Corporate Governance and Earnings Management
The corporate companies have been under strict surveillance so that the stakeholder’s interest can be protected. This is mainly in the context of regulations and rules in the corporate industry. The business world has been stunned by the various scandals in the late 90s and the early start of 20 century. The big companies that were involved in such scandals were WorldCom, HealthSouth and Enron (Agrawal and Cooper 2017). These major scandals have affected the financials and management of different corporate organisations all over the world. Globalization has enabled free trade in the market, so investment in developing countries and developed countries have increased significantly. The importance of financial reporting has increased significantly due to the increase in the number of investors and the amount of investment made in the market.
Therefore, in order to protect the interest of stakeholders in different countries external auditing and corporate governance have been emphasised. The stock exchanges and financial governing bodies have instructed managing activities and monitoring the unhealthy practices in the organisation (Aguilera et al. 2015). Empirical studies on financial reporting and corporate governance have thrown light on the fact that earning management can be used by the different firm to paint a picture that is favourable. Earning management can be used to mask the real image and provide vague information to the stakeholders.
Therefore, accountant and regulators all over the world have been worried about this grey area of accounting which increases the risk factor for the organisations in the corporate industry. Researches in accounting show that low earnings reporting is associated with low content of the financial reporting which implies manipulation from the management (Agrawal and Cooper 2017). The stakeholders have been demanding effective reporting of the financial data so that the true equity value will be reflected. Stakeholders consider this information to be the benchmark for extrapolating returns in the future.
This study will identify the impact of corporate governance and external auditing on earning management. The different components of corporate governance and external auditing will be identified in this research along with the elements of earning management. The impact of the components of corporate governance and external auditing on the elements of earning management will be examined. The research will not take any particular organization or country and the generalized impact of corporate governance and external auditing will be analysed. The study will identify the gap in literature in different researches to address those issues that still needs to be addressed.
External Auditing and Earnings Management
The objective of this research are as follows:
- To identify the different elements of corporate governance
- To evaluate the different elements of external auditing
- To investigate the impact of corporate governance and external auditing on earning management
- To recommend suitable strategies for effective management of earning
Research question
- What are the different elements of corporate governance?
- What are the different elements of external auditing?
- What are the impacts of corporate governance and external auditing on earning management?
Research hypothesis
H0: There is no impacts of corporate governance and external auditing on earning management
H1: There is impacts of corporate governance and external auditing on earning management
This part of the study will critically evaluate the three factors which are corporate governance, external auditing and earnings management. As stated by Miko and Kamardin (2015), corporate governance covers a wide perspective that explains the traditions, ethics, policies, sequential steps and bodies that will used to control, supervise and direct the companies. Corporate governance is based on values and ethics which is used for governing and taking follow ups within the organization. According to Iraya, Mwangi and Muchoki (2015), corporate governance is aimed at maximizing the capacity of gaining more profit within the organization which means profit maximization or maximization of the stakeholder value.
As opined by Katmon and Al Farooque (2017), the objective of corporate governance is providing opportunity to the management in effectively dealing with the risk factors so that the organization can be treaded to long term success. However, the basic problem that is faced by the government is conflict in interest between the organizational stakeholders and the managers. In context to the agency, it can be exclaimed that corporate governance has a positive effect on mitigating the issues faced by the government. The different elements of corporate governance are board size, board activities and ownership structure. The foundation of corporate management is laid out by effectively implementing corporate governance within the organization.
As stated by Lin, Hutchinson and Percy (2015), external auditing is a mode of reducing the level of risk faced by the investors. External auditing facilities in reducing the information asymmetry and protecting the interest of the different stakeholders by reducing the chances of material mismanagement. The stakeholders rely on the external auditors for providing them with assurance that the financial statements are not misleading so that they can accurate calculate the potential equity in the future. Therefore, the role of audit committee is very crucial in providing support to the stakeholders by developing effective financial reporting.
According to the Iraya, Mwangi and Muchoki (2015), the manipulation of the financial statement of the organization in order to portray a false financial report is known as earnings management. This is basically done to deceive the partners and the stakeholders within a firm. Therefore, the activity of developing false number to deceive the stakeholders is known as earnings management. This activities lead to fraud and can be considered as a crime. Jizi et al. (2014) states that earnings management means disclosure management where financial report is purposefully intervened for private gains. Therefore, external auditing and corporate governance is very important in stopping such activities within the organization. Moreover, the financial reporting in different countries is different due to the different standards they use. Therefore, corporate governance is essential for proper monitoring of the financial activities within the organization. There is significant impact of external auditing and corporate governance on earnings management which is discussed in upcoming sections.
Research Methodology
Agrawal and Cooper (2017) stated that opportunistic earnings management practice indicates less reliable accounting earnings which do not indicate performance of companies. These researchers also stated that the stock market regulators along with investor protection agencies are concerned regarding earnings management. Aguilera et at (2015) indicated that this is particularly after decline of numerous large companies in the current years and they have also responded through improving corporate governance along with independence of external auditors. These researchers also revealed that one of the important monitoring systems is corporate governance and its major objective is not just to directly enhance corporate performance. It is also focused on resolving the agency problem through associating management interests with the shareholder interests. According to Gaynor et al. (2016) corporate governance as well as external audit therefore supports investors through associating the objectives of management with shareholders objectives. This can further facilitate in improving the reliability of financial information as well as the integrity of financial reporting process. He, Pittman, Rui and Wu (2017) elaborated that the auditors have increased responsibility for reliable financial reporting at the time the role of audit committee is basically ceremonial and the symbolic efforts of committee might result in efficient management questionnaire. These researchers also indicated that monitoring offered by an independent as well as high quality external auditor decreased capability of the management in managing the earnings. Supporting such view, Gaynor et al. (2016) revealed that supporting corporate governance effectiveness can deal with the monotoring system and among them corporate governance decreases ability of management to deal with earnings.
Corporate governance codes within the countries are observed to go through an extended process of amendment along with enhancing the form of the current code. It is also gathered from analysis of the previous literature that the process of earnings management is associated with corporate governance. This includes attributes including commitment, composition of nomination as well as remuneration committees and gender diversity. He, Pittman, Rui and Wu (2017) indicated that earnings management takes place with effect from external auditing at the time when the managers exercise their discretion over accounting numbers devoid of restrictions. Such type of discretion might be in the form of firm value maximization. Agency theory also indicates that the corporate governance in alignment with the external auditing improves interest convergence among the shareholders as well as the managers. Agrawal and Cooper (2017) stated that based on same, earnings management is deemed to be measured employing the magnitude of discretionary accruals that is anticipated through performance matched discretionary accruals. These researchers also stated that the literature on corporate governance and the external auditing offers views regarding evidence of role of board of directors as internal devices against CEO opportunism. It is also revealed that the stock based aspects of CEO are related with reserving practices at theme control is maintained over cross effect among such components and the existence of big four auditors. In order to decrease the opportunistic behavior certain monitoring mechanism are used by the independent directors, rating agencies and the external auditors.
The framework within which research is conducted is known as the research methodology. The methodology section will comprise of the research design, philosophy, approaches, data collection methods, data analysis methods, sampling, research validity, reliability and ethical aspect of research (Taylor, Bogdan and DeVault 2015). The methodology should be appropriate to facilitate in conducting the investigation. The research methodology is selected based on the nature and purpose of the study. The current research is objective in view so the study will use quasi-experimentation to validate the existing theories. The research methodology can be fundamental and applied based on the nature of the study. In this current study, applied research will be conducted as it addresses real-life issues faced by the corporate world and the result of the findings will be used to develop a suitable recommendation that could be used by the corporate organisations mitigate similar issues faced by them (Lewis 2015).
Research philosophy defines the different methods that should be used for collecting and analysing data. There are four types of research philosophies, and they are realism, positivism, interpretivism and pragmatism (Flick 2015). In this current study, positivism has been selected as the methodology of research as the study aims to use the survey as a method of data collection. Positivism philosophy is based on observations where observed facts are developed into meaningful data. The scope of the research in positivism philosophy is limited to data collection and interpretation. These quantifiable data can be analysed statistically, but the data is not at all predictable due to the inclusion of human experiences in the study.
Research approach defines the method of analysing the collected data in the study. The two different types of research approaches are deductive approach and inductive approach. The distinction between the deductive and the inductive method can be made by the significance of hypothesis in the study (Csikszentmihalyi and Wolfe 2014). The deductive method is used to prove the theories that have been discussed in the literature review and the conceptual framework. The inductive approach used for developing new structures and theories. In this current study, the deductive approach has been selected as the approach as it will facilitate in improving the observational scope of the study.
Research design has a different meaning to different researches. It can be defined as the research plan to address the research question in the study. It can also be stated as the method of choosing between qualitative and quantitative analysis. Research design has been divided into conclusive and exploratory research (Meyers, L.S., Gamst, G. and Guarino, A.J., 2016). The explorative research is used to provide a general insight into a situation while conclusive research offers deep and specific ideas that will facilitate in taking action. Conclusive research can be further divided into descriptive and causal research. In this current study, causal research will be used to understand the cause and effect between the among the research variables.
Data collection is the procedure of gathering information that is relevant to the study and can be used for providing answers to the research question. There are two types of data collections, one is primary, and the other is secondary. In this current study, primary data collection method and consists of a single research design. The primary data collection method will consist of developing a close-ended questionnaire which will be asked of the employees of different organisations (Lu and Wang 2017). The study will collect quantitative data and will analyse the data using statistical techniques. The study will obtain the mean, mode and median and frequency of responses of the respondents. The research will also use regression analysis for identifying the relationship between the independent and dependent variable. Ms Excel is the statistical tool that will be used for analysing the collected data.
Sampling is the standard for selecting certain members from the population to be a part of the study. Some populations are huge and difficult to work with, so sampling is a statistical technique developed to obtain small population from the overall population in the study. When the population size is enormous, there is no other alternative than to select element or cases from the population that will represent the overall population. In primary data collection, there are stages involved in the sampling process such as defining the target population, determining the size of the sample and selecting the appropriate frame for sampling. There are two types of sampling methods, one is probabilistic sampling, and other is non-probabilistic sampling (Palinkas et al. 2015). In this current study, probabilistic sampling will be used where simple random sampling will be used to select population. The study will initially collect data from 300 respondents and sampling will be used to reduce the sample size to 100 respondents. The respondents will consist of accountants and financial advisors working in different organisations in the United Kingdom.
Reliability is the capability of the research model to replicate the result of the study using different sets of data. Reliability is a crucial aspect in the study as the success of the research depends in it. Validity is the degree to which the prescribed methods have been followed in the study. The study will initially consist of conducting a pilot study where the questionnaire will be sent to 10 respondent via emails to check whether the desired the answers can be achieved or not. The questionnaire will be amended based on the results of the pilot study (Csikszentmihalyi and Larson 2014). The study will also use test rated reliability where different datasets will be collected to check whether same is obtained or not. Similarly, content validity will be used to check the appropriateness of the data that has been collected.
The study will follow the data privacy act so the anonymity of the respondents can be maintained and their personal data will not be used for any other purpose in the study. The participants of the research will be treated with dignity and participants should be kept away from harm of any kind (Wallace and Sheldon 2015). The study will not force the respondents to take part in the survey, and they will be made aware of the objective of the research.
References
Agrawal, A. and Cooper, T., 2017. Corporate governance consequences of accounting scandals: Evidence from top management, CFO and auditor turnover. Quarterly Journal of Finance, 7(01), p.1650014.
Agrawal, A. and Cooper, T., 2017. Corporate governance consequences of accounting scandals: Evidence from top management, CFO and auditor turnover. Quarterly Journal of Finance, 7(01), p.1650014.
Aguilera, R.V., Desender, K., Bednar, M.K. and Lee, J.H., 2015. Connecting the dots: Bringing external corporate governance into the corporate governance puzzle. The Academy of Management Annals, 9(1), pp.483-573.
Aguilera, R.V., Desender, K., Bednar, M.K. and Lee, J.H., 2015. Connecting the dots: Bringing external corporate governance into the corporate governance puzzle. The Academy of Management Annals, 9(1), pp.483-573.
Csikszentmihalyi, M. and Larson, R., 2014. Validity and reliability of the experience-sampling method. In Flow and the foundations of positive psychology (pp. 35-54). Springer, Dordrecht.
Csikszentmihalyi, M. and Wolfe, R., 2014. New conceptions and research approaches to creativity: Implications of a systems perspective for creativity in education. In The systems model of creativity (pp. 161-184). Springer, Dordrecht.
Flick, U., 2015. Introducing research methodology: A beginner’s guide to doing a research project. Sage.
Gaynor, L.M., Kelton, A.S., Mercer, M. and Yohn, T.L., 2016. Understanding the relation between financial reporting quality and audit quality. Auditing: A Journal of Practice & Theory, 35(4), pp.1-22.
He, X., Pittman, J.A., Rui, O.M. and Wu, D., 2017. Do social ties between external auditors and audit committee members affect audit quality?. The Accounting Review, 92(5), pp.61-87.
Iraya, C., Mwangi, M. and Muchoki, G.W., 2015. The effect of corporate governance practices on earnings management of companies listed at the Nairobi securities exchange. European Scientific Journal, ESJ, 11(1).
Jizi, M.I., Salama, A., Dixon, R. and Stratling, R., 2014. Corporate governance and corporate social responsibility disclosure: Evidence from the US banking sector. Journal of Business Ethics, 125(4), pp.601-615.
Katmon, N. and Al Farooque, O., 2017. Exploring the impact of internal corporate governance on the relation between disclosure quality and earnings management in the UK listed companies. Journal of Business Ethics, 142(2), pp.345-367.
Lewis, S., 2015. Qualitative inquiry and research design: Choosing among five approaches. Health promotion practice, 16(4), pp.473-475.
Lin, T., Hutchinson, M. and Percy, M., 2015. Earnings management and the role of the audit committee: an investigation of the influence of cross-listing and government officials on the audit committee. Journal of Management & Governance, 19(1), pp.197-227.
Lu, B. and Wang, S., 2017. Data Collection and Analysis. In Container Port Production and Management (pp. 31-71). Springer, Singapore.
Meyers, L.S., Gamst, G. and Guarino, A.J., 2016. Applied multivariate research: Design and interpretation. Sage publications.
Miko, N.U. and Kamardin, H., 2015. Impact of audit committee and audit quality on preventing earnings management in the pre-and post-Nigerian corporate governance code 2011. Procedia-Social and Behavioral Sciences, 172, pp.651-657.
Palinkas, L.A., Horwitz, S.M., Green, C.A., Wisdom, J.P., Duan, N. and Hoagwood, K., 2015. Purposeful sampling for qualitative data collection and analysis in mixed method implementation research. Administration and Policy in Mental Health and Mental Health Services Research, 42(5), pp.533-544.
Taylor, S.J., Bogdan, R. and DeVault, M., 2015. Introduction to qualitative research methods: A guidebook and resource. John Wiley & Sons.
Wallace, M. and Sheldon, N., 2015. Business research ethics: Participant observer perspectives. Journal of Business Ethics, 128(2), pp.267-277
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
