DO AUDIT COMMITTEES CONSTRAIN EARNINGS MANAGEMENT? EVIDENCE FROM ACCRUAL-BASED AND REAL ACTIVITIES MANIPULATION IN NIGERIA

Abstract

This study examines whether audit committee characteristics effectively constrain earnings management in an emerging market context, Department of Accounting and Finance, Faculty of Management and Social Sciences, Kwara State University, Malete distinguishing between accrual-based earnings management and real earnings management through production and cash flow channels. Using a panel of Nigerian listed non-financial firms over the period 2008–2019, the study adopts a dynamic panel estimation framework to address persistence and endogeneity concerns inherent in corporate governance research. Earnings management is measured using established proxies for discretionary accruals and real activities manipulation, while audit committee effectiveness is captured through measures of independence, size, expertise, and meeting frequency. The results reveal a clear asymmetry in governance effectiveness. Audit committee attributes are significantly associated with lower accrual-based earnings management, consistent with their role in monitoring financial reporting and accounting discretion. In contrast, audit committee characteristics exhibit weak and inconsistent associations with real earnings management, particularly with respect to abnormal production costs and abnormal operating cash flows. These findings suggest that while audit committees are effective in constraining accounting-based manipulation, they are considerably less effective in limiting operational forms of earnings management that are embedded in real business decisions. The evidence suggests that governance reforms and enhanced reporting standards may reduce accrual manipulation but do not eliminate earnings management, instead allowing a shift toward manipulation of real activities. The findings carry important implications for regulators, auditors, and investors, highlighting the need for governance mechanisms that extend beyond financial reporting oversight to address operational sources of earnings manipulation.