The Relationship between Audit Committee Characteristics and Earnings Management among Jordanian Listed Companies: Proposing Conceptual Framework

Abstract

In a capital market where financial reports are a key feature of communication with respect to public firms’ performance and financial position, as is well known, one of the objectives of a company’s corporate governance system is to ensure the quality of that company’s financial reporting. Accounting earnings are more reliable and of higher quality when managers’ opportunistic behavior is reduced using monitoring systems. One specific area of concern is the monitoring function of the audit committee on earnings management. This paper proposes a conceptual framework that investigates the role of audit committee characteristics (independence, size, activity, and financial expertise) on earnings management using a sample of all industrial companies listed on the Amman Stock Exchange (ASE). Evidence from prior studies suggested that audit committee takes over the board function to oversee the firm’s financial reporting process. The audit committee’s role vital in monitoring the company’s operation and internal control system with the aim of protecting the interest of the shareholders. In regards to earnings management, this paper views earnings management as opportunistic earnings. The current study argues that the firms with effective characteristics of audit committee are less likely to allow earnings management because opportunistic earning's cause uncertainty about the economic value of a firm.

Keywords: Audit committee characteristics, earnings management, financial reporting quality, Jordan.