audit committee, audit quality and earnings management

Author

Listed:
  • Inaam ZGARNI
  • Khmoussi HLIOUI
  • Fatma ZEHRI

Abstract

Purpose - – A steady stream of literature has examined relationships between audit committee effectiveness, audit quality and financial reporting quality. The purpose of this paper is to connect these various streams of research to provide an empirical evidence from an Arabic emergent country namely Tunisia. This study examines the role of audit committee effectiveness and audit quality on financial reporting quality particularly to mitigate the earnings management in the Tunisian companies before and after financial security law adoption. Design/methodology/approach - – The study uses ordinary least squares regression model to investigate the effect of audit committee characteristics, audit quality attributes and the interaction between these two overseeing mechanisms on earnings management for a sample of 29 non-financial listed Tunisian firms during the period 2001-2009. Findings - – The results document a substitute effect between the presence of Big Four auditor and effective audit committee in order to reduce the discretionary accruals before the enforcement of law no. 2005-96 dealing with the financial securities. The authors find a complementarity link between the score of audit committee’s effectiveness and auditor industry specialization’s to constrain earnings management. Finally, the findings show a complementary relation between audit committee’s effectiveness and audit tenure, after the passage of the law. Research limitations/implications - – This study shows the value of considering the institutional setting in governance research. This paper is restricted to firms in the Tunisia from 2001 to 2009. Future research should investigate this issue in other settings and periods. Practical implications - – This study is important to practitioner and academic literature, policy makers and professional accounting bodies as it shows that legislative reforms can enhance companies to adopt good governance practices in emerging countries. The results also give useful information to investors in examination the effect of audit committee characteristics and audit quality on earnings quality. Another interesting practical focus of this study is to assess how successful was the implementation of financial security law in improving audit transparency and support shareholder involvement in the audit process. Originality/value - – The results suggested that governance regulation is a substitute for strong governance mechanisms in both the pre- and post-law periods.

Suggested Citation

  • Inaam ZGARNI & Khmoussi HLIOUI & Fatma ZEHRI, 2016. "Effective audit committee, audit quality and earnings management," Journal of Accounting in Emerging Economies, Emerald Group Publishing Limited, vol. 6(2), pages 138-155, May.
  • Handle: RePEc:eme:jaeepp:jaee-09-2013-0048
    DOI: 10.1108/JAEE-09-2013-0048
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    Citations

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    Cited by:

    1. Sunday Azeita OKOUGHENU & Oluwasegun Temitayo ODUNSI, 2023. "Audit Quality And Earnings Quality Reporting Of Nigerian Listed Oil And Gas Companies: The Moderating Influence Of Audit Committee," Contemporary Economy Journal, Constantin Brancoveanu University, vol. 8(4), pages 65-75.
    2. Ahmad A. Toumeh & Sofri Yahya & Azlan Amran, 2023. "Surplus Free Cash Flow, Stock Market Segmentations and Earnings Management: The Moderating Role of Independent Audit Committee," Global Business Review, International Management Institute, vol. 24(6), pages 1353-1382, December.

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