the influence of the audit committee’s composition and expertise on earnings quality in the...

8/18/2019 THE INFLUENCE OF THE AUDIT COMMITTEE’S COMPOSITION AND EXPERTISE ON EARNINGS QUALITY IN THE EURO…

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ABSTRACT

M% master4s thesis focuses on the transformation of the au it committeestructure regar ing the au it committee irectors4 com0osition an e50ertise

re6uirements that is ,eing 0ro0ose in the au it reform ,% the Euro0ean+ommission 72!118* I use ata on 2!- Euro0ean 0u,lic interest entities s0reaacross 19 Euro0ean Union mem,er states to stu % the relationshi0 among au itcommittee characteristics :ith earnings 6ualit%; 0ro5ie ,% ,enchmar)inga00roaches* I e; more acti e an em0lo%e more


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TABLE OF CONTENT S

I INTRODUCTION 1

II THEORETICAL BAC GROUND !

AUDIT COMMITTEES !EARNINGS QUALITY "

III RELE#ANT LITERATURE 1$

EMPIRICAL LITERATURE USING E XTERNAL INDICATORS OF EARNINGS MISSTATEMENTS1!

EMPIRICAL LITERATURE USING P ROPERTIES OF EARNINGS 1!

# HYPOTHESIS DE#ELOPMENT 1"

# RESEARCH METHODOLOGY %1

S AMPLE & D ATA %1M ETHODOLOGY %'

#I RESULTS %(

THE TREND IN EU AUDIT COMMITTEE CHARACTERISTICS %(THE RELATION AMONG THE AUDIT COMMITTEE CHARACTERISTICS AND EARNINGS QUALITY PROXIES ) %"ADDITIONAL TESTS ''

#II CONCLUSION '!

LIMITATION '(F UTURE R ESEARCH '*

APPENDIX '+

REFERENCES $$


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I INTRODUCTION

The


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their sta)ehol ers :ith a higher 6ualit% of


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focus on 0ro0erties of earnings in or er to i entif% a lin) to au it committeestructures* A,normal accruals",ase measurements are commonl% use ,%em0irical researchers to measure earnings 6ualit% an the e i ence from thestu ies consistentl% suggests a 0ositi e association ,et:een au it committee

monitoring 0erformance an earnings 6ualit% 7Decho: et al* 2!1!8*

For m% master4s thesis I :ill use ,enchmar)ing a00roaches to measure earnings6ualit%* The earnings 6ualit% 0ro5ies use in m% mo els ca0ture the li)elihoo of a oi ing negati e earnings sur0rises an the li)elihoo of small earningsincreases* $% utili>ing these uncommonl% use a00roaches m% master4s thesis:ill contri,ute in e5ten ing the literature stu %ing au it committeecharacteristics an earnings 6ualit%* I e50ect to


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higher earnings 6ualit%* Furthermore; the e i ence suggests that also thefre6uenc% in :hich the au it committee meets an larger au it committeessigni


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II THEORETICAL BAC GROUND

In this section I :ill iscuss the rele ant ,ac)groun surroun ing au itcommittee an earnings 6ualit%*

AUDIT +OMMITTEES

A 0u,lic"interest entit%4s au it committee is the in e0en ent go ernance ,o %in charge :ith the o ersight of the entit%4s


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current au it committee4s uties; res0onsi,ilities an structure re6uirementsare Directi es 7Directi e 2!!K .# E+8 from the Euro0ean +ommission* Directi esesta,lish a common goal for all Euro0ean Union mem,er statesH ho:e er e er%Euro0ean Union mem,er state is res0onsi,le for achie ing the goals of the

Directi e in their o:n :a%* This im0lies that the Euro0ean Union mem,er statescan choose to go further in a ing more uties; res0onsi,ilities an orstructure re6uirements than those mentione in the irecti es in or er for au itcommittees to ,e more e@ecti e in monitoring the entit%4s


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In short the Euro0ean +ommission is intro ucing :ith the E+ 2!11 moreregulations on the e50ertise an in e0en ence re6uirements for the au itcommittee irectors in or er to im0ro e au it committee 0erformance* In the0ast the $lue Ri,,on +ommittee 7$R+ 1///8 has in estigate esira,le au it

committee structures in or er for the 0u,lic"interest entities in the UniteStates of America to im0ro e their


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larger au it committee can monitor ,etter ue to its a,ilit% to istri,ute tas)san or res0onsi,ilities to more irectors; ,ut :ith an increases in si>e the au itcommittee ma% lose 0erformance ue to higher ecision ma)ings ancoor ination costs 7 ermac) 1//K8*

The literature on au it committee 0erformance has i enti


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ha e ,een in ol e in frau s an scan als are less li)el% to ,e em0lo%e onanother su0er isor% or e5ecuti e ,oar ue to the amage one to the

irector4s re0utation* This re0utation e@ect increases the au it committeeirector4s 0erformance to ,e more e@ecti e in monitoring the 0u,lic"interest

entit%4s


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• Au it committee si>eH• Au it committee meetings fre6uenc%*

The main moti e :h% characteristics such as e6uit% o:nershi0; total ,oarseats; other committee seats an social ties :ill not ,e e5amine is ue to thesigni


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shoul limit management4s o00ortunit% or a,ilit% to inPuence the entit%4saccounting s%stem in or er to manage earnings =* ence the focus of em0iricalstu ies on au it committee structures as eterminant of earnings 6ualit% has,een on 0ro0erties of earnings an e5ternal in icators of earnings

misstatements* Lhile accrual ,ase measurements / are the t%0ical a00roachuse ,% 0rior em0irical researchers 7 lein 2!!2H ie et al* 2!!#H +arcello et al*2!!KH ooghiemstra 2!!=8; the focus has also ,een on ,enchmar)inga00roaches 7Vafeas 2!!-8 an e5ternal in icators of earnings misstatements7+arcello G Neal 2!!!H A,,ot et al* 2!!.H aramanou G Vafeas 2!!-8 to

etermine the relation among au it committee characteristics an earnings6ualit%* The e i ence from em0irical literature consistentl% suggests that au itcommittee 0erformance is 0ositi el% associate :ith earnings 6ualit%*

The focus of m% master4s thesis :ill ,e on 0u,lic interest entities in i@erentEuro0ean Union mem,er states; therefore it :ill ,e er% iQcult to measureearnings 6ualit% using e5ternal in icators of earnings misstatementsa00roaches ue to the fact that the gathering of ata ma% ta)e a signiing ,enchmar)ing a00roaches instea of the most commonl% use accrual ,ase measurements a00roach* $ecause

there is no earnings 6ualit% measurement that is e


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$urgstahler G Eames 2!!K8 i entiero income le el* The small earnings change ,enchmar)focuses on 0u,lic interest entities that are a oi ing negati e earnings change inor er to re0ort a marginal earnings gro:th for all re0orting 0erio s an anal%>es

entities aroun the >ero earnings change le el* The anal%sts4 forecasts,enchmar) anal%>es 0u,lic interest entities that ust meet or ,eat the forecast,% a fe: cents an anal%>es entities aroun the >ero earnings sur0rise le el*

The a oi ance of ,a ne:s in the form of small losses; small earnings ecline ornegati e earnings sur0rises causes an irregularit% in the earnings istri,utionaroun >ero* This irregularit% in the earnings istri,ution can ,e i entiero income; >ero earnings change; ornegati e earnings sur0risesH 7ii8 an unusuall% lo: fre6uenc% of small negati e

income 7losses8; small earnings ecline or small negati e earnings sur0risesHan 7iii8 an unusuall% high fre6uenc% of small 0ositi e income 70ro


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conse6uences of ,a ne:s 7lo:er share 0rices8 :ill ha e negati e e@ects ontheir re0utation an com0ensation*

As I ha e alrea % mentione in the 0rior 0aragra0hs; the theor% ,ehin thea00roaches suggests that the management of 0u,lic"interest entities :ho area oi ing ,a ne:s can use t:o mechanisms that ecrease earnings 6ualit%&mani0ulating earnings u0:ar s or gui ing anal%sts4 forecasts o:n:ar s*Mani0ulating earnings u0:ar s is one in the form of real4 o0erating actions 1!

an or ,oo))ee0ing4 actions 11 * The u0:ar s mani0ulation of earnings isiQcult for management ue to the constant su0er ision of au itors; ,oar of irectors an or au it committee that :ill 6uestion their actions if ou,tful

accounting 0ractices are isco ere * Furthermore; it is unli)el% thatmanagement is a,le to use earnings mani0ulation; in the form of a,normalaccruals; to increase earnings u0:ar s in or er to a oi re0orting ,a ne:s ine er% re0orting 0erio ,ecause accruals must re erse in the follo:ing 0erio s*Jui ing anal%sts4 forecasts o:n:ar s re6uires management to a ust the0u,lic interest entit%4s initial 0erformance e50ectation o:n:ar s to a more

,eata,le4 le el* o:e er setting an initial lo:er 0erformance e50ectation isalso costl% for the 0u,lic interest entit% gi en that this :ill ,e rePecte as lo:ershare 0rice for a long time s0an* For either of the a,o e mentione mechanismsto ,e ,ene


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that income ta5es an s0ecial items o not cause 0u,lic interest entities tomo e from small loss 0osition to small 0ro


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irregularit% 0resent for 0u,lic interest entities is more isi,le :hen anal%>inganal%sts4 forecasts*

M% master4s thesis :ill therefore focus on the anal%sts4 forecasts ,enchmar)inga00roach* To test if EU 0u,lic interest entities are mani0ulating their earningsu0:ar s to a oi re0orting ,a ne:s to their sta)ehol ers I :ill also test thesam0le using the small earnings change ,enchmar)ing a00roach to etermine if the results are consistent :ith the anal%sts4 forecasts ,enchmar)ing results*


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III RELE#ANT LITERATURE

In this Section I :ill iscuss the 0rior em0irical literature relate to au itcommittee 0erformance an earnings 6ualit%* After re ie:ing se eral em0irical

stu ies in estigating the e@ect of irectors4 an au it committees4characteristics as eterminants of earnings 6ualit%; I can conclu e that the 0riorem0irical literature4s focus has ,een more on au it committee characteristicssuch as in e0en ence; meeting fre6uenc% an o:nershi0 as eterminants of earnings 6ualit%* Lhile the literature oes focus to some e5tent on irector4se50ertise as eterminants; to m% )no:le ge there is no em0irical stu %in estigating the e@ects of the au it committee com0osition an e50ertisere6uirements transformation that is ,eing 0ro0ose ,% the Euro0ean

+ommission in the 0ro0ose au it reform 7E+ 2!118*

Lhat se0arates m% master4s thesis from other em0irical stu ies is that au itcommittee irector 6ualif%ing as


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literate irectors 1K an meeting fre6uenc% ha e a 0ositi e relationshi0 :ithearnings 6ualit%* (rior em0irical literature stu %ing the relationshi0 among au itcommittee structures an earnings 6ualit% can ,e i i e into t:o ,roa 0ro5%categories of earnings 6ualit%& 718 e5ternal in icators of earnings misstatements

an 728 0ro0erties of earnings*

1K Financial literate irectors can ,e e


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EM(IRI+A3 3ITERATURE USINJ E TERNA3 INDI+ATORS OF EARNINJSMISSTATEMENTS

I ha e re ie:e em0irical stu ies from +arcello G Neal 72!!!8; A,,ot; (ar)er G

(eters 72!!.8 an aramanou G Vafeas 72!!-8 :ho focuse on e5ternalin icators of earnings misstatements to measure earnings 6ualit%* +arcello GNeal 72!!!8 in estigate :hether the com0osition of


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First I :ill iscuss the em0irical stu ies 7 lein 2!!2H ie et al* 2!!#H +arcello etal* 2!!KH ooghiemstra 2!!=8 using accrual ,ase measurements to 0ro5% forearnings 6ualit%* The o, ecti es from 0rior em0irical stu ies in estigate theim0act of i@erent au it committee characteristics4 com,inations 19 on earnings

mani0ulation 7 lein 2!!2H ie et al* 2!!#H ooghiemstra et al* 2!!=8*Furthermore; the earnings 6ualit% measurements for the a,o e mentioneem0irical stu ies ar% from 'ones 71//18 mo el; mo i


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em0irical literature using accrual ,ase measurements an e5ternal in icatorsof earnings misstatements as earnings 6ualit% measurements*

Lhat se0arates m% master4s thesis from Vafeas4 72!!-8 stu % is the i@erentclassieof the au it committee is not a reasona,le 0ro5% to etermine au it committee0erformance ue to the tra e"o@s 7non"linear e@ect8 that large au it committeesi>e has on the au it committee4s 0erformance; :hich is consistent :ith the


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au it committee meets is associate :ith higher earnings 6ualit%; em0iricale i ence 7 ie et al* 2!!#H ooghiemstra et al* 2!!=8 suggests that meetingfre6uenc% is associate :ith lo:er le els of earnings mani0ulation*


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E,hi-it %)

(anel A* Em0irical Stu ies focusing on au it committee irector characteristics as eterminantsof earnings 6ualit%

Authors O, ecti e of stu % Sam0le (ro5% +haracteristics

(ro0erties of earnings

Accrual ,ase measurements&

lein 72!!28

Im0act of au itcommittee s

e@ects on EM

SG(-!!entities listein 1//2 1//# 'ones 71//18 Mo el

ie; Da i sonG DaDalt72!!#8

Im0act of au itcommittee s

e@ects on EM

11! SG( -!!liste entities

in 1//K 'ones 71//18 Mo el

+arcello; leinG Neil 72!!K8

Im0act of au itcommittee


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$lue Ri,,on+ommittee7$R+8 71///8

E5amination of au it committee

structures toim0ro e e an e50ertise

I n e 0 e n

e n c e

M e e

t i n g

F r e 6 u e n c %

S i > e

E 5 0 e r t

i s e

McDaniel;Martin GMaines 72!!28

Im0act of


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# HYPOTHESIS DE#ELOPMENT

The Euro0ean +ommission has 0ro0ose in 2!11 to reform the au it 0rofessionin or er to re"esta,lish trust an mar)et con< ence in the Euro0ean Union* Not

onl% :ill the au it reform intro uce a ne: cha0ter in ho: au itors :ill 0erformtheir tas)s in the Euro0ean Union mem,er states; ,ut the au it reform :ill also,ring changes to the au it committee structure* The goal of m% master4s thesisis to 0ro i e e i ence :hether the ne: re6uirements 0ro0ose ,% the Euro0ean+ommission :ill im0ro e the au it committee4s monitoring ca0a,ilities* Thene: structure :ill re6uire that au it committees consist full% out of in e0en ent

irectors of :hich at least one irector has to ha e )no:le ge an e50eriencein au iting an another irector that has to ha e )no:le ge an e50erience in

either accounting or au iting* I e50ect that the 0ro0ose changes to thecom0osition an e50ertise re6uirements :ill im0ro e the au it committee4smonitoring ca0a,ilities ,ecause e i ence from em0irical literature 7 ie et al*2!!#H Vafeas 2!!-H +arcello et al* 2!!K8 suggests that au it committeestructures :ith irectors :ho are in e0en ent an ha e accounting au itinge50ertise are associate :ith higher earnings 6ualit%*

The relation ,et:een the au it committee characteristics an earnings 6ualit%:ill ,e e5amine using t:o ,enchmar)ing a00roaches& the li)elihoo of 0u,lic"

interest entities meeting or ,arel% ,eating anal%sts4 earnings forecasts7negati e earnings sur0rise a oi ance8 an the li)elihoo of a 0u,lic"interestentit% re0orting small earnings increases* The literature suggests that 0u,lic"interest entities that are meeting or ,arel% ,eating anal%sts4 earnings forecastor re0orting small earnings increases are li)el% a,le to o so ,% mani0ulatingtheir earnings u0:ar s an or gui ing anal%sts4 forecasts o:n:ar s; thus0ro i ing their sta)ehol ers :ith a ero

is o,ser a,le :hen anal%>ing the sam0le using the small earnings change,enchmar)ing a00roach; ,ut is more isi,le :hen anal%>ing anal%sts4 earningsforecasts* The au it committee is res0onsi,le in monitoring the


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MAIN HYPOTHESIS .H1/0 +he li#elihood of E public-interest entitiesmeetin% or barely beatin% analysts4 earnin%s forecasts or reportin% smallearnin%s increases $ill be ne%ati!ely associated $ith audit committees that arecurrently meetin% the proposed European Commission4s audit committeecomposition and e pertise re.uirements'

$esi es the au it committee com0osition an e50ertise re6uirements that ha e,een the focus of the 0ro0ose au it reform 7E+ 2!118; there are other au itcommittee characteristics that can inPuence the monitoring ca0a,ilities of theau it committee* (rior em0irical literature on au it committee 0erformance

7 lein 2!!2H ie et al* 2!!#H Vafeas 2!!-H ooghiemstra et al* 2!!=8 hasi enti


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# RESEARCH METHODOLOGY

This section contains the a00roach use to test the h%0otheses* First; I :illescri,e the sam0le G ata an thereafter the metho olog% a00lie to o,tain

the main results of the master4s thesis*

SAM(3E G DATA

M% initial sam0le consist out of EU 0u,lic interest entities that are liste on the Thom0son One 1= 7T18 ata,ase :ith a turn o er greater than - ,illion US ollarsin %ear"en 2!11* Financial institutions 7JI+ co es .!!!8 an utilit% com0anies7JI+ co e --1!8 are e5clu e from the initial sam0le ,ecause the s0ecial

regulator% en ironment 0resent in these in ustries inPuences the 0u,lic"interestentit%4s cor0orate go ernance an as a result the role of the au it committee*

From Thom0son One 7T18 I :as a,le to collect an initial sam0le of 2#! 0u,lic"interest entities s0rea across 1/ Euro0ean Union mem,er states* I o,taine


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in 2!!= an 1/# 0u,lic interest entities in 2!11 :ith au it committeecharacteristics ata* A ta,le of the sam0le construction is 0resente in e5hi,it#; :hile a list of the 0u,lic interest entities that re0resent the 2!!= an 2!11sam0le can ,e foun in the a00en i5*

1/ Some (u,lic interest entities4 annual re0orts contain incom0lete information on their au it committee such as& nos0eci


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E5hi,it #* Sam0le

+riteria Eliminate

Sam0le

1 All Entities 1;21/;-2#

% +ountr%& AUT; $JR; $E3; + E; + (; + E; DEU; DN ; ES(; EST;FIN; FRA; JR+; UN; IR3; ITA; 3VA; 3TU; 3U ; M3T; N3D; NOR;(O3; (RT; ROU; SVN; SV G SLE

7/=-;#2.8

2#.;1//

' Sales USD -!!! 72##;2!/8

//!

$ JI+S 1!; 1-; 2!; 2-; #!; #-; .- G -! 79K!8 2#!

! Financial ata a aila,le on DATASTREAM 7=8 222

( Au it +ommittee ata a aila,le on 0u,lic interest entit% sannual re0ort or :e,site

7198 2!-

Due to the changes in au it committee com0osition 7e*g* ne: irectors8 a shorttime"s0an is chosen to in estigate :hether the com0osition an e50ertise of theau it committee in the %ear 2!!= an 2!11 :ill a@ect earnings 6ualit%* Thus; Ie5ten the sam0le 0erio one annual re0orting 0erio for:ar of 2!!= an oneannual re0orting 0erio 0rior of 2!11; creating a four %ear sam0le 0erio from2!!= to 2!11* I ha e not collecte au it committee characteristics ata for thee5ten e 0erio ; ,ut em0lo%e the same au it committee characteristics forthe %ear 2!!/ as the %ear 2!!=; an li)e:ise for the %ear 2!1! an 2!11*

The ata for the au it committee characteristics; such as in e0en enc% ane50ertise; :as o,taine ,% searching for the irector4s cre entials on the 0u,licinterest entit%4s annual re0ort :e,site or on $loom,erg4s $usiness Lee):e,site in esting*,usiness:ee)*com * As suggeste ,% the 0ro0ose Euro0ean+ommission4s au it reform 7E+2!118; au it committee irectors classif% forEUFE :hen the% are in e0en ent an either ha e e50erience an )no:le ge inau iting 7EUFE"Au iting8 or accounting 7EUFE"Accounting8* Directors classif%ingfor the EUFE"Au iting must ha e hel a 0osition as senior sta@; manager or0artner in the au iting or assurance e0artment of an accounting


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entit% an hol s a +hartere Accountant; +erti


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MET ODO3OJ

I :ill em0lo% t:o logistic regression mo els to ca0ture the relationshi0 ,et:eenthe au it committee characteristics an earnings 6ualit%*

The mo el em0lo%e for m% master4s thesis is the follo:ing&

( 71 lo: earnings 6ualit%8 W X 1 In e0en ent umm% X 2 YEUFE X # A+si>e X. A+ meetings X - Au it reform umm% Z 1 3oss umm% Z 2 3itigation ris)

umm%

Z# Entit% si>e 7MV8 Z . Entit% gro:th Z - +JV S+ORE [718

DEPENDENT #ARIABLES

The earnings 6ualit% 0ro5% use as e0en ent aria,le ca0tures the li)elihooof 0u,lic interest entities a oi ing earnings sur0rises an the li)elihoo of smallearnings increases 7scale ,% ,eginning of the %ear mar)et alue of commone6uit%8*

The earnings 6ualit% 0ro5% is set to 1 for 0u,lic interest entities that are li)el%a oi ing earnings sur0rises or small earnings increases; an ! other:ise* (u,licinterest entities a oi earnings sur0rises if the% meet or ,eat the meananal%sts4 forecast ,% t:o cents; measure as the latest forecast 0rior to theannouncement of 6uarterl% earnings* A small earnings increase is a 0ositi eearnings change 70ro


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to ,e hel onsite are gi en one full 0oint an meetings that are hel o@site 7ahoc meetings such as 0hone conferences8 are gi en half 0oint ' $% a ing u0these 0oints a 0u,lic"interest entit% :ill ha e their total au it committeemeeting fre6uenc% score* The reason o@site meetings are re:ar e :ith a lo:er

score is ue to the 0ro ucti it% that can ,e achie e :ith such meeting incom0arison :ith an onsite meeting* The au it reform umm% in icates :hetherthe 0u,lic interest entit% is meeting the Euro0ean +ommission4s 0ro0ose au itcommittee com0osition an e50ertise re6uirements 7E+ 2!118 an is set to 1 forau it committees that are full% 71!!?8 in e0en ent an has either t:o

irectors :ith )no:le ge an e50erience in au iting or one irector :ith)no:le ge an e50erience in accounting an another in au iting; an !other:ise*

CONTROL #ARIABLES

The t:o logistic regression mo els em0lo%e to ca0ture the relationshi0,et:een the au it committee characteristics an earnings 6ualit% :ill alsoinclu e < e control aria,les* Follo:ing the research mo els from Matsumoto72!!28 an Vafeas 72!!-8 I :ill inclu e the follo:ing < e control aria,les to0ro5% for losses; high litigation ris) in ustries; si>e; gro:th o00ortunities an

the le el of the 0u,lic interest entit%4s cor0orate go ernance structure in themo el& a loss umm%; a litigation ris) umm%; entit% si>e; entit% gro:th ancor0orate go ernance score 7+JV Score8*

First; the 0u,lic interest entit%4s 0erformance is li)el% to inPuencemanagements4 esires to manage earnings :hen losses are incurre * (riorem0irical stu ies from Degeorge; (atel G ec)hauser 71///8; $ro:n 72!!18 anMatsumoto 72!!28 suggest that earnings sur0rises a oi ance an re0ortingsmall earnings increases ,ecomes less im0ortant for management of 0u,lic

interest entities that incur losses* I control for losses ,% using a loss umm%;:hich is set to 1 for 0u,lic interest entities :ith negati e earnings 7losses8; an! other:ise*

Secon ; management of 0u,lic interest entities in high litigation ris) in ustriesare more li)el% using forecast gui ance in or er to )ee0 anal%sts4 e50ectationslo: to ecrease the ris) of sta)ehol er la:suits 7Matsumoto 2!!28* I control forhigh litigation ris) in ustr% ,% using a litigation ris) umm%; :hich is set to 1 for0u,lic interest entities o0erating in high ris) in ustries such as ,iotech 7SI+&

2=##"2=#K8; com0uters 7SI+& #-9!"#-99 an 9#9!"9#9.8; electronics 7SI+&#K!!"#K9.8 an retailing 7SI+& -2!!"-/K18; an ! other:ise*


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Thir ; au it committee characteristics an 0erformance ma% ar% ue to thesi>e of the 0u,lic interest entities* Thus; I control for 0u,lic interest entit%4s si>e,% using the log of the mar)et alue of e6uit%*

Fourth; +ollins G othari 71/=/8 0resent e i ence sho:ing that the mar)etreaction to earnings announcements is greater for 0u,lic interest entities :ithhigh gro:th o00ortunities* Therefore; management of high"gro:th 0u,licinterest entit% has strong incenti e to manage earnings in or er to a oinegati e earnings sur0rises an re0ort small earnings increases* A 0u,licinterest entit%4s gro:th o00ortunit% is 0ro5ie ,% mar)et"to",oo) ratio*

Finall%; the cor0orate go ernance score 7+JV Score8 measures an entit% sinternal control s%stems an 0rocesses* (u,lic interest entities :ith high +JVScore ha e a ,etter cor0orate go ernance structure :hich ensures that its,oar mem,ers an e5ecuti es act in the ,est interests of its long termsta)ehol ers* It ma% ,e the case that 0u,lic interest entities :ith ,ettercor0orate go ernance structures are more e@ecti e in limiting the occurrence of earnings mani0ulations* Thus; limits the li)elihoo of 0u,lic interest entitiesa oi ing earnings sur0rises an re0orting small earnings increases* I o,tainethe ata for the cor0orate go ernance score from DATASTREAM 2! *

A short time s0an is chosen to e5amine the relationshi0 among the au it

committee characteristics an control aria,les :ith the li)elihoo of lo:earnings 6ualit%; a itionall% m% mo els em0lo% a ran om e@ect for 0u,licinterest entities; ,ut


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#I RESULTS

First; I o,ser e the au it committee characteristics for the %ears 2!!= an 2!11to un erstan au it committee structures; irector4s e50ertise; meeting

fre6uenc% an ho: man% au it committees are meeting the E+ 2!11 au itreform re6uirements*

Secon ; I stu % the relation among the au it committee characteristics ancontrol aria,les to the li)elihoo of lo: earnings 6ualit%; 0ro5ie ,% theli)elihoo of a oi ing earnings sur0rises an the li)elihoo of small earningsincreases*

Finall% I :ill 0erform a itional tests ,% s0litting the total num,er of EUFEser ing on the au it committee in EUFE"Au iting an EUFE"Accounting; anusing i@erent metho s of scaling*

T E TREND IN EU AUDIT +OMMITTEE + ARA+TERISTI+S

The tren in au it committee characteristics for m% sam0le of EU 0u,lic interestentities are 0resente in ta,le 1 for the %ears 2!!= an 2!11* Lhereas; ta,le 2;0resents the o,ser ations of au it committee characteristics such as0ercentage of outsi e in e0en ent irectors; au it committee si>e; total 0ercentage EUFE; meeting fre6uenc% score an irector4s e50ertise for the%ears 2!!= an 2!11*

First; I o,ser e an increase in the au it committee si>e from #*=K to .*!# 7 t 1*.1H p !*!=!8* Lhile the increase in au it committee si>e is not signi


39/73

of the au it committees ,% em0lo%ing more irectors :ith )no:le ge ane50erience in au iting*


40/73

Ta,le 1* Tren in au it committee characteristicsamong the %ears 2!!= G 2!11

Au it committeecharacteristic 2!!= 2!11

t "test

7 p " alue8

?in e0en ence

irectors

Mean !*/1 !*/! "!*-.

Me ian 1 1 7*2/#8

StDe !*1/ !*1/

n 1/. 1/#

Au itcommitteesi>e

Mean #*=K .*!# 1*.1

Me ian #*- . 7*!=!8

StDe

1*1.9

1*2#1

n 1/. 1/#

Y EUFE Mean 1*K2 1*/# #*-2

Me ian 1 2 7*!!!8

StDe !*=1 !*/2

n 1/# 1/2

? EUFE Mean !*.. !*K. 9*.-

Me ian !*## !*K9 7*!!!8

StDe !*22 !*#1

n 1/# 1/2

Y EUFE "Au iting

Mean !*-/ !*=# #*!1

Me ian ! 1 7*!!18

StDe !*92 !*=-

n 1/# 1/2


41/73

Y EUFE "Accounting

Mean 1*!# 1*1! !*=K

Me ian 1 1 7!*19-8

StDe !*K/ !*=.

n 1/# 1/2

Meetingfre6uenc%score

Mean -*#/ -*91 1*!!

Me ian .*! -*! 7!*1K!8

StDe #*!/ 2*-/

n 1K1 19-

Full in e0en ent au it committees

1-. 1.-

Au it committees meeting E+ 2!11 re6uirements

K9 K/


42/73

Ta,le 2* Au it committee characteristics

! 1 2 # . - K\9 n

2!!=

A+ :ith n si>e ! ! . /# -! 29 19 #1/

.

A+ :ith n EUFE . /- 91 1= . 1 ! !1/

#

A+ :ith n meeting fre6uenc%score ! 2 12 1/ .= 2- 2! #-

1K1

2!11

A+ :ith n si>e ! ! ! =2 K# 2! 22 K1/

#

A+ :ith n EUFE 1 91 92 .! - # ! !1/

2

A+ :ith n meeting fre6uenc%score ! 1 K / .. .# 29 .-

19-

Au it +ommittees :ith n


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Au it +ommittees :ith n


44/73

T E RE3ATION AMONJ T E AUDIT +OMMI TTEE + ARA+TERISTI+S ANDEARNINJS UA3IT (RO IES*

Ta,le #; :hich can ,e foun in the a00en i5; 0resents (earson 7S0earman4s

Rho8 0air :ise correlations ,elo: 7a,o e8 the iagonal among the au itcommittee characteristics; control aria,les an the li)elihoo of a oi ingearnings sur0rises; :hile ta,le .; :hich can ,e foun in the a00en i5; 0resents0air":ise correlations among the au it committee characteristics; control

aria,les an the li)elihoo of small earnings increases* The correlations ta,lesuggests that the ma orit% of e@ecti e au it committee characteristics are0ositi el% correlate :ith each other; therefore enhancing au it committee4s0erformance in monitoring the 0u,lic interest entit%*

Ne5t I estimate the relation among the au it committee characteristics ancontrol aria,les :ith the li)elihoo of negati e earnings sur0rise a oi ance ansmall earnings increases in a logistic regression mo el using e6uation 718&

( 71 lo: earnings 6ualit%8 W X 1 In e0en ent umm% X 2 YEUFE X# A+ si>e X . A+ meetings X - Au it reform umm% Z 1 3oss umm% Z2 3itigation ris) umm% Z # Entit% si>e 7MV8 Z . Entit% gro:th Z - +JV

S+ORE [718

The results are 0resente in ta,le -*

The mo el on negati e earnings sur0rise a oi ance an small earningsincreases are ,oth highl% signi


45/73

at least one irector :ith e50erience an )no:le ge in au iting an another inaccounting*

In line :ith the secon h%0othesis; the results from ,oth mo els suggest thatthe fre6uenc% in :hich the au it committee meets signi


46/73

7*!9-8 7*!2.8

Au it reform umm%7 18 "*K!/ "*292

7*!2=8 7*#998

+ontrol Varia,les

3oss umm% "*111 "2*2/K

7*9!.8 7*!!!8

3itigation ris) umm% *./2 *!K2

7*!..8 7*=#=8

Entit% si>e 73og MV8 *2K1 "*21-

7*#!#8 7*..#8

Entit% gro:th *!#2 *!12

7*.2#8 7*=.98

+JV S+ORE *!1. "*!!2

7*!1K8 7*9#/8

ear ummiesinclu e ES ES

uarter ummiesinclu e ES N A

+ountr% ummiesinclu e ES ES

Sam0le Si>e 1#-/ -/#

]2 ]2

7 p " alue8 7 p " alue8

Mo el Signi


47/73

For the thir h%0othesis the results from ,oth mo els are contra icting thee i ence from 0rior em0irical research 7 ie et al* 2!!#; Vafeas 2!!- an

ooghiemstra et al* 2!!=8 that the 0resence of in e0en ent outsi e irectorsenhances the monitoring ca0a,ilities of the au it committee* The results

suggest that the in e0en enc% of au it committee irectors ecreases theli)elihoo of higher earnings 6ualit%* o:e er; the results from ,oth mo els areinsigni


48/73

suggeste ,% the Euro0ean +ommission 7E+ 2!118 increases the li)elihoo of re0orting higher earnings 6ualit%* It ma% ,e the case that the au it reform

umm% in m% e6uation is ointl% e50laining the e@ects of in e0en enc% ane 0ro5ie ,% log sales oes 0ro i e consistent results forthe main h%0othesis; ,ut not for the secon h%0othesis* Lhereas; the main ansecon h%0othesis oes not %iel consist results :hen using entit% si>e 0ro5ie,% log assets* $% using log sales an log assets to 0ro5% for entit% si>e m%sam0le si>e ecreases; gi en that e are 0ro i ing results that ha e thesame sign for all au it committee characteristics aria,les ,ut the ,etas ha ehigher p " alues ue to the lo:er sam0le si>e causing a i@erent set of classie outcome is the same for the 0u,lic interest entities that ha e morethan one o,ser ation in a re0orting 0erio for the mo el ca0turing negati e

earnings sur0rise a oi ance* The use of annual ata for entit% si>e in the mo elca0turing negati e earnings sur0rise a oi ance might ,e causing the sign of entit% si>e 0ro5ie ,% log assets an log sales to ,e the contrar% of entit% si>e0ro5ie ,% log mar)et alue for ,oth mo els*

A 0ossi,le e50lanation for the i@erence in results ,et:een the t:o mo els isue to the ariation in sam0le si>e* The mo el ca0turing negati e earnings

sur0rise a oi ance contains more o,ser ations ue to stu %ing 6uarterl% ata*o:e er; the mo el ca0turing small earnings increases is stu %ing a larger

sam0le of 0u,lic interest entities* $oth mo els are using i@erent sam0les an ai@erent set of classi


49/73

6ualit%; therefore a 0ossi,le e50lanation for the i@erence in results can ,ecause ,% either scaling 7The mo els 0ro i e inconsistent results :hen scalingis altere for entit% si>e from log mar)et alue to log assets or log sales8;sam0le selection; statistical issues; or a com,ination of these e@ects 7Durtschi

G Easton 2!!-8* Secon ; the t:o mo els use to ca0ture the li)elihoo of earnings 6ualit% in m% master4s thesis measure i@erent mechanisms that

ecrease earnings 6ualit%& mani0ulating earnings u0:ar s an or gui inganal%sts4 forecasts o:n:ar s* Therefore a 0ossi,le e50lanation for the

i@erence in results ,et:een the t:o mo els might ,e ue to management4sesire to meet anal%sts4 e50ectation or the esire to re0ort small earnings

increases* Finall%; most au it committee characteristics em0lo%e for e6uation718 are signi


50/73

ADDITIONA3 TESTS

In this section; I :ill iscuss a num,er of a itional tests ,% altering t:oaria,les of e6uation 718&

( 71 lo: earnings 6ualit%8 W X 1 In e0en ent umm% X 2 YEUFE X # A+si>e X. A+ meetings X - Au it reform umm% Z 1 3oss umm% Z 2 3itigation ris)

umm% Z# Entit% si>e 7MV8 Z . Entit% gro:th Z - +JV S+ORE [ 718

YEUFE :ill ,e s0lit into YEUFE"Au iting an YEUFE"Accounting; :hile t:o

a itional 0ro5ies; log assets an log sales; :ill ,e use to measure entit% si>e* Therefore; transforming e6uation 718 into the follo:ing e6uation&

( 71 lo: earnings 6ualit%8 W X 1 In e0en ent umm% X 2 YEUFE"Au iting

X# YEUFE"Accounting X . A+ si>e X - A+ meetings X K Au it reform umm%

Z1 3oss umm% Z 2 3itigation ris) umm% Z # Entit% si>e 73og assets; log salesG log MV8

Z. Entit% gro:th Z - +JV S+ORE [ 728

I estimate the relation among the au it committee characteristics an controlaria,les :ith the li)elihoo of negati e earnings sur0rise a oi ance in a logistic

regression mo el using e6uation 728* The results are 0resente in ta,le K*

The mo els on negati e earnings sur0rise a oi ance are all highl% signi


51/73

sales for entit% si>e the results are signi


52/73

7*!2-8 7*!#-8 7*!1.8

A+ si>e "*1/K "*1/2 "*2=#

7*!=98 7*!/28 7*!118

A+ meetings 7 28 "*!99 "*!9- "*!/1

7*!9K8 7*!=K8 7*!#.8

Au it reform umm%7 18 "*-K- "*-=- "*K/9

7*!-!8 7*!.18 7*!1-8

+ontrol Varia,les

3oss umm% "*2.. "*2!K "*1!2

7*.!28 7*.998 7*92=8

3itigation ris) umm% *92. *9-1 *-21

7*!!28 7*!!28 7*!#K8

Entit% si>e 73og Assets8 "*K!9

7*!.#8

Entit% si>e 73og Sales8 "*K./

7*!228

Entit% si>e 73og MV8 *2..

7*##/8

Entit% gro:th *!1= *!1/ *!2/

7*K.K8 7*K2.8 7*.K28

+JV S+ORE *!1= *!1/ *!1#

7*!!18 7*!!18 7*!2.8

uarterl% ummiesinclu e ES ES ES

+ountr% ummiesinclu e ES ES ES


53/73

Sam0le Si>e 1#-K 1#-# 1#-=

]2 ]2 ]#

7 p "

alue87 p "

alue87 p "

alue8

Mo el Signi


54/73

#II CONCLUSION

For m% master4s thesis I ha e stu ie the relationshi0 among au it committeecharacteristics an the li)elihoo of lo: earnings 6ualit% 22 *

First; I e; more acti e an em0lo%e more EUFE* Noticea,l%; EU 0u,licinterest entities :ere alrea % ta)ing actions to increase the monitoringca0a,ilities of their au it committees ,% em0lo%ing more irectors :ith)no:le ge an e50erience in au iting* The actions to em0lo% more EUFE"Au iting has le to more au it committees meeting the 0ro0ose Euro0ean+ommission4s 0ro0ose au it committee com0osition an e50ertisere6uirements for the %ear 2!11 than 2!!=*

Secon ; m% master4s thesis has 0ro i e e i ence from logistic regressions thata relationshi0 e5ists among the au it committee characteristics an theli)elihoo of lo: earnings 6ualit%* The e i ence 0ro i e from the mo elsca0turing negati e earnings sur0rise a oi ance suggests that au it committees:ho are currentl% meeting the Euro0ean +ommission4s 72!118 0ro0ose au itreform re6uirements; the fre6uenc% in :hich the au it committees meets; anlarger au it committees increases the li)elihoo of higher earnings 6ualit%*

Finall%; the mo els ca0turing negati e earnings sur0rise a oi ance 0ro i escontra icting e i ence :ith 0rior em0irical literature* The e i ence from ie etal* 72!!#8; A,,ot et al* 72!!.8 Vafeas 72!!-8; +arcello et al* 72!!K8 an

ooghiemstra et al* 72!!=8 suggests that in e0en enc% an


55/73

contra icting results at the in i i ual le el for in e0en enc%; Y EUFE; Y EUFE"Au iting an Y EUFE"Accounting*

The e i ence 0ro i e ,% m% master4s thesis su00orts the Euro0ean+ommission4s actions of reforming the au it committee to im0ro e


56/73

of classi


57/73


58/73

APPENDIXE,hi-it 1)

Source& Decho:; Je G Schran 72!1!8

E5hi,it 1 lists the earnings 6ualit% 0ro5ies summari>e ,% Decho: et al* 72!1!8* The earnings measuresliste in this ta,le are commonl% use 0ro5ies 7in icators8 for 7of8 earnings 6ualit%*

Em0irical 0ro5% Theor% (ros an +ons

Earnings 6ualit% categor% 1& (ro0erties of earnings

Earnings 0ersistence&

^ Earnings t 1 W XEarnings t [ t* (u,lic"interest entities thatre0ort 0ersistent earningsthroughout consecuti ere0orting 0erio s areconsi ere to ha e a high6ualit% of earnings ,ecauseearnings 0ersistencecontains a moreBsustaina,leC earnings cashPo: stream*

Pr s0 Fits :ell :ith a Jrahaman Doie: of earnings as a summar% metric ofe50ecte cash Po:s useful for e6uit%

aluation*^ Earnings t 1 W X_+Ft X`Accruals t [ t

^ Earningst 1 W Z_Earningst Z`Financial statementcom0onents Z OtherInformation t [t

C 2s0 (ersistence e0en s ,oth on the


59/73

:hich re uce ecisionusefulness

accruals*

^ 'ones 71//18 mo el C 2s0 +orrelate omitte aria,lesassociate :ith fun amentals are ofconcern gi en the e0en ence of normalaccruals on fun amentals an theen ogeneit% of the h%0othesi>e

eterminants conse6uences :ith thefun amentals

^ Mo i


60/73

Target ,eating or,enchmar)ing&

^ in)s in earningsistri,ution

Unusual clustering inearnings istri,utionsin icates earningsmanagement arountargets* O,ser ations at orslightl% a,o e targets ha elo: 6ualit% earnings

Pr s0 The measure is eas% to calculate;the conce0t is intuiti el% a00ealing; ansur e% e i ence suggests earningsmanagement aroun targets*

^ +hanges in earningsistri,ution

^ in)s in forecasterror istri,ution

C 2s0 In a ition to statistical ali it%issues; e i ence that )in)s re0resento00ortunistic earnings management ismi5e ; :ith cre i,le alternati ee50lanations inclu ing non" accountingissues* It is iQcult to istinguish


61/73

C 2s0 For AAERs& small sam0le si>es;selection issues; an matching 0ro,lems

ue to T%0e II error rate* For restatementsan SO


62/73

(u,lic interest entities that re0resent the 2!!= an 2!11 sam0le& E2tit3 Na4e C 52tr3

%66+

%611

E2tit3 Na4e C 52tr3

%66+

%611

1 An rit> AJ AUT 5 5

1!- 3afarge SA FRA 5 5

2 OMV AJ AUT 5 5

1!K 3agar ere Jrou0e FRA 5 5

# Stra,ag SE AUT 5 5

1!9 3egran FRA 5 5

. Tele)om AustriaAJ AUT 5 5

1!= 3VM FRA 5 5

- Voestal0ine AJ AUT 5 5

1!/ Michelin FRA 5 5

11

! Ne5ans SA FRA 5 5

KAnheuser"$uschIn,e $E3 5

111 (erno "Ricar FRA 5 5

9 $elgacom SA $E3 5

112 (eugeot SA FRA 5

= +olru%t $E3 5 5

11# (lastic Omnium FRA 5

/ D ieteren SA $E3 5 5

11. ((R SA FRA 5

1! Delhai>e Jrou0 $E3 5 5

11- (u,licis Jrou0e SA FRA 5 5

11 Sol a% SA $E3 5 5

11K Rall%e FRA 5 5

12 Umicore SA $E3 5 5

119 Renault SA FRA 5 5

11

= Re5el FRA 5 5

1# A i as AJ DEU 5 5

11/ Safran SA FRA 5 5

1. Air $erlin (3+ DEU 5 5

12! Sano< FRA 5 5

1-An reae"Noris

ahn AJ DEU 5 5

121

Schnei er ElectricSA FRA 5 5

1K Arcan or AJ DEU 512

2 SE$ SA FRA 5 5

19 Au i AJ DEU 5 5

12# Se6uana FRA 5 5

1= Auru,is AJ DEU 5 5

12. So e5o FRA 5 5


63/73

1/ $ASF SE DEU 5 5

12- Techni0 FRA 5 5

2! $a%er AJ DEU 5 5

12K Thales SA FRA 5 5

21 $a%:a AJ DEU 5 5

12

9 Total SA FRA 5 5

22 $eiers orf AJ DEU 5 5

12= Valeo FRA 5 5

2# $ertelsmann AJ DEU 5 5

12/ Vallourec FRA 5 5

2.$il


64/73

2

.1 3an5ess AJ DEU 5 5

1.# Autogrill ITA 5 5

.2 3in e AJ DEU 5 5

1.. +IR ITA 5 5

.# Man SE DEU 5 5

1.- +o< e S0a ITA 5 5

.. Merc) gaa DEU 5

1.K ENI ITA 5 5

.- Metro AJ DEU 5 5

1.9 ERJ S0a ITA 5 5

.K Rheinmetall AJ DEU 5 5

1.= Fiat S0a ITA 5 5

.9 Sal>gitter AJ DEU 5 5

1./ Finmeccanica S0a ITA 5 5

.= SA( AJ DEU 5 5

1-! Italcementi ITA 5 5

./ Siemens AJ DEU 5 5

1-1 3u5ottica ITA 5 5

-! Sue >uc)er AJ DEU 5 5

1-2 Me iaset S0a ITA 5 5

-1 Th%ssen)ru00 AJ DEU 5 5

1-# (armalat S0a ITA 5 5

-2 TUI AJ DEU 5 5

1-. (irelli G + ITA 5 5

-# Vol)s:agen AJ DEU 5 5

1-- (r%smian ITA 5 5

-.Lac)er +hemieAJ DEU 5 5

1-K Sai0em ITA 5

1-9 Saras ITA 5 5

--A*(* Moeller"Maers) DN 5 5

1-= Telecom Italia ITA 5 5

-K +arls,erg AS DN 5

-9 No o Nor is) A S DN 5 5

1-/ Arcelormittal 3U 5 5

-=VestasLin s%stems DN 5 5

1K! RT3 Jrou0 3U 5 5

1K

1 Tenaris SA 3U 5 5

-/ A,engoa SA ES( 5 5

K! Acerino5 SA ES( 5 5 1K A)>o No,el NV N3D 5 5


65/73

2

K1 A+S ES( 5 5

1K# +N Jlo,al N3D 5 5

K2 Ferro ial SA ES( 5

1K

. Ea s NV N3D 5 5

K#Fomento+onstruccion ES( 5 5

1K- eine)en NV N3D 5 5

K. In ite5 SA ES( 5 5

1KK

onin)li )e AholNV N3D 5 5

K-O,rascon uarte3ain ES( 5 5

1K9 onin)li )e $AM N3D 5 5

KK Re0sol (F SA ES( 5 5

1K= onin)li )e DSM N3D 5 5

K9Sac%rVallehermoso SA ES( 5 5

1K/ onin)li )e (N NV N3D 5 5

K= Telefonica SA ES( 5 5

19! onin))li )e (hili0s N3D 5 5

191 Nutreco NV N3D 5

K/ es)o O ' FIN 5 5

192 (ostnl NV N3D 5 5

9! one O ' FIN 5 5

19#

Ran sta ol ingNV N3D 5 5

91 Metso O ' FIN 5 5

19. Ro%al Dutch Shell N3D 5 5

92 Neste Oil O ' FIN 5 5

19- Ro%al Imtech N3D 5 5

9# No)ia +or0oration FIN 5 5

19K

StmicroelectronicsNV N3D 5 5

9. Outo)um0u O ' FIN 5 5

199 Unile er NV N3D 5 5

9- Stora Enso A O ' FIN 5 5

9KU(M" %mmeneO ' FIN 5 5

19= A)er Solutions ASA NOR 5 5

99 Lartsila O ' FIN 5 5

19/ Nors) % ro ASA NOR 5 5

9= IT O ' FIN 5 5

1=! Or)la ASA NOR 5 5

1=1 Statoil ASA NOR 5

9/ Accor FRA 5 5 1= Statoil Fuel G Retail NOR 5


66/73

2

=! Air France" 3M FRA 5 51=

# Telenor ASA NOR 5

=1 Air 3i6ui e FRA 5 51=

. ara InternationalASA NOR 5 5

=2 Alcatel"3ucent FRA 5 5

=# Alstom SA FRA 51=

- ghm (ols)a Mie > (O3 5

=. Are a FRA 5 5

=- Ar)ema FRA 5 51=

K 'eronimo MartinsSA (RT 5 5

=K Atos FRA 5 51=

9 (ortugal Telecom (RT 5 5

=9 $ollore FRA 51=

= Sonae Sg0s SA (RT 5

== $ongrain FRA 5 5

=/ $ou%gues SA FRA 5 51=

/ Assa A,lo% A$ SLE 5 5

/! +a0 Jemini SA FRA 5 51/

! Atlas +o0co A$ SLE 5 5

/1 +arrefour SA FRA 5 51/

1 $oli en A$ SLE 5 5

/2 +asino Juichar "( FRA 5 51/

2 Electrolu5 A$ SLE 5 5

/# +hristian Dior SA FRA 5 51/

# Ericsson $ A$ SLE 5 5

/. +iments Francais FRA 5 51/

. G M A$ SLE 5 5

/- +olas SA FRA 51/

- (EA$ A$ SLE 5 5

/K+om0agnie De St"Jo,ain FRA 5 5

1/K San i) A$ SLE 5 5

/9 Danone FRA 5 51/

9 SAS A$ SLE 5 5

/= Ei@age FRA 5 51/

= S+A A$ SLE 5 5

//EssilorInternational FRA 5

1// Scania A$ SLE 5 5

1!! Esso FRA 5

2!! Securitas A$ SLE 5 5


67/73

1!1 Faurecia FRA 5 5

2!1 S)ans)a A$ SLE 5 5

1!2 Fonciere Euris SA FRA 5

2!2 S F A$ SLE 5 5

1!

# France Telecom FRA 5 5

2!

# SSA$ A$ SLE 5 5

1!. 3 Oreal FRA 5 5

2!. Teliasonera A$ SLE 5 5

2!- Vol o A$ SLE 5 5

1/. 1/#

Ta,le #* (earson 7S0earman4s Rho8 0air :ise correlations ,elo: 7a,o e8 the iagonal among the au it committee charthe li)elihoo of a oi ing earnings sur0rises for 1#-/ 0u,lic interest entities for the %ears 2!!= an 2!11*

1 2 # . - K 9 = / 1!1* Earnings Sur0rise A oi ance

1 6)6(6)6

(6)6

*

76)6

*!*!2 "!*!2 !*!2

6)6( !*!2

2* ?In e0en ent!*!- 1 1)66 !*!!

76)1

6

76)1

6

76)1

6

"!*!.

6)6"

6)%$

#* In e0en ent umm% 6)6(

6)+" 1

"!*!1

76)1

6

76)1

6

76)1

6

"!*!.

6)6"

6)%$

.* YEUFE"Au iting 6)16

6)6( !*!1 1

76)$

$

6)!!

76)6

(

6)!$

6)%(

6)(!

-* YEUFE"Accounting 76)6

*

76)6

"

76)1

$

76)$

61 6)$( !*!.

6)'+

76)1

!!*!.

K* YEUFE!*!. "!*!2

76)1

1

6)(%

6)$+ 1 !*!1

6)"1

6)1(

6)((

9* Si>e "

!*!-

76)1

%

76)%

$

"

!*!1

6)1

!

6)1

'1

76)%

%

76)1

+

"

!*!#=* ?EUFE

!*!. !*!!7

6)6*

6)!+

6)$'

6)"%

"!*!. 1

6)%(

6)!+

/* Meeting fre6uenc% score 6)6+

6)6"

6)6"

6)$6

76)1

!

6)%!

76)1

%

6)%' 1

6)1$

1!* Meeting au it reform umm%!*!2 6)%$

6)%$

6)!( !*!#

6)!(

"!*!#

6)!$

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Ash,augh; *; 3aFon ; R* an Ma%he:; $* 72!!#8* Do nonau it ser icescom0romise au itor in e0en ence Further e i ence* The Accounting Re ie:9= 7#8& K11 #/*

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Re0orting* The Accounting Re ie: 9- 7.8& .-#".K9*

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71/73

DeAngelo; *; DeAngelo; 3* G S)inner; D* 71//K8* Re ersal of fortune& Di i ensignaling an the isa00earance of sustaine earnings gro:th* 'ournal of Financial Economics .! 7#8& #.1"#91*

Decho:; (*M* 71//.8* Accounting earnings cash Po:s as measures of


72/73

Fich; E*M* G Shi asani; A* 72!!K8* Are ,us% ,oar s e@ecti e monitors 'ournalof Finance K1 728& K=/"92.*

:ang; $* an im; S* 72!!/8* It 0a%s to ha e frien s* 'ournal of FinancialEconomics /# 718& 1#="1-=*

ooghiemstra; R*; 3ammerin); A* G Marra; T* 72!!=8* Resultaatmani0ulatie ene au itcommissie* Maan ,la oor Accountanc% en $e ri fseconomie =2& #9!"

#=!*

'ensen; M* 72!!-8* Agenc% costs of o er alue e6uit%* Financial Management#.718& - 1/*

aramanou; I*; an Vafeas; N* 72!!-8* The association ,et:een ,oar s anau it committees :ith management earnings forecasts& An em0irical anal%sis*

'ournal of Accounting Research .# 7#8& .-#".=K*

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earnings management* 'ournal of Accounting an Economics ## 7#8& #9- .!!*rishnan; '* 72!!-8* Au it committee 6ualit% an internal control& An em0irical

anal%sis* The Accounting Re ie: =! 728; K./"K9-*

3arc)er; D* an Richar son; S* 72!!.8* Fees 0ai to au it


73/73

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ermac); D* 72!!.8* Remuneration; retention; an re0utation incenti es foroutsi e irectors* 'ournal of Finance -/ 7-8& 22=1"2#!=*

the influence of the audit committee’s composition and expertise on earnings quality in the...

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