Audit committee disclosure tone and earnings management

Al-Shaer, Habiba; Zaman, Mahbub

Abstract

Purpose: This paper examines the effect of audit committee (AC) reporting, measured by the tone of audit committee disclosures, in improving financial reporting quality as proxied by earnings management. Design/methodology/approach: The authors focus on the textual properties of AC reports, particularly the tone of AC disclosure, and their impact on financial reporting quality proxied using real and accruals-based earnings management. For additional analysis, the authors use a financial reporting index and matched sample. The analysis is based on a sample of UK FTSE 350 firms. Findings: The analysis suggests that AC reports are not boilerplate but varied in language. The authors find AC reporting is negatively associated with both real and accruals-based earnings management. In our additional tests, the authors find a positive association between financial reporting quality index and reporting tone. Research limitations/implications: Overall, this paper provides baseline evidence for future research and policy making and reveals that ACs reporting what they have done increases transparency and impacts on reporting quality. Practical implications: Overall, this paper suggests that the tone of AC reports seems to convey information that affects the communication function of AC reporting and thereby helps to improve reporting quality. Originality/value: Though the importance of AC disclosures in improving reporting quality is well recognised in policy guidelines and governance recommendations, no study has employed computer-based textual analysis of AC reports and investigated the effect of AC disclosure tone and the role it can play in achieving higher reporting quality.

Citation

Al-Shaer, H., & Zaman, M. (in press). Audit committee disclosure tone and earnings management. Journal of applied accounting research, https://doi.org/10.1108/JAAR-12-2020-0243

• Journal Article Type: Article
• Acceptance Date: Apr 26, 2021
• Online Publication Date: May 24, 2021
• Deposit Date: Apr 26, 2021
• Publicly Available Date: May 26, 2021
• Journal: Journal of Applied Accounting Research
• Print ISSN: 0967-5426
• Publisher: Emerald
• Peer Reviewed: Peer Reviewed
• DOI: https://doi.org/10.1108/JAAR-12-2020-0243
• Keywords: Audit committees; Voluntary disclosure; Earnings management; Textual analysis; Tone
• Public URL: https://hull-repository.worktribe.com/output/3760021