Audit Committee Effectiveness and Earnings Management Among Publicly Listed Firms in Kenya



Earnings Management, Audit Committee Effectiveness, Audit Committee Independence, Audit Committee Meeting frequency, Audit Committee Financial Expertise


Objective: The paper sought to investigate the role of an effective audit committee in controlling earnings management practices.

Design / Methodology: A panel data sourced from the audited financial reports of firms listed at the Kenyan Nairobi Securities Exchange for the periods between 2004 and 2017 were analyzed using a panel regression model.

Findings: Audit committee effectiveness proved an important monitoring mechanism for earnings management. The independence, Meeting frequency, and financial expertise of the audit committee evidenced a negative and significant effect on earnings management.

Practical Implications: Firms need to ensure that their audit committees operate effectively. This is achieved through enhancing their independence, ensuring optimal meeting frequency, and a higher number of members with financial expertise for fewer earnings management.

Originality: The paper suggests the ways through which audit committee effectiveness can be enhanced to reduce earnings management amid rampant global financial scandals.


Download data is not yet available.

Author Biography

Josephat Cheboi, Moi University, Kenya

Ag.Dean School of Business and Economics


Abbott, L. J., Parker, S., & Peters, G. F. (2004). Audit committee characteristics and restatements. Auditing: A Journal of Practice & Theory, 23(1), 69-87.

Abdul Rahman, R., & Haneem Mohamed Ali, F. (2006). Board, audit committee, culture and earnings management: Malaysian evidence. Managerial Auditing Journal, 21(7), 783-804.

Al-dhamari, R., Ismail, K., & Izah, K. N. (2017). Governance structure, ownership structure and earnings predictability: Malaysian evidence. Al-Dhamari, RA, & Ismail, KNIK (2013). Governance structure, ownership structure and earnings predictability: Malaysian evidence. Asian Academy of Management Journal of Accounting and Finance, 9(1), 1-23.

Albersmann, B. T., & Hohenfels, D. (2017). Audit committees and earnings management–Evidence from the German two-tier board system. Schmalenbach Business Review, 18(2), 147-178.

Albu, C. N., & Girbina, M. M. (2015). Compliance with corporate governance codes in emerging economies. How do Romanian listed companies “comply-or-explain”? Corporate Governance, 15(1), 85-107.

Ali Shah, S. Z., Butt, S. A., & Hassan, A. (2009). Corporate governance and earnings management an empirical evidence form Pakistani listed companies. European Journal of Scientific Research, 26(4), 624-638.

Baxter, P., & Cotter, J. (2009). Audit committees and earnings quality. Accounting & Finance, 49(2), 267-290.

Beasley, M. S., Carcello, J. V., Hermanson, D. R., & Neal, T. L. (2009). The audit committee oversight process. Contemporary Accounting Research, 26(1), 65-122.

Bédard, J., Chtourou, S. M., & Courteau, L. (2004). The effect of audit committee expertise, independence, and activity on aggressive earnings management. Auditing: A Journal of Practice & Theory, 23(2), 13-35.

Bédard, J., & Gendron, Y. (2010). Strengthening the financial reporting system: Can audit committees deliver? International journal of auditing, 14(2), 174-210.

Bryan, D., Liu, M. C., Tiras, S. L., & Zhuang, Z. (2013). Optimal versus suboptimal choices of accounting expertise on audit committees and earnings quality. Review of Accounting Studies, 18(4), 1123-1158.

Buallay, A. M., & AlDhaen, E. S. (2018). The relationship between audit committee characteristics and the level of sustainability report disclosure. Paper presented at the Conference on e-Business, e-Services and e-Society.

Chen, K. Y., Elder, R. J., & Hsieh, Y.-M. (2007). Corporate governance and earnings management: The implications of corporate governance best-practice principles for Taiwanese listed companies. Journal of Contemporary Accounting & Economics, 3(2), 73-105.

Chen, S., & Komal, B. (2018). Audit committee financial expertise and earnings quality: A meta-analysis. Journal of Business Research, 84, 253-270.

Choi, J.-H., Jeon, K.-A., & Park, J.-I. (2004). The role of audit committees in decreasing earnings management: Korean evidence. International Journal of Accounting, Auditing and Performance Evaluation, 1(1), 37-60.

Cornett, M. M., McNutt, J. J., & Tehranian, H. (2009). Corporate governance and earnings management at large US bank holding companies. Journal of Corporate finance, 15(4), 412-430.

Davidson, R., Goodwin‐Stewart, J., & Kent, P. (2005). Internal governance structures and earnings management. Accounting & Finance, 45(2), 241-267.

Dechow, P. M., Sloan, R. G., & Sweeney, A. P. (1995). Detecting earnings management. Accounting review, 193-225.

Desai, H., Hogan, C. E., & Wilkins, M. S. (2006). The reputational penalty for aggressive accounting: Earnings restatements and management turnover. The Accounting Review, 81(1), 83-112.

Dhaliwal, D., Naiker, V., & Navissi, F. (2010). The association between accruals quality and the characteristics of accounting experts and mix of expertise on audit committees. Contemporary Accounting Research, 27(3), 787-827.

Eisenhardt, K. M. (1989). Agency theory: An assessment and review. Academy of management review, 14(1), 57-74.

Elijah, A., & Ayemere, I. L. (2015). Audit committee attributes and earnings management: Evidence from Nigeria. International Journal of Business and Social Research, 5(4), 14-23.

Fama, E. F., & Jensen, M. C. (1983). Separation of ownership and control. The journal of law and Economics, 26(2), 301-325.

Ghosh, A., Marra, A., & Moon, D. (2010). Corporate boards, audit committees, and earnings management: pre‐and post‐SOX evidence. Journal of Business Finance & Accounting, 37(9‐10), 1145-1176.

Hassan, S. U., & Ahmed, A. (2012). Corporate governance, earnings management and financial performance: A case of Nigerian manufacturing firms. American International Journal of Contemporary Research, 2(7), 214-226.

He, L., Wright, S., Evans, E., & Crowe, S. (2007). Earnings management in Australia under new ASX corporate governance guidelines. Paper presented at the Accounting Association of Australia and New Zealand Conference (2007).

Healy, P. M. (1985). The effect of bonus schemes on accounting decisions. Journal of accounting and economics, 7(1-3), 85-107.

Healy, P. M., & Wahlen, J. M. (1999). A review of the earnings management literature and its implications for standard setting. Accounting horizons, 13(4), 365-383.

Huang, H.-W., Mishra, S., & Raghunandan, K. (2007). Types of nonaudit fees and financial reporting quality. Auditing: A Journal of Practice & Theory, 26(1), 133-145.

Huang, H.-W., Rose-Green, E., & Lee, C.-C. (2012). CEO age and financial reporting quality. Accounting horizons, 26(4), 725-740.

Jaggi, B., Leung, S., & Gul, F. (2009). Family control, board independence and earnings management: Evidence based on Hong Kong firms. Journal of Accounting and Public Policy, 28(4), 281-300.

Jaggi, B., & Tsui, J. (2007). Insider trading, earnings management and corporate governance: empirical evidence based on Hong Kong firms. Journal of International Financial Management & Accounting, 18(3), 192-222.

Jamil, N. N., & Nelson, S. P. (2011). An Investigation on the Audit Committees Effectiveness: The Case for GLCs in Malaysia. Gadjah Mada International Journal of Business, 13(3).

Jao, R., & Pagalung, G. (2011). Corporate governance, ukuran perusahaan, dan leverage terhadap manajemen laba perusahaan manufaktur Indonesia. Jurnal akuntansi dan auditing, 8(1), 43-54.

Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of financial economics, 3(4), 305-360.

Karamanou, I., & Vafeas, N. (2005). The association between corporate boards, audit committees, and management earnings forecasts: An empirical analysis. Journal of Accounting research, 43(3), 453-486.

Katmon, N., & Al Farooque, O. (2017). Exploring the impact of internal corporate governance on the relation between disclosure quality and earnings management in the UK listed companies. Journal of Business Ethics, 142(2), 345-367.

Keune, M. B., & Johnstone, K. M. (2012). Materiality judgments and the resolution of detected misstatements: The role of managers, auditors, and audit committees. The Accounting Review, 87(5), 1641-1677.

Kim, J. B., & Yi, C. H. (2006). Ownership structure, business group affiliation, listing status, and earnings management: Evidence from Korea. Contemporary Accounting Research, 23(2), 427-464.

Klein, A. (2002). Audit committee, board of director characteristics, and earnings management. Journal of accounting and economics, 33(3), 375-400.

Kolsi, M. C., & Grassa, R. (2017). Did corporate governance mechanisms affect earnings management? Further evidence from GCC Islamic banks. International Journal of Islamic and Middle Eastern Finance and Management, 10(1), 2-23.

Krishnan, J., Wen, Y., & Zhao, W. (2011). Legal expertise on corporate audit committees and financial reporting quality. The Accounting Review, 86(6), 2099-2130.

Latif, A. S., & Abdullah, F. (2015). The effectiveness of corporate governance in constraining earnings management in Pakistan.

Law, P., & Act, A. (2002). Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, Sarbanes-Oxley Act of 2002. Public Law, 107, 204.

Lee, G., & Masulis, R. W. (2011). Do more reputable financial institutions reduce earnings management by IPO issuers? Journal of Corporate finance, 17(4), 982-1000.

Li, J., Mangena, M., & Pike, R. (2012). The effect of audit committee characteristics on intellectual capital disclosure. The British Accounting Review, 44(2), 98-110.

Lin, J. W., Kang, G., & Roline, A. (2009). The effects of the Blue Ribbon Committee and the Sarbanes Oxley Act of 2002 on the characteristics of the audit committees and the board of directors. Advances in Accounting, Finance & Economics, 2(1).

Lin, J. W., Li, J. F., & Yang, J. S. (2006). The effect of audit committee performance on earnings quality. Managerial Auditing Journal, 21(9), 921-933.

Lin, Z., Liu, M., & Noronha, C. (2016). The impact of corporate governance on informative earnings management in the Chinese market. Abacus, 52(3), 568-609.

Mohamed Yunos, R., Ismail, Z., & Smith, M. (2012). Ethnicity and accounting conservatism: Malaysian evidence. Asian Review of Accounting, 20(1), 34-57.

Mohammady, A. (2010). Earnings quality constructs and measures. Available at SSRN 1678461.

Mohd Saleh, N., Mohd Iskandar, T., & Mohid Rahmat, M. (2007). Audit committee characteristics and earnings management: Evidence from Malaysia. Asian Review of Accounting, 15(2), 147-163.

Naiker, V., & Sharma, D. S. (2009). Former audit partners on the audit committee and internal control deficiencies. The Accounting Review, 84(2), 559-587.

Nasution, M., & Setiawan, D. (2007). Pengaruh corporate governance terhadap manajemen laba di industri perbankan Indonesia. Simposium Nasional Akuntansi X, 1(1), 1-26.


Peasnell, K. V., Pope, P. F., & Young, S. (2005). Board monitoring and earnings management: do outside directors influence abnormal accruals? Journal of Business Finance & Accounting, 32(7‐8), 1311-1346.

Puat Nelson, S., & Devi, S. (2013). Audit committee experts and earnings quality. Corporate Governance: The international journal of business in society, 13(4), 335-351.

Rainsbury, E. A., Bradbury, M. E., & Cahan, S. F. (2008). Firm characteristics and audit committees complying with’best practice ‘membership guidelines. Accounting and Business Research, 38(5), 393-408.

San Martín Reyna, J. M. (2018). The effect of ownership composition on earnings management: evidence for the Mexican stock exchange. Journal of Economics, Finance and Administrative Science, 23(46), 289-305.

Sharma, V. D., Sharma, D. S., & Ananthanarayanan, U. (2011). Client importance and earnings management: The moderating role of audit committees. Auditing: A Journal of Practice & Theory, 30(3), 125-156.

Singh, A. K., Aggarwal, A., & Anand, A. K. (2016). The Impact of Corporate Governance Mechanisms on Earnings Management: A Case of Indian Stock Exchange Listed Companies. Asia-Pacific Journal of Management Research and Innovation, 12(3-4), 304-316.

Song, J., & Windram, B. (2004). Benchmarking audit committee effectiveness in financial reporting. International journal of auditing, 8(3), 195-205.

Sun, J., Lan, G., & Liu, G. (2014). Independent audit committee characteristics and real earnings management. Managerial Auditing Journal, 29(2), 153-172.

Tehranian, H., Cornett, M. M., Marcus, A. J., & Saunders, A. (2006). Earnings management, corporate governance, and true financial performance. Corporate Governance, and True Financial Performance (January 2006).

Vafeas, N. (2005). Audit committees, boards, and the quality of reported earnings. Contemporary Accounting Research, 22(4), 1093-1122.

Van Der Zahn, J. W. M., & Tower, G. (2004). Audit committee features and earnings management: further evidence from Singapore. International Journal of Business Governance and Ethics, 1(2-3), 233-258.

Velte, P., & Stiglbauer, M. (2011). Impact of audit committees with independent financial experts on accounting quality. An empirical analysis of the German capital market. Problems and Perspectives in Management, 9(4), 17-33.

Woidtke, T., & Yeh, Y.-H. (2013). The role of the audit committee and the informativeness of accounting earnings in East Asia. Pacific-Basin Finance Journal, 23, 1-24.

Xie, B., Davidson III, W. N., & DaDalt, P. J. (2003). Earnings management and corporate governance: the role of the board and the audit committee. Journal of Corporate finance, 9(3), 295-316.

Yang, J. S., & Krishnan, J. (2005). Audit committees and quarterly earnings management. International journal of auditing, 9(3), 201-219.

Yusof, M. (2009). Does audit committee constraint discretionary accruals in MESDAQ listed companies? Does Audit Committee Constraint Discretionary Accruals in MESDAQ Listed Companies.



How to Cite

Kapkiyai, C., Cheboi, J. ., & Komen, J. (2020). Audit Committee Effectiveness and Earnings Management Among Publicly Listed Firms in Kenya. SEISENSE Journal of Management, 3(2), 31-44.