The Effect of Board Independency and Audit Quality on Earnings Management in Listed Companies in Tehran Stock Exchange

Document Type : Original Article

Authors

1 M.A. in Accounting, Mobarakeh Branch, Islamic Azad University, Mobarakeh, Isfahan, Iran

2 Assistant Professor of Accounting, Mobarakeh Branch, Islamic Azad University, Mobarakeh, Isfahan, Iran

Abstract

Prior studies document that accrual income plays a significant role in pricing process. Timing and mismatch problems between revenue and expenses and how to identify these items may disturb reliability and usefulness of accruals income. Managers are able to manipulate accrual items in order to report income consistent with generally accepted accounting principles but in their benefits. Prior studies show that audit industry specialization and independent non-executive directors may limit earnings management. Therefore, the aim of this study is to investigate the effect of audit industry specialization and board independency on earnings management. Consequently, 77 firms over the period of 1381-1392 were selected from the companies listed in Tehran Stock Exchange. This study uses a market share approach in order to identify audit industry specialization. In addition, board independency is the number of independent non-executive directors as reported in the companies’ annual report, divided by the total number of directors. Findings of this study show a negative and significant relationship between board independency and earnings management. In addition, there is a negative and significant relationship between audit industry specialization and earnings management. Finally, this study documents a negative and significant effect of the interaction term between board independency and audit industry specialization on earnings management.

Keywords

Journal of Iranian Accounting Review
Volume 3, Issue 10
June 2016
Pages 61-80

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