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Internal governance structures and earnings management
Accounting and Finance (2005)
  • Ryan Davidson, University of Queensland
  • Jenny Goodwin-Stewart, University of Queensland
  • Pamela Kent, University of Queensland
This paper investigates the role of a firm’s internal governance structure in constraining earnings management. It is hypothesized that the practice of earnings management is systematically related to the strength of internal corporate governance mechanisms, including the board of directors, the audit committee, the internal audit function and the choice of external auditor. Based on a broad cross-sectional sample of 434 listed Australian firms, for the financial year ending in 2000, a majority of non-executive directors on the board and on the audit committee are found to be significantly associated with a lower likelihood of earnings management, as measured by the absolute level of discretionary accruals. The voluntary establishment of an internal audit function and the choice of auditor are not significantly related to a reduction in the level of discretionary accruals. Our additional analysis, using small increases in earnings as a measure of earnings management, also found a negative association between this measure and the existence of an audit committee.
  • Audit committee; Corporate governance; Earnings management; Internal audit function
Publication Date
January 1, 2005
Citation Information
Ryan Davidson, Jenny Goodwin-Stewart and Pamela Kent. "Internal governance structures and earnings management" Accounting and Finance (2005)
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