Board Monitoring and Earning Management

7/31/2019 Board Monitoring and Earning Management

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Board monitoring and earning management;

do outside director,s influence abnormal

accrual,s?

Submitted to;

Sir Hammad Mirza

Submitted by;

Adeel umer

11-013

MBA (1.5) FINANCE

UNIVERSITY OF SARGODHA


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IntroductionWhat is board monitoring?

We focus on two aspect of board monitoring

1. The role of outside board director,s

Have a financial background Hold senior mgt position in other large corporation.

2.Audit commitee

What is earning management?

Manipulation of operating accrual,s is likekly to be a favoredinstrument for oppurtunistic earning management becaz they

generally have no direct cash flow consequence and relativly

difficult to detect

A more costly method is to manipulate earning is by changing theway the firm does business. The firm could for example

Boost reported profit by cutting back on advertising and researchand development.

There are many more possibilites. Selling asset it wouldotherwise keep.. Cutting back on staff development and

essential equipment maintinance..


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The list is almost endless. All these actions are costly in the sensethat they have negative affect on the firm,s future cash flow,s.

Such manipultion reduce the value of the firm and as such aremore costly then mere accounting manipulation. We thereforeexpect that the manipulation of accrual,s will be the instrument

choosen frist, before mgt resort,s to more costly ones involving

real changes in investment and operating activities.we focus on

only accounting manipulations.

We use abnormal accruals as our proxy for earning management.Audit committee

audit committee has the specific responsibility for the production

of financial statement and usually for communicating with the

external auditor.

Audit committee are not mandatory in the uk firms but listed

companies are encouraged to form them.

Why focus on outside director,s

1.Outside directors contribute towards the integrity of financialstatements.

2.Audit comitee has no direct impact on earning management.3.Audit comitees are voulentry in uk.4.Outside directors role is to resolve agency problem between

managers and shareholders through the creation of appropriateemployement contract.

Two reason for outside directors

1.Have a financial background2.Hold senior management position in other large corporation


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Data and sample

Our test are conducted using data for UK listed firms with fiscalyear end,s between JUNE 30 1993 AND MAY31 1996.

The number of firms 1993,94,95 were 620,651,657 respectfully. The maximum no of observation for any given industory-year

combination is 56 while the mean estimation portfolio size is

21..

Board data were hand collected using the following samplingproceedureFor each year we selected the largest 1000

companies based on the market capitalization at december 31 as

reported in the london share price database.

We than excluded all financial firm,s becaz they have differentaccrual processes.we also excluded all regulated utilities becaz ofdiffrences in their incentive,s and oppurtunities to manage

earning,s.

THE PRICE WATERHOUSE CORPORATE REGISTER is usedas the source of board composition data and firm,s annual report,s

are used to identify the presence or absence of an audit

comitee

The final sample consist of 1271 firm year,s The final sample comprises of 559 firm,s The distribution of firm,s accros sample year is as follow.


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Board Monitoring and Earning Management