Audit committees and earnings management in Finnish listed firms

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School of Business | Master's thesis
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Abstract Managers’ engagement in managing firms’ earnings through accruals or real business activities decreases the informativeness of firm’s earnings releases. To increase the quality of financial statements law makers and regulators have issued a wide range of different rules, regulations and recommendations regarding accounting standards, but more and more emphasis has also been put on the corporate governance structures such as audit committees. The objective of this study was to determine whether audit committee existence and characteristics influence the level of earnings management in Finnish listed firms. The topic has been quite widely researched in the international setting, especially in the U.S, but not in Finland, which acts as the motivational background for this study. Based on previous literature on audit committees and earnings management six hypotheses were developed for this study. The scope of the first hypothesis was to study the effect of audit committee existence on earnings management while hypotheses 2 to 6 related to the effects of chosen audit committee characteristics: independence, activity, expertise, gender and size. The main sample of this study consist of firms listed on Nasdaq OMX Helsinki Stock Exchange between 2014 and 2016 and registered in Finland. The study was conducted running OLS regression to analyze the relationship between earnings management and audit committee existence and characteristics. Earnings management was proxied trough the dependent variable absolute discretionary accruals which is estimated using the Modified Jones model (1994). In contrast to previous studies no relationship between audit committee existence and the level of earnings management was found. Of the audit committee characteristics however, meeting frequency and financial expertise of the members was found to affect earnings management.
Thesis advisor
Niemi, Lasse
earnings management, audit committee, corporate governance, earnings quality, accruals
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