The influence of audit committee effectiveness on the relationship between ownership structure and earnings management in Malaysia

In recent decades, there has been a noticeable increase in the practice of earnings management through accrual and especially real activities, with effect on the quality of financial statements. The role of the ownership structure in mitigating earnings management remains ambiguous because of inconclusive findings. Therefore, this study examines the influence of ownership structure (family, managerial, dedicated institutional, transient institutional and foreign) on earnings management (accruals and real activities). In addition, the audit committee is investigated as a moderator
between these types of ownership and earnings management. The study used the panel data regression approach with 1,960 firm-year observations of non-financial firms listed on the Bursa Malaysia over the period 2013 to 2016. The results show that family ownership leads to less aggressive earnings management practice in both types, accruals and real activities. The findings also show that dedicated and transient institutional investors have a significant role in restricting the real earnings management. However, the results indicate insignificant effects of managerial ownership and foreign ownership on real earnings management. Audit committee
effectiveness is found to significantly moderate the relationship between family, managerial and transient institutional ownership with real earnings management, whereas it only moderates the relationship between dedicated institutional and foreign ownership with accruals earnings management. Based on the findings, this
study contributes to better understanding of the ownership structure and earnings management practices among Malaysian listed firms. The results suggest that firms should improve the effectiveness of audit committees to enhance their financial reporting quality. Overall, this study provides a reference point for the relevant
parties such as regulatory bodies, policymakers and standard setters towards improving the quality of earnings and corporate governance practices in ensuring credible accounting information.