Audit Committee Characteristics and Earnings Management: Evidence from Companies Listed in Colombo Stock Exchange, Sri Lanka

Abstract

The study aims to examine the influence of audit committee characteristics on the earnings management of listed companies in Sri Lanka. Secondary data of listed firms on the Colombo Stock Exchange (CSE) was collected for the five-year period from 2017 to 2021. For data analysis, 107 companies listed on CSE were selected as samples, and a quantitative technique was employed. Audit committee size, audit committee independence, audit committee financial expertise, and audit committee meetings are proxies for audit committee characteristics while firm size and leverage are considered as control variables. This study used discretionary accruals as a signal of the presence of earnings management. The techniques of Pearson’s Correlation and panel data regression were employed to estimate the association between the audit committee characteristics and earnings management. The empirical findings reveal that audit committee independence and audit committee meetings significantly influence the earnings management of listed companies in Sri Lanka. Therefore, there is strong evidence that a low level of audit committee independence and audit committee meetings have a major effect as a device in mitigating earnings management. This study contributes significantly to improving one's understanding of the interactive role of audit committee characteristics.