IMPACT OF AUDIT QUALITY AND CORPORATE GOVERNANCE ON EARNINGS MANAGEMENT; CASE OF UK PUBLIC LISTED COMPANIES
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Saudi Digital Library
Abstract
Earnings management is used as a tool by the managers to detect the unsuspecting shareholders to the financial fraud. As the managers have discretion in these accounting options, some unsuspected managers capitalise on the chance to deceive people on the appearance of the financial reports. Over the years, some companies in UK have collapsed whereas others have been put under receivership due to misappropriation of funds. This has resulted to unemployment, revenue loss, and loss of shareholders wealth to the government. Thus, the study strived to examine the impact of audit quality and corporate governance on earnings management among UK listed corporations. In the exploration, the variables that helped to attain the goals of the study were the independence of audit committee, board activity, board size, firm size, discretionary accruals, ownership concentration, and board independence. The exploration covered 40 companies listed at London stock exchange. The random sampling was the appropriate sampling technique for the exploration. The data was collected from FTSE database and annual reports of the companies that covered from April 2020 to December 2020. The findings showed that board size had the largest beta. The study affirmed that the independence of audit committee and board size were the variables of corporate governance that improved the earnings management of the UK listed corporations. The recommendations of the exploration was that stakeholders of the listed companies should choose the appropriate boards with sufficient members to offer an insight role that would reduce the earnings management, the shareholders should guarantee that the audit committees of their listed companies are effectively constituted to have the independent directors that would bring the experience from outside that would reduce earnings management. The exploration was restrained to a small sample size of 40listed corporations. This comparatively small sample size led to generalization of findings. The areas of further research for the study are carried out linking audit quality and corporate governance with other proxies other than earnings management and attributes of audit quality linked with earnings management.