Academic journal article Australasian Accounting Business & Finance Journal

The Audit Committee Characteristics and Earnings Quality: Evidence from Jordan

Academic journal article Australasian Accounting Business & Finance Journal

The Audit Committee Characteristics and Earnings Quality: Evidence from Jordan

Article excerpt


The aim of the paper is to investigate the relationship between audit committee characteristics and earnings management. Samples in the study included 50 industrial companies listed on the Amman Stock Exchange ASE. Two models were used to measure earnings quality: one which depends on earnings continuity as an indication of quality, and one which depends on the decrease of discretionary accruals of quality, using pooled data regression for the two tests (Ordinary Least Squares OLS and Binary Logit). The study found that there was an influence of some standard characteristics of audit committee on earnings quality.

Keywords: Audit Committee Characteristics; Earnings Quality; Amman Stock Exchange.

JEL Code: M40

(ProQuest: ... denotes formulae omitted.)

1. Introduction

Corporate governance has created significant changes in business environments in general, and in the accounting and auditing professions in particular. Interest in the role of audit committees has increased in the last few years because it is the tool of corporate governance, whose aim is to increase the questioning of the board of management and to increase the role of audit and its independence, after several financial failures of many local and international companies (Hamdan & Mushtaha 2011). During the last years, there was, as well, an increasing organisational interest in the role of the audit committee in preparing financial reports (Martnez & Fuentes 2007). The Wild (1994) study found that the credibility and fairness of financial reports issued by companies depends on the existence of an audit committee emerging from management councils of such companies, while Martnez and Fuentes (2007) found that an audit committee would be more active in the process of monitoring financial statements and limiting the differences between the management and the external auditor. This reduces the probability of the company receiving qualified opinions from the external auditor resulting from accounting errors or non-commitment to accounting standards.

Many countries and local and international vocational bodies now spend more effort to issue instructions and standards, which when adopted help restore credibility in the financial data declared. This also helps in activating the role of audit committees, which consolidates functioning and independence of the external auditor as an impartial party providing his opinion on the declared financial data fairly and objectively. One of these efforts is the recommendation of the Securities and Exchange Commission (SEC) and Exchange Commission, New York Stock Exchange (NYSE), and the National Association of Securities Dealers (NASDA), to form a Blue Ribbon Committee (BRC 1999) to be a natural reaction to the distortions in financial statements. These committees aimed to develop recommendations which help improve financial reports through consolidating their role. It also put down a series of qualities which should prevail in order to have an active audit committee. Such qualities include: size of committee, experience, financial knowledge of members, degree of their independence, and frequent meetings. In July 2002, the USA's Sarbanes-Oxley law was described by analysts to be the most significant and comprehensive American legislation since the forming of the SEC because of its impact on general companies and independent accountants. Some of the large reforms that the legislation included were the right of declaration, submission of financial reports by foreign general companies' corporate governance, and monitoring of accounting auditors. According to article 301 of the legislation, a special part was made stressing the duties and formation of an audit committee, in order to secure the safety and credibility of the report of the external auditor who might be subjected to managerial pressure. As for Jordan, much legislation supporting corporate governance was issued in order to regulate the work of audit committees in Jordanian companies. …

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