Audit Committee Independence and Earnings Management: How Independent are Independent Directors?

摘要

This study investigates whether a significant correlation exists between evidence of earnings management and increases in the subsequent year value of stock and exercisable stock options held by independent directors serving on the audit committee. Results show that, on average, independent directors on the audit committee of companies exhibiting evidence of earnings management benefited from significantly greater cumulative percentage increases in the market value of stock and stock options owned either actually or beneficially than did independent directors on the audit committees of companies presenting no evidence of earnings management. These results hold regardless of whether the earnings management was income increasing or income decreasing. Similar results also hold for audit committee independent chairs. While these results should not be interpreted as clear evidence that independent directors act in their own self-interest, such potential benefits could result in independent directors either being inappropriately lax when reviewing and approving management actions involving earnings management or actively participating with management in earnings management schemes. It is recommended that independent directors, like independent auditors, be prohibited from owning stock or holding stock options of any company for which they serve.