Financial Distress And Earnings Management: Effectiveness Of Independent Audit Committees
This paper empirically tests whether independent audit committees protect investors' interests by constraining managerial behavior of earnings management, especially when managers have a strong motivation to manage the reported earnings in financially distressed firms. Additionally, it examines whether monitoring of earnings management is more effective when audit committees are fully independent than partially independent. Audit committees are considered fully independent when all committee members are independent, as required under the Sarbanes-Oxley Act, and partially independent when the percentage of independent members is between 70% and 99%. Discretionary accruals are used as a proxy for earnings management, and financially distressed and non-distressed firms are identified based on losses and negative cash flows for two consequent years.