Board Characteristics, Audit Committee Characteristics and Abnormal Accruals

This paper examines the relation between governance (as measured by board and audit committee characteristics) and accounting quality (as measured by abnormal accruals) in a setting where there is no a priori reason to suspect systematic management of earnings. Using data from Singapore and Malaysia, we find both board size and audit committee independence are related to lower abnormal working capital accruals. Furthermore, the relation between audit committee independence and higher quality accounting exists only when the abnormal accruals are income increasing. This suggests that audit committees are effective in the financial reporting process by reducing the level of income increasing abnormal accruals. The results also indicate that audit committees are effective only when all members are independent directors.