The moderating effect of foreign ownership on audit committee characteristics and earnings management in Nigeria

Managers in large organizations may manipulate earnings reports to suit their desire at the detriment of shareholders and other stakeholders. This may threaten the continuous survival of the organizations. To protect their interest shareholders through the board mandate audit committee to monitor the financial reporting process. The objective of this study is to examine a relationship between audit committee and external audit characteristics and earnings management in Nigeria. The study also investigates the moderating role of foreign ownership on the relationship between audit committee and external audit characteristics and earnings management. In addition, it also investigates the extent of earnings management before and after the revision of the code of corporate governance. Secondary data is collected for a sample of 93 nonfinancial public companies listed in the Nigerian Stock Exchange (NSE) for the period of 2009-2014. This study conducts multiple linear regressions using pooled OLS. Earnings
management is measured by the level of discretionary accruals using modified Jones model (1995). Audit committee and external audit characteristics are discussed from the perspective of agency theory and resource dependence theory. The study finds that the size and independence of audit committee and external auditors’ type are negatively related to earnings management before and after the moderation; audit committee overlapping positively affects earnings management before and after the moderation; while external auditors’ independence and female director in audit committee positively affect earnings management prior to moderation; audit committee meeting is negatively related to earnings management only after the moderation. The study also finds higher earnings management prior to the revision of corporate governance code. This study recommends further policies that will increase foreign ownership in firms because it enhances corporate governance mechanisms and boosts the economy of the country.