Question

How do non-audit fees and audit fees affect the level of earnings management? Does the audit committee characteristics play a role in earnings management?

Answer 1

Both Audit fees and non audit fees affect the level of earnings management. Lower audit fees is part of better management and chances of earning management are lower, however higher audit fees some time may lead to earning management as they may have the fear of loosing higher audit fees.

Depending on the size of firm, board size and leverage, audit committee size and audit committee that had meetings with external auditor without the presence of executive directors periodically twice a year or once in quarter has significant association with earnings management. it plays a crucial role in mitigating earnings management.

Audit Committe are intended to monitor the financial reporting process and constrain opportunistic managerial reporting. Audit Committe governs the Code of Conduct and Stakeholders perceive the audit committee as a ceremonial decoration acting to lift the image of good corporate governance

Regulatory pressure to increase both audit committee financial expertise and board independence has resulted in lower status for audit committees relative to management. This status differential is relevant because expertise and relative status are important determinants of each party׳s ability to influence outcomes, particularly when parties face conflicting goals. We find that audit committees with both financial expertise and high relative status are associated with lower levels of earnings management, as measured by accounting irregularities and abnormal accruals. These results speak to benefits and limitations of financial expertise, which have been the focus of considerable debate.