THE EFFECT OF BOARD AND AUDIT COMMITTEE INDEPENDENCE ON EARNINGS MANAGEMENT IN SPAIN

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Abstract

This paper investigates the role played by the board and the audit committee as a mean to improve the quality of financial statements’ information in Spanish firms. We use abnormal accruals as a measure of earnings management and therefore as a proxy of the quality of financial statements. Additionally, we analyse from an agency theory perspective whether the ownership structure affects the managerial incentives to manipulate the firms’ results. Results show that the board and audit committee independence mitigates accounting manipulation practices. However, we find no evidence that the ownership structure affects the extent of corporate earnings management. We have also found that financial leverage is an incentive for the managers to manipulate accounting figures. Our findings are in line with the Spanish authorities’ recommendations to foment the formation of independent mechanisms of control.

Keywords: Board of Directors; Audit Committee; Ownership Structure; Earnings Management, Abnormal Accruals

How to cite this paper: Fernandez Mendez, C. F., & Arrondo García, R. A. (2007). The effect of board and audit committee independence on earnings management in Spain [Special issue]. Corporate Ownership & Control, 5(1-4), 372-381. https://doi.org/10.22495/cocv5i1c4p5