Audit committee effectiveness, audit quality and earnings management: evidence from Ghana

Figures & data

Table 1. Variable description and measurement.

Variable	Symbol	Variable type	Measurement
Earnings Management	EM	Dependent	The absolute value of discretionary accruals
Audit Committee Independence	AC_IND	Independent	It is the percentage (%) of independent AC members on the AC
Audit Committee Size	AC_Size	Independent	It is the total number of members serving on the AC
Audit Committee Gender Diversity	AC_GENDER	Independent	It is the ratio of female AC members and AC size
Audit committee meetings	AC_MEET	Independent	It is the number of meetings held by the AC in a year
Audit Quality	Big 4	Moderator	The dummy variable equals 1 if the firm is audited by Big4 (KPMG, EY, PWC, Deloitte) and 0 otherwise
Profit	ROE	Control	It is earnings before interest and tax divided by total equity
Leverage	LEV	Control	The ratio of total debts to total assets
Operating Cash Flow	CF	Control	Operating cash flow this year to total assets of the previous year
Firm Size	SIZE	Control	Log 10 of the total assets of the firm

Source: Author’s elaboration from literature.

Table 2. Augmented Dickey-Fuller unit root test results.

Variables	Level	Difference	Conclusion
Earnings Management	−3.64	−8.32**	I (1)
Audit Quality	−4.17	−15.297***	I (1)
AC_Size	−3.06	5.25**	I (1)
AC_Gender	−1.45	−7.83***	I (1)
AC_Independence	−4.26**	−1.53	I (0)
AC_Meetings	−2.74	−4.05**	I (1)
Cash Flow	−4.64	−3.95**	I (1)
SIZE	−3.45**	2.56	I (0)
Profitability	−5.46	−6.66***	I (1)
Leverage	−1.87	−5.73***

Note(s): *, **, *** denote 10%, 5% and 1% significance levels respectively. Source: Author’s estimation.

Table 3. Descriptive statistics.

Variable	Obs	Mean	SD	Min	Max
EM	275	2.027	1.076	−0.920	4.097
Big4	275	0.770	0.421	0	1
AC_Size	275	3.641	1.132	3.00	5
AC_Gender	275	0.234	0.242	1	3
AC_Independence	275	0.822	0.295	2	4
AC_Meetings	275	3.923	2.028	4	8
Cash flows	275	7.853	1.105	4.130	9.983
Size	275	8.870	1.010	6.160	10.162
ROE	275	0.119	0.134	−1.435	0.412
Leverage	275	0.733	0.239	0.050	1.430

Note: EM is earnings management. Source: Author’s analysis with data from selected firm’s annual reports.

Table 4. Correlation.

Var	EM	Big 4	AC_Size	AC_Gender	AC_IND	ACM	CF	SIZE	ROE	LEV
EM	1
Big4	−0.407*	1
AC_Size	0.305*	0.357*	1
AC_Gender	−0.432*	−0.254	0.07	1
AC_IND	0.341*	0.193	0.36	0.23	1
ACM	−0.057	−0.108	0.070	−0.00	−0.11	1
CF	−0.365*	−0.201	−0.41	0.081	−0.04	0.664	1
SIZE	0.418	0.208	−0.034	−0.241*	0.278	−0.157	−0.167	1
ROE	−0.11	−0.15	−0.04	0.209	−0.006	−0.106	0.306*	−0.06	1
LEV	0.356*	−0.35	−0.00	0.022	−0.108	0.342*	0.375*	0.265*	0.321*	1

Note: Significance level * is p < 0.5. Source: Author’s computation with data from selected firms’ annual reports. ACM is AC meetings. All other variables are defined in Table 1.

Table 5. Effect of audit committee effectiveness on earnings management.

	FE	FE	2SLS	2SLS
Var	(1)	(2)	(3)	(4)
AC_IND	−0.514*** (0.021)	−0.360*** (0.102)	−0.024*** (0.004)	−0.214*** (0.024)
AC_MEET	−0.478*** (0.040)	−0.106*** (0.056)	0.047 (0.358)	−0.314*** (0.025)
AC_GENDER	0.051 (0.874	1.829* (0.549)	0.024 (0.547)	0.054 (0.045)
AC_SIZE	−0.208*** (0.024)	0.061 (0.051)	−0.351* (0.147)	−0.215** (0.064)
ROE		0.130 (0.888)		0.024 (0.087)
CF		−0.487** (0.147)		−0.458*** (0.061)
LEV		−0.371 (0.510)		−0.054*** (0.008)
SIZE		−1.076*** (0.327)		0.220*** (0.014)
Constant	0.014*** (0.002)	7.203*** (1.149)	0.343 (0.207)	0.354** (0.102)
Year FE	Yes	Yes	No	No
Firm FE	Yes	Yes	No	No
Adj. $R^2$	0.354	0.510	0.340	0.450
F. Stats	12.097	14.097	8.087	11.087
Prob.	0.000	0.000	0.000	0.000

Note: * represents (0.1 sig.); ** represents (0.05 sig.); and *** represents (0.01 sig.). AC_IND is audit committee independence; AC_MEET is audit committee meetings; AC_GENDER is audit committee gender; AC_SIZE is audit committee size; ROE is profit; CF is cash flow; LEV is leverage; and SIZE is firm size. Source: Author’s analysis with data from firms’ annual reports.

Table 6. The role of audit quality in the AC effectiveness and earnings management nexus.

	FE	FE	2SLS	2SLS
Variables	(5)	(6)	(7)	(8)
Big4	−3.024*** (0.024)	−4.029* (1.104)	−0.204 (0.145)	−0.254** (0.058)
AC_IND	-2.147*** (0.254)	-0.054*** (0.007)	−1.354*** (0.103)	-0.432*** (0.042)
AC_MEET	−2.145*** (0.621)	−4.727** (1.340)	0.208 (0.108)	-0.204*** (0.051)
AC_GENDER	0.254 (0.124)	−0.342 (0.298)	−0.210 (0.236)	−0.021** (0.004)
AC_SIZE	0.454*** (0.100)	0.054 (0.060)	0.402*** (0.100)	0.654 (0.432)
Big4*AC_IND	-0.417*** (0.103)	-0.210*** (0.098)	-0.460*** (0.124)	-0.450*** (0.065)
Big4*AC_MEET	0.365 (0.297)	-0.575*** (0.081)	-2.054*** (0.360)	−0.354*** (0.105)
Big4*AC_GENDER	−0.453 (0.609)	0.043 (0.254)	0.034 (0.065)	−0.321 (0.217)
Big4*AC_SIZE	0.056 (0.017)	0.032 (0.109)	0.025 (0.140)	−0.435*** (0.087)
ROE		−9.109*** (3.600)		−0.015 (0.087)
CF		−0.342*** (0.076)		0.147** (0.047)
LEV		−0.231*** (0.031)		0.342 (0.564)
SIZE		−1.269** (0.601)		−0.065*** (0.007)
Constant	−14.564*** (4.907)	−19.975*** (7.920)	0.346*** (0.065)	6.342 (7.875)
Year FE	Yes	Yes	No	No
Firm FE	Yes	Yes	No	No
F. Stats	13.097	16.907	12.907	8.098
Prob.	0.000	0.000	0.000	0.000

Note: * represents (0.1 sig.); ** represents (0.05 sig.); and *** represents (0.01 sig.). Big4 is audit quality; AC_IND is audit committee independence; AC_MEET is audit committee meetings; AC_GENDER is audit committee gender; AC_SIZE is audit committee size; ROE is profit; CF is cash flow; LEV is leverage; and SIZE is firm size. Source: Author’s analysis with data from firms’ annual reports.

Table 7. Robustness analysis using audit fees as a moderator of audit quality on the ECE -EM nexus.

	FE	FE
Variables	(9)	(10)
Fees	−1.024*** (0.214	−2.014*** (0.621)
AC_IND	−2.025*** (0.157)	1.054 (1.984)
AC_MEET	−0.147*** (0.019)	0.564 (0.408)
AC_GENDER	1.341 (1.047)	−0.157*** (0.024)
AC_SIZE	−0.045*** (0.009)	1.324 (1.654)
Fees*AC_IND	−2.235 (0.980)	−2.024*** (0.602)
Fees*AC_MEET	−2.024*** (0.521)	−1.054*** (0.091)
Fees*AC_GENDER	−0.354*** (0.102)	0.243 (0.109)
Fees*AC_SIZE	2.075 (2.000)	−0.432** (0.107)
ROE	−5.087* (2.020)	−0.054 (0.077)
CF	−0.342*** (0.087)	−0.308** (0.043)
LEV	−0.453 (0.509)	−0.426*** (0.031)
SIZE	−4.986** (0.965)	2.087 (1.432)
Constant	−14.086*** (4.097)	−12.674*** (2.075)
Year FE	Yes	No
Firm FE	Yes	No
Adj. $R^2$	0.508)	0.408
F. Stats	10.086	9.097
Prob.	0.000	0.000

Note: * represents (0.1 sig.); ** represents (0.05 sig.); and *** represents (0.01 sig.). Fees (audit fees) is audit quality; AC_IND is audit committee independence; AC_MEET is audit committee meetings; AC_GENDER is audit committee gender; AC_SIZE is audit committee size; ROE is profit; CF is cash flow; LEV is leverage; and SIZE is firm size. Source: Author’s analysis with data from firms’ annual reports.

Data availability statement

Data and materials supporting the results or analyses presented in this paper is available upon reasonable request.