Роль совета директоров и комитета по аудиту в сдерживании манипулирования прибылью: анализ российских компаний

Earnings represent one of the key indicators of the company’s performance. It is applied by outside stakeholders in a wide variety of cases. For example, earnings indicator is used in the covenants established by creditors who need to control company’s activities and prevent it from taking steps that could lead to the eventual bankruptcy. Earnings are also utilized in corporate valuation via market multiples; one of the most popular multiples is the price-to-earnings ratio that establishes a direct relationship between company’s earnings and its share price.
What distinguishes earnings from the other key indicators of financial performance is their accounting nature. While such indicators as market capitalization are market-based, earnings figure is reported in the company’s financial statements. It means that managers have a greater influence on earnings than on the other figures that characterize the company’s performance. Managers may exercise discretion over the financial reporting; when they do so with a particular purpose, they resort to earnings management.
Fraudulent earnings management can result in serious negative consequences for all company’s stakeholders: for example, in the famous Enron corporate scandal, the firm, which was resorting to all forms of window-dressing in its financial statements, was forced into bankruptcy, while employees lost their jobs and investors lost their money (Healy and Palepu 2003). However, earnings management does not necessarily imply fraudulent actions. On the contrary, most extant studies focus on the legal earnings management that is allowed by the flexibility of accounting standards and consists in making certain accounting choices (e.g. how large a provision for bad debts should be) or altering real decisions or transactions (e.g. how large the marketing expenditure should be).
Legal earnings management is used in a variety of cases by managers that pursue different incentives. In many cases, manipulations are performed before or after some particular event, such as the initial public offering (Teoh, Welch, and Wong 1998) or the competition for government subsidies (Jiang et al. 2018). Some managers may also use a long-term earnings management strategy — income smoothing, which helps to report more stable earnings during consecutive time periods.
Various groups of stakeholders are affected by reporting manipulations. For outside stakeholders, it is not easy to distinguish between window-dressed and real figures in the accounting information. For creditors, it becomes more difficult to control companies, as covenants that are tied to the reported figures may not represent the real performance of the enterprise. For investors, there is a risk of making a wrong investment decision based on the distorted financial reporting data. Several studies reported a negative effect of earnings
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management on the shareholders’ returns or the firm’s reputation. For governments, earnings management presents a fiscal risk, as companies may engage in manipulations in order to decrease their effective tax rate. In other words, managers’ self-interest that results in earnings management creates hurdles for many other company’s stakeholders.
Corporate governance system should act as a bridge between the interests of managers and those of other stakeholders, especially investors. Corporate governance mechanisms should restrain earnings manipulations by imposing additional controls and checks (Daily, Dalton, and Canella 2003). One of the finance-related functions of the corporate governance system is to ensure credibility and relevance of the financial statements. The central internal corporate governance mechanism that deals with the quality of the financial information is the board of directors. In many companies, the audit committee is also established by the board of directors with the aim of control and verification of the data that is going to be published in the company’s external reports. However, while these corporate governance mechanisms exist in many public companies, the composition, functionality and structure of the board and the audit committee differ a lot. Some key attributes of the board and the audit committee are the independence of directors, the level of their financial expertise or the number of other directorships held by them.
Several prior studies, mainly of the developed markets, such as that of the U.S or European countries, have found that certain characteristics of the audit committee and the board of directors, such as their size, the financial expertise or the independence of their members, help to restrain earnings manipulations (Klein 2002; Piot and Janin 2007; Sierra García, Ruiz Barbadillo, and Orta Pérez 2012). However, the results vary from country to country. As for the Russian context, few existing studies of the phenomenon of earnings management focus mainly on the illegal earnings management (Volkov and Nikulin 2013). In the domain of corporate governance, several studies have analyzed the structure of the board of directors of Russian firms (see, for example, (Beresintets, Ilina, and Cherkasskaya 2013)); yet, there is no study that focused on the presence, role and composition of the audit committee in Russian companies. Thus, the thesis represents the first study of the topic for the Russian firms.
This study aims at covering this research gap and looks at the characteristics of those corporate governance mechanisms in Russia. The goal of the thesis is to determine the association between the structure of the board of directors and the presence and composition of the audit committee and earnings management for Russian firms. The following interim tasks are completed in order to fulfill that goal:
1. To analyze the phenomenon of earnings management and its consequences for the firm’s stakeholders;
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2. To outline the role of the board of directors and the audit committee in the control over the quality of the firm’s financial reporting;
3. To justify the method of the estimation of the firm’s level of earnings management;
4. To formulate the research hypotheses and to collect data for empirical research;
5. To identify the characteristics of the board of directors that are associated with the level of
earnings management for Russian firms;
6. To identify the attributes of the audit committee that are associated with the level of
earnings management for Russian firms.
The study will be relevant for a wide variety of companies’ stakeholders. First, the
regulators might need to develop a better understanding about the efficiency of the board and audit committee monitoring of the financial information quality. Perhaps some changes in the future legislation could improve the quality of internal monitoring system, prevent manipulations and protect stockholders (as well as the other stakeholders). Second, the implications for investors are also significant; they might be able to understand whether the existing corporate governance mechanisms are deterring managers from earnings manipulations and if they need to adjust for these manipulations when making estimations and investment decisions. Moreover, investors may also initiate changes in the corporate governance mechanisms of their own companies. Third, directors and auditors themselves may see the areas where their control might be weak for the moment and consider changes to the composition of the corporate governance mechanisms that are currently established in their firms. The study can also spotlight the issues which require a closer attention in the future.
The rest of the paper is organized as follows. Chapter 1 presents a theoretical review on the issue of earnings management, the types of earnings management and its potential consequences for various stakeholders of the firm. Next, the Chapter 1 focuses on the role corporate governance mechanisms, i.e. the board of directors and the audit committee, in the monitoring of the quality of the company’s financial information and the extant research linking the attributes of the board of directors and the audit committee with the extent of earnings management. At the end of the Chapter 1, the hypotheses of this study are developed.
Chapter 2 starts with the description of the sample used in this study and the outline of the research methodology. Next, the analysis of descriptive statistics for variables utilized in the study is demonstrated. After that, the empirical results are presented: models for the characteristics of both the board of directors and the audit committee and the level of earnings management are estimated and discussed. Additional analysis deals with the issue of state ownership and the
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differences in the association between the characteristics of the board and the audit committee and the magnitude of earnings management for state-owned and private Russian enterprises.
The research in this study was conducted on the sample of 184 Russian public companies. The panel data were collected for 2014-2018. The databases of Thomson Reuters (Refinitiv) Eikon, SKRIN and SPARK were used to collect accounting data. E-disclosure database of corporate reports of Interfax was also utilized to gather data on corporate governance mechanisms’ attributes from the companies’ annual reports. The statistical analysis was conducted in the Stata software package.