Audit Committee Characteristics and Earnings Management: The Case of Bahrain

Abstract

This study examines the effectiveness of some audit committee (AC) characteristics to monitor management behavior with the respect to their incentives to manage earnings. Bahraini listed companies on Bahrain Bursa for the year 2012 to 2014 have been investigated to analyze the relationship between AC characteristics and earnings management. The AC characteristics examined are AC independence, AC size, AC meetings and AC financial experts. Multivariate regression modelis used to examine the relationship between earnings managementasdependent variable and AC characteristics as independent variables and other firm-specific attributes, as control variables. As a small developing market, Bahrain’s unique business environment and context offer a good opportunity and provides a useful setting for examining the effectiveness of AC characteristics in detecting and preventing earnings management practices. The results show that discretionary accruals as a proxy for earnings management is negatively associated with AC size and AC financial experts, but positively associated audit firm size as control variable. However, the results do not show a significant relationship between AC independence, AC meetings, company size, leverage and earnings management. This study extends the literature on the monitoring function of the AC on earnings management, and contributes geographically to the financial reporting process and earnings management literatures by analyzing data from an emerging market and providing useful information for the corporations, accounting profession and the regulators on the effective practice of ACs.