Does corporate governance influence earnings management? Evidence from Singapore

The industrial revolution followed by globalization and multi-nationalization of businesses has enhanced the need for best practices of corporate governance. This paper examines the influence of corporate governance practices on earnings management. Specifically, the core objective of this study is to test whether the roles of board of directors and other key committees influence Earnings Management (EM) through Discretionary Accruals (DAC). This study has analyzed the governance practices of 326 companies listed in the Singapore stock exchange by using the observations of two years. The structural model linking the corporate governance practices and EM through DAC has been tested using Lisrel 9.1 student version. The key findings of the study are: (1) the chances of recording discretionary accruals are high if the board size is big implying that higher control can lead to better management. These controls must come through appointment of more independent directors for Boards that are big; (2) board independence, segregation of duties between the CEO and chairman, sizes of the audit committee and nomination committee have significant positive influence on board size; (3) the nomination committee influences the remuneration committee directly implying that the motivation for recording discretionary accruals is higher leading to higher possibilities of earnings management; and (4) board size mediates the relationship between corporate governance practices (board independence, segregation of duties between CEO and chairman, audit committee size and nomination committee size) and EM through DAC implying that board size is crucial to effect better control. We accentuate that segregation of responsibilities between the remuneration committee and the nomination committee, when the Board size is big, will reduce earnings management through discretionary accruals. These governance practices will reduce the agony of stakeholders due to broken trust. The findings are pertinent to Asian countries where the institutional investors have a very small role to play. The onus of protecting the minority shareholders and foreign investors are in the hands of insiders. This requires effective corporate governance practices. The regulatory bodies must ensure that the practices of good governance are strictly adhered to.