Board Independence, Audit Quality and Earnings Management: Evidence from Egypt

What is it about?

Using a unique dataset for Egyptian firms, we investigate the relationship between board independence, audit quality and earnings management. We test whether firm-level corporate governance provisions matter in an emerging market setting characterised by weak legal enforcement and inadequate external discipline by the market for corporate control. Our results cast doubt on the notion that a higher ratio of nonexecutive members is associated with lower earnings management. We find that the effect of board independence on earnings management practices is contingent on the levels of ownership held by executive directors and large shareholders, as well as the composition of audit committee. In addition, the results are consistent with the view that high-quality auditors are effective in reducing earnings management.

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Why is it important?

few studies have directly addressed the relationship in emerging countries that are characterised by both highly concentrated ownership and weaker investor protection. This is important because we extend earlier research on earnings management by investigating the potential roles of board independence and audit quality as crucial governance mechanisms in controlling opportunistic earnings management practices in emerging countries like Egypt.

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