BOARD CHARACTERISTICS AND EARNINGS MANAGEMENT: A SRI LANKAN PERSPECTIVE

Accounting

ABSTRACT With the increasing status of the topics of corporate governance and earnings management in the field of accounting research, this literature explores whether good corporate governance practices can lead to minimize the earnings management practices and improve the quality of earnings. It analysed the association between earnings management and board characteristics because board of directors is an integral part of corporate governance. Out of the 289 companies listed in the Colombo Stock Exchange, 60 companies have been selected from three sectors (Hotel and Travels; Beverage, Food and Tobacco; and Manufacturing), for three years as the sample. CEO duality, board independence, board members with financial expertise, number of board meetings and board size were considered as corporate governance variables. Firm Size, return on assets (ROA), leverage and auditor type were used as control variables. The magnitude of Discretionary Accruals (DA) was used as the proxy for earnings management which was measured using the modified Jones model. The cross-sectional study showed that CEO duality and board size are negatively associated with earnings management while board independence, board size, board members with financial expertise are positively associated with earnings management practices. Data collection was carried out through secondary data available in annual reports published by the selected companies. However, very few studies have been taken place in emerging economies like Sri Lanka, but it’s worthwhile to conduct. As corporations can minimize earnings management practices by adopting good corporate governance practices which would in turn be for the betterment of all stakeholders, this study examined the effect of corporate governance practices in Board perspective. This study would be useful in identifying and minimizing earnings management practices, thereby contributing to the well-being of government and non-government organizations and development plans.

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