A Study On Contemporary Earnings Management and Corporate Governance Practices in India

DECLARATION
I, Mr. Pranesh Debnath, Research Scholar, Department of Commerce, Tripura University (A

Central University) do hereby declared that the work embodied in this Thesis entitled “A
Study on Contemporary Earnings Management and Corporate Governance Practices in
India” is my own bonafide work carried out by me under the supervision and guidance of
Prof. Chinmoy Roy, Department in Commerce, Tripura University (A Central University).
The matter embodied in this Thesis has not been submitted for the award of any other
Degree or Diploma in this University or any other Institutions.
I declare that I have faithfully acknowledged, given credit to and referred to the research
workers wherever their works have been cited in the text and the body of this Thesis. I have
adhered to all principles of academic honesty and integrity. No falsified or fabricated data
have been presented in the present Thesis. The Thesis has been prepared without resorting to
plagiarism.
I understand that any violation of the above will cause for disciplinary action by the institute,
including revoking the conferred degree, if conferred, and can also evoke penal action from
the sources for which permission has not been taken.
Dated: Suryamaninagar Mr. Pranesh Debnath

June 19, 2019 Research Scholar
Department of Commerce
Tripura University
……………………………………………………………
i
Prof. Chinmoy Roy TRIPURA UNIVERSITY
Professor and Head, (A Central University),
Department of Commerce Agartala-799022,
Mobile: +91-9862580208 Tripura, India
E-mail: chinmoy68[at]gmail.com +91-381-237-9064
Ref: No.F.TU/COE/Ph.D/10/COM/05/16 Date: 19.06.2019
CERTIFICATE
This is to certify that the Thesis entitled “A Study on Contemporary Earnings Management
and Corporate Governance Practices in India” is an original research work of Mr. Pranesh
Debnath, Research Scholar, Department of Commerce, Tripura University (A Central
University). He has completed his research work and finalised the Thesis for the degree of
Doctor of Philosophy (Ph.D.) in Commerce under my supervision and guidance in the year
2019.
I, therefore, recommend that Mr. Pranesh Debnath, Research Scholar be allowed to submit his
Thesis for the degree of Doctor of Philosophy (Ph.D.) to the Department of Commerce, Tripura
University (A Central University).
Forwarded By
……….………………
(Prof. Chinmoy Roy),
Supervisor & Professor,
Department of Commerce,
Tripura University
ii
ACKNOWLEDGMENT
I wish to express my warm gratification and indebtedness to my Supervisor, Prof. Chinmoy

Roy, Professor, Department of Commerce, Tripura University (A Central University) for his
invaluable guidance, co-operative attitude and dynamic efforts during the Ph.D. work. He
provided me assistance, suggestions and instructions whenever needed that has been
instrumental in the successful completion of this Thesis.
I wish to express my sincere thanks to Prof. Prallad Debnath, Dr. S. K. Sen, Dr. Joy Das and
Sri Rajat Deb, Department of Commerce, Tripura University (A Central University) and all
other RAC (Research Advisory Committee) members for their valuable comments,
suggestions, instructions and constant encouragement during the course of the study.
The generosity of friends in my academic contact especially Dr. Debdas Rakshit, Dr.
Chanchal Chaterjee, Dr. Raghubeer Kaur, Dr. Ashu Khanna, Dr. Bhushan Dholakia, and Dr.
Kanika Karmakar and others across the country deserves a special mention for the
substantial support and cooperation they rendered during the course of my Ph.D. work which
has been instrumental for finalisation of the Thesis.
Further, I am thankful to different Experts and Participants of various Conferences and
Seminars across the country for giving valuable comments and suggestion wherever I have
presented my works which helps me to provide the final shape of my Ph.D. work and thus
Thesis.
I am also thankful to the Central Library of Tripura University (A Central University) and its
officials for providing constant access to the required study materials, including online
database during the Ph.D. work.
Last but not least, I am also thankful to all my friends, well-wishers for their best wishes to
complete the Ph.D. work successfully.
Finally, I must also be thankful to my Parents and Brother for their sacrifice, constant
support and encouragement during the course of my Ph.D. work which helped me for
successful completion of this work and finalisation of the Thesis. Without their support and
encouragement, it would not have been possible for me to complete the same on time.
Mr. Pranesh Debnath

Research Scholar
Department of Commerce
Tripura University
iii
TABLE OF CONTENTS
Declaration .................................................................................................. Page No.

Declaration .................................................................................................................. i
Certificate ................................................................................................................... ii
Acknowledgement ....................................................................................................iii
Table of Contents ................................................................................................ iv-vi
List of Tables ............................................................................................................vii
List of Figures .........................................................................................................viii
List of Abbreviations ........................................................................................... ix-x
Abstract ................................................................................................................ xi-xii
Chapter 1: Introduction ..................................................................................... 1-17

1.1 Context of the Study .................................................................................................................... 1
1.2 Statement of the Problem ......................................................................................................... 7
1.3 Earnings Management Concepts and Definition ....................................................................... 9
1.4 Execution of Earnings Management....................................................................................... 10
1.5 Types of Accruals ...................................................................................................................... 13
1.6 Root Cause of Earnings Management ...................................................................................... 13
1.7 Significance of the Study ........................................................................................................... 15
1.8 Organisation of the Thesis ......................................................................................................... 16
Chapter 2: Review of Literature ...................................................................... 18-47

2.1 General Overview ....................................................................................................................... 18
2.2 Corporate Governance in India ................................................................................................. 19
2.3 Survey of Literature ................................................................................................................... 20
2.4 Hypothesis Development ........................................................................................................... 34
2.5 Corporate Governance Attributes and Earnings Management ................................................ 34
2.6 Firm-Specific Characteristics and Earnings Management ....................................................... 43
2.7 Research Gap............................................................................................................................... 46
2.8 Research Questions ..................................................................................................................... 47
2.9 Research Objectives .................................................................................................................... 47
Chapter 3: Data and Methodology .................................................................. 48-66

3.2 Research Design .......................................................................................................................... 48
3.2.1 Sample Selection Criteria.................................................................................................. 48
3.2.2 Sample Size ........................................................................................................................ 49
3.3 Data Collection............................................................................................................................ 50
3.3.1 Data Sources ...................................................................................................................... 50
iv
3.3.2 Time Period of the Study .................................................................................................. 51
3.3.3 Sample Observations ......................................................................................................... 51
3.4 Estimation of Discretionary Accruals ........................................................................................ 52
3.4.1 Discretionary Accruals Models .................................................................................. 52
3.4.2 Discretionary Accruals................................................................................................ 53
3.4.3 Measurement of Discretionary Accrual (dependent variable).................................. 53
3.5 Estimation of Independent variables.......................................................................................... 55
3.6 Estimation of Control Variables ................................................................................................ 56
3.7 Summary of Dependent and Independent Variables ................................................................ 57
3.8 Assumptions for the Multiple Regression Analysis ................................................................. 57
3.8.1 Normality Test ................................................................................................................... 57
3.8.2 Multicollinearity Test ........................................................................................................ 58
3.8.3 Autocorrelation Test .......................................................................................................... 58
3.8.4 Regression Models ............................................................................................................ 62
3.9 Logical Framework of EM and CG Mechanism ...................................................................... 63
Chapter 4: State of Earnings Management Practices in India ................... 67-79

4.1 Introduction ................................................................................................................................ 67
4.2 Status of Earnings Management Practices in the Indian Context ........................................... 70
4.3 Objectives of the Chapter ........................................................................................................... 71
4.4 Results and Discussions ............................................................................................................ 71
4.5 Concluding Remarks ................................................................................................................. 78
Chapter 5: Association between Corporate Governance Attributes and

Earnings Management Practices in India ................................... 80-106
5.2 Background of the Chapter......................................................................................................... 82
5.3 Objectives of the Chapter ........................................................................................................... 90
5.4 Independent Variables ................................................................................................................ 90
5.5 Results and Discussions ............................................................................................................ 91
5.5.1 Descriptive Analysis.......................................................................................................... 91
5.5.2 Correlation and Multicollinearity Analysis ..................................................................... 95
5.5.3 Regression Results............................................................................................................. 96
5.6 Concluding Remarks................................................................................................................. 105
Chapter 6: Relationship between Women Participation in Board and

Earnings Management Practices in India ................................ 107-119
6.1 Introduction ............................................................................................................................... 107
6.2 Objectives of the Chapter ......................................................................................................... 110
6.3 Data Analysis and Discussion .................................................................................................. 110
v
6.3.1 Descriptive Statistics ................................................................................................ 110
6.3.2 Regression Analysis ................................................................................................. 115
Chapter 7: Nexus between Audit Committee Attributes and Earnings

Management Practices in India ................................................. 120-142
7.1 Introduction ............................................................................................................................... 120
7.2 Context of the Study ................................................................................................................. 122
7.3 Composition and Role of Audit Committee............................................................................ 125
7.3.1 Composition of Audit Committee as per CA, 2013 ...................................................... 125
7.3.2 Role Audit Committee in Corporate Governance mechanism under CA, 2013 ......... 126
7.4 Objectives of the Chapter ......................................................................................................... 126
7.5 Description of Independent Variables ..................................................................................... 127
7.6 Description of Control Variables ............................................................................................. 128
7.7 Model Formulation ................................................................................................................... 128
7.8 Results and Discussions............................................................................................................ 129
7.8.1 Descriptive Statistics ....................................................................................................... 129
7.8.2 Multicollinearity Tests .................................................................................................... 133
7.8.3 Regression Results .......................................................................................................... 133
Chapter 8: Summary and Conclusions ...................................................... 143-151

8.1 Introduction ............................................................................................................................... 143
8.2 Summary of Empirical Analysis ............................................................................................. 143
8.3 Contributions of the Study ....................................................................................................... 146
8.4 Potential Limitations of the Study ........................................................................................... 147
8.5 Summary of Hypotheses and Findings .................................................................................... 148
8.6 Further Scope of Research ..................................................................................................... 148
8.7 Suggestions................................................................................................................................ 150
8.8 Summary.................................................................................................................................... 151
Endnotes................................................................................................................... 152
Bibliography .................................................................................................... 153-179
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vi
LIST OF TABLES
Sl. No. Table No. Title of the Tables Page No.
1 Table 3.1 Sample Selection 49

2 Table 3.2 Industry-wise distribution of sample companies 50
Summary of Variables Measurement and Literature
3 Table 3.3 59-61
Review
Summary of Research hypotheses development and
4 Table 3.4 65-66
literature support
5 Table 4.1 Descriptive Statistics of Discretionary Accruals 72
6 Table 4.2 Industry and Year-wise Average Discretionary Accruals 76
Average Discretionary Accruals of service and non-service
7 Table 4.3 77
sector
Company-wise extreme positive Discretionary Accruals
8 Table 4.4 77
during the period under study
Company-wise extreme negative Discretionary Accruals
9 Table 4.5 78
during the period under study
10 Table 5.1 Descriptive Statistics of CG Variables under consideration 94
Descriptive Statistics before and after application of CA,
11 Table 5.2 95
2013
12 Table 5.3 Correlation among Independent Variables 96
13 Table 5.4 VIF and Tolerance Test 97
14 Table 5.5 Multiple Regression results for the whole sample 100
Multiple Regression results for Pre and Post-Application of
15 Table 5.6 104
CA, 2013
16 Table 6.1 Descriptive Statistics 111
Women Representation in Service and Manufacturing
17 Table 6.2 111
companies
18 Table 6.3 Multiple Regression Output 116
19 Table 7.1 Descriptive Statistics of Variables 130
20 Table 7.2 Year-wise presentation of independent variables 131
21 Table 7.3 Multicollinearity Tests 132
22 Table 7.4 Test of VIF across the Variables 134
23 Table 7.5 Pearson Product-Moment Correlation Matrix 135
24 Table 7.6 Multivariate Regression Output 137
Multivariate Regression Analysis (before and after
25 Table 7.7 140
application of CA, 2013)
26 Table 8.1 Summary of Hypotheses and Findings 149
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vii
LIST OF FIGURES
Sl. No. Figure No. Title of the Figures Page No.
1 Figure 3.1 Logical Relationship between EM and CG Mechanism 64
2 Figure 4.1 Pattern of Average DA from 2012 to 2016 74
3 Figure 5.1 Conceptual Framework for Board Structure and EM 93
Board Strength and Composition of Independent
4 Figure 5.2 96
Directors
5 Figure 6.1 Board Size and Women representation 111
Year-wise Total Number of Women Directors across
6 Figure 6.2 112
the Firms under Consideration
7 Figure 6.3 Trend of Women Representation (%) in Boardroom 112
Women Representation before and after application of
8 Figure 6.4 114
CA, 2013
Industry-wise Women Representation (%) in the
9 Figure 6.5 114
Boardroom
10 Figure 7.1 Audit Committee Strength and Independence 133
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viii
LIST OF ABBREVIATIONS
Abbreviations Full Form
∆REC Changes in receivables
∆REV Changes in revenue
AC Audit Committee
ACD Audit Committee Diligence
ACI Audit Committee Independence
ACS Audit Committee Size
BDD Board Diligence
BDI Board Independence
BDS Board Size
BSE Bombay Stock Exchange
CG Corporate Governance
CA, 2013 Companies Act, 2013
CEO Chief Executive Officer
CEOD CEO-duality
CFO Cash Flow From Operation
CLSA Credit Lyonnais Security Asia
CV Coefficient of Variance
DA Discretionary Accruals
DRG Development Research Group
EM Earnings Management
ET-500 Economic Times-500
FLEV Financial Leverage
FRMA Firm Age
FRMG Firm Growth
FRMP Firm Performance
FRMS Firm Size
FRQ Financial Reporting Quality
GAAP Generally Accepted Accounting Principles
GEND Gender Diversity
GLC Government Linked Companies
IDs Independent Directors
ix
LIST OF ABBREVIATIONS
Abbreviation Full Form
ISE Istanbul Stock Exchange
MLD Multiple Directorships
NDA Non-Discretionary Accruals
NFCs Non-Financial Companies
NSE Nairobi Security Exchange
PPE Property Plant and Equipment
PSUs Public Sector Units
R&D Research & Development
RFD Regulation of Fair Disclosure
RoCE Return on Capital Employed
SD Standard Deviation
SEBI Securities and Exchange Board of India
SOX Surbanes-Oxely
TA Total Accruals
TF Tolerance Factors
TSE Tehran Stock Exchange
UK United Kingdom
USA United States of America
VIF Variance Inflation Factors
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x
A Study on Contemporary Earnings Management and Corporate Governance Practices in India
ABSTRACT
The Corporate Governance (CG) mechanism is all about ensuring the balance between the
economic and social goals of a corporate organization encouraging the efficient and effective
use of resources aiming to align the interest of individuals, corporations and society at large.
Most importantly, the CG is considered as a safeguard mechanism to the shareholders from
agency problems, which is arising out of the appointment of the managers to execute the
business on behalf of shareholders. In addition to monitoring the management activity, fair
financial reporting is also considered as a fundamental responsibility of the CG mechanism.
However, in the recent years, high profile corporate scams in the USA such as Enron,
WorldCom and Xerox, Parmalat in Italy, Flowtex in Germany and Royal Ahold in the
Netherlands, along with Ketan Parikh and Satyam in India have eroded the public confidence
in CG mechanism and financial reporting system. Taking advantage of ineffective CG
mechanism, managers interfere in the financial reporting process to yield the desired
accounting results, which is known as Earnings Management (EM) in the accounting
literature. It has a serious detrimental bearing on financial reporting quality. Consequently,
the studies of CG and EM have got the substantial attention among the accounting
professionals in the free enterprise economy as the research suggested that EM practices in
financial reporting are the staple cause of such CG scandals across the globe. Though, the
empirical research on the impact of CG mechanism on EM practices in financial reporting is
done mostly in the context of developed economies, especially after the 1990s, but very rare
in case of developing country like India.
Therefore, the present study attempts to examine the role of the CG mechanism to curtail the
EM practices in financial reporting by examining the relationship between various CG
attributes and discretionary accruals (a standard proxy of EM) in the Indian context. To
achieve the objectives of the study collected data from across 175 non-financial companies
selected through predetermined criteria from Economic Times-500 list in the year 2012 over
five years from 2012 to 2016, which finally yielded 875 firm-year observations for the study.
Corresponding to the objectives of the study, the required data on the CG mechanism and
accounting figure have been collected from the annual reports of respective companies and
financial statements compiled by Capitalineplus Corporate Database, respectively. All
financial and CG related data have been assessed at the single point of time, i.e., on 31st
March in standalone mode to ensure consistency in the dataset. Subsequently, collected data
has been analysed through descriptive and inferential statistical techniques to test the
xi
hypotheses. Multiple regression has been used for drawing the inference of the study after
applying the relevant diagnostic tests to satisfy the assumptions of the panel data setup.
After analysis and interpretation of data, the study shows that the average EM in the Indian
corporate sector is around 0.41 percent of the total assets of these firms, which is analogous
to the estimates elsewhere in the world. Subsequently, using the multiple regressions on
balance panel data, the study revealed that unlike other developed countries, the CG
mechanism has a mixed impact on EM practices in financial reporting in the Indian context.
At par with the expectation of the CG philosophy, the study ratified that, among the CG
attributes under consideration, the board size, board diligence, gender diversity, audit
committee size and audit committee independence have a significant negative impact of EM.
The CEO-duality, on the other hand, has a positive effect on EM. However, in contradiction
to the CG philosophy, the analysis further exposed that audit committee independence had a
positive impact on EM, but the board independence was not significantly associated with
EM. Further, among the firm-specific attributes, size and growth of the firms were found to
be significantly associated with EM practices in financial reporting.
Therefore, the results of the present study noted that despite the presence of CG laws and
regulations in the country, the EM practices remain in financial reporting in the context of
the Indian economy. The reason may be explained by the fact that India is considered as
over-regulated but under-enforced nation where we need to empower the regulators to
implement them with speed and determination so that CG regulations are followed in letter
and spirit to achieve the desired accountability and transparency of the CG mechanism. This
will ensure the protection for the investors from corporate malpractice concerning falsified
financial reporting and ultimately give safeguard to all the stakeholders in future days to
come.
Nevertheless, the present study is based on the limited number of sample firms across
fourteen industries working in the Indian economy for a finite period of five years. Hence,
generalization or applicability of the present findings over other countries and industries with
different incentives for pampering into EM in financial reporting, other industry-specific and
country-specific factors are expected to be explored in the future course of research in this
field considering the cross-country sample firms for the more extended period.
Keywords: Earnings Management, Corporate Governance, Total Accruals, Discretionary

Accruals, Financial Reporting Quality, Board Attributes and Audit Committee Attributes.
--------
xii
CHAPTER 1
Introduction
1.1 Context of the Study
In the recent years, ineffective Corporate Governance (CG) mechanism, negligent auditing
system and weak enforcement of corporate laws have led to major corporate scandals
across the world (Rath, 2009), which eventually eroded the public confidence in audited
financial information system and questioned the credibility of CG mechanisms. This
situation called for an imperative to make CG more transparent and stringent across the
world because taking advantage of weak CG managers interferes in the financial reporting
process to yield the desired result which is known as Earning Management (EM) (Schipper,
1989). It has a detrimental impact on Financial Reporting Quality (FRQ) (Munter, 1999).
Consequently, the study of CG and EM engaged the serious attention among the accounting
professionals in the free enterprise economy, especially after the 1990s as research
suggested that EM practices are the core cause of such candles (Goncharov, 2005). The
high profile corporate scams in the United States of America (USA), such as Enron,
WorldCom and Xerox, as well as failures of Parmalat in Italy, Flowtex in Germany and
Royal Ahold in the Netherlands, along with Ketan Parikh scam and Satyam scandal in India
have eroded the public confidence in audited financial information system. The underlying
motive of the financial reporting system is to inform shareholders and other stakeholders
about the financial performance of the business and also provide an opportunity to judge
the financial health for meeting future business necessities (Kumari & Pattanayak, 2017).
Iqbal et al., (2015) rightly stated that the CG and EM practices are of immense importance
as they provide some opportunities and protections to different parties. Where the CG
serves a whole lot of interests of all these stakeholders, but EM phenomenon, on the other
hand, shows its kind nature only to managers and provides them the opportunity to
manipulate financial information according to their desires.
Thus, publicity about those cases raised a series of questions about the reliability of the
accounting information system and professional integrity of accounting and auditing to
safeguard the interest of investors. Consequent upon those scams, investors lost their
Tripura University (A Central University), Agartala-799022 1

confidence in CG mechanism and financial reporting (Jain et al., 2003; Jain & Rezaee,
2003; Kumari & Pattanayak, 2017). Many contemporary studies (Leventis &
Dimitropoulos, 2012; Mohamad et al., 2012; Gakher, 2014; Iqbal et al., 2015; Kapoor &
Goel, 2017; Kumari & Pattanayak, 2017) across the world have observed that CG quality
and EM (inverse measure of FRQ) are negatively linked with each other. While Ali et al.,
(2009) found CG instead promotes EM in Pakistan. Outa et al., (2017) found that DA (a
standard measure of EM) has no connection with CG in the context of Kenya. Rwegasira
(2000); Mak & Kusnadi, (2005) claimed that given the unstable political regimes, low per-
capita income and socio-economic disparities, the system of CG is not necessarily an ideal
solution for developing economies. However, it is needless to state that, financial reporting
is a fundamental responsibility of the corporate management involving sharing of economic
information related to the organisational unit with various stakeholders (Ayemere & Elijah,
2015) irrespective of economic development of the country. And the onus of preparing and
furnishing the financial information lies with the managers who are the agents employed by
the owners (generally not directly involved in daily business activities). Therefore,
prevailing information asymmetry allows managers to use their discretion in reporting
accounting information to promote their interest, which is commonly known as EM.
Schipper (1989) defines EM as "purposeful intervention in the external financial reporting
process, to obtain some private achievement."
Considering the said ineffective CG mechanism, many countries have come up with new
forms of CG mechanism with the enactment of the appropriate law to cater to the interest of
the shareholders. For instance, India has replaced the old Companies Act, 1956 by the
Companies Act, 2013 (CA, 2013). Given this development, the board of directors and
different other sub-committees constituted with the directors of the board like the Audit
Committee (AC), the risk management committee is vital governing organs of a corporate
system, which exercise supervising role through the different window to align the interest
of managers with other stakeholders (Dellaportas et al., 2005). Agency theory suggested
that the importance of CG lies in supervising the management decision to minimize the
conflict of interest between managers and owners. Therefore, the effectiveness of the CG is
in monitoring over management activity and conserving the quality of financial information

disclosure (Baccouch & Omri, 2014). Positive accounting theory holds that management
enjoys some flexibility in the choice of accounting methods in the firm's environment and
future uncertainty (Watts & Zimmerman, 1986). There is a possibility of illegal actions by
the management (agent) for their benefits, which are the detriment to the interests of
shareholders to achieve their economic incentives (Ayemere & Elijah, 2015). Because of
departure from the actual business administration, the shareholders are unable to observe
the day to day activities of the management directly (Jensen & Meckling, 1976). Therefore,
EM practice is linked with the deliberate acts of management concerning financial
estimates, classification and presentation of data to achieve some pre-defined earnings
figure. Consequently, EM can deteriorate the quality of reported earnings and investors’
confidence in financial reporting (Dechow et al., 1996). To safeguard their interests and to
restore the confidence of shareholders maintaining thee FRQ is utmost important in the
accounting information system.
Therefore, CG mechanism has been used by shareholders to align their interests with the
interest of managers and to ensure that they fairly report the financial information for the
external users (Hazarika et al., 2012; Waweru & Riro, 2013). Thus, the CG mechanism and
EM practices are of paramount imperative in accounting literature, especially in the modern
free enterprise economy. This situation brings into the focus of good CG structure to ensure
check and balance in the financial reporting processes to minimise the scope of
management for discretionary judgement in accounting decisions, which ultimately reduce
the EM in financial reporting and ensure the quality of accounting information, which
depicts the actual underlying financial position of a company. It has been mentioned by
Iqbal et al., (2015) that both CG and EM provide some opportunities and protections to
different parties where CG covers a broad set of stakeholders and protects the interests of
all these stakeholders. Because, the CG is based on principles of guiding the business with
integrity, fairness, and transparency regarding all transactions, makes the necessary
disclosures in compliance with all the laws of the land. Fundamentally CG is about
bringing transparency and accountability in the corporate system. Consequently, CG makes
corporate houses accountable and responsible towards the stakeholders and stands
committed to conducting business ethically and responsibly. But, EM phenomenon shows

its kind nature only to managers and insiders, providing them the opportunity to manipulate
financial information according to their desires.
Empirical research revealed that the CG mechanism is used as a measure to improve the
business environment, to limit EM practices, and enhance the FRQ (Kumari & Pattanayak,
2017). It has been defined by Organisation for Co-operation and Development Principles in
(OEDC) 1999 that "Good CG simply means good business." Besides, CG practice also
includes the decision-making and controlling modalities of corporate units. It facilitates an
understanding of the managerial structure of the business, resource utilization and various
other issues on company laws and business ethics (Adams et al., 2009). Effective CG
makes it mandatory to have a board of directors, Independent Directors (IDs), AC and
various other monitoring committees within a board. Owner’s participation and director
remuneration are factors that influence firms' decision-making process and thus, play a
crucial role in controlling managers' discretionary power leading EM practices in financial
reporting process (Kumari & Pattanayak, 2017).
Because of the fastest economic growth, increasing prospects of foreign institutional

investors, the need for reliable financial reporting and transparency in CG practice is of
paramount importance in the present Indian economic scenario. The CG is the sum total of
economic, legal, social and organizational mechanisms (or forces), which ensures that
corporations share the legitimate claim to their stakeholders. Contemporary economic
survey of International Monetary Fundi (IMF), World Bank and other economic survey
organization across the world have anticipated that India is one of the quickly developing
economies and therefore, calls for integrity and transparency in financial sectors to ensure
such development is sustainable. Hence, the study of EM and CG would be one such
catalyst which will cater to restore the confidence of investors by way of ensuring
transparent financial reporting practices. Therefore, the present study seeks to uncover the
propensity of EM practice in most vibrant Economic Times-500 (ET-500) listed Non-
Financial Companies (NFCs) and assessed the importance of CG in monitoring such
discretionary EM practices.
The term EM is one of the widely discussed subjects among the accounting professionals in

the era of free enterprise economy, especially after the 1990s when many reputed corporate
scams surfaced. The controversies, in connection with the abundant corporate scams around
the world slowly eroded the public confidence in published financial statements. It has given
rise to a plethora of issues about the reliability of the published accounting information and
responsibility of the auditing profession in the interest of the stakeholders and the public in
general. According to Watts & Zimmerman, (1986), management enjoy flexibility in the
choice of accounting methods in the firm's environment and future uncertainty while
estimating the amount of earnings. Earning, the "bottom line'' or "net income" is the single
most important item in financial statements, which signifies the degree of company's value
generation by the company for the shareholders. Because of the above reason, management
uses their discretionary power to manipulate the reported earnings figure to make it look
better than its actual underlying position (Goel, 2012). Therefore, EM involves the deliberate
act of management of financial estimates, classification, and presentation of data to achieve
certain pre-determined objectives. The Satyam and Enron scams in the past are prime
examples of misuse of laxity and discretion in choosing the accounting methods and
treatments by the management. Many reputed companies across the world do corporate
misconduct in the form of accounting frauds. It has impaired the trustworthiness between
corporate governance and investors (Routray & Bal, 2016).
EM has been defined in many different ways; such as Fields et al., (2001) stated that EM
arises when managers use their choice over accounting numbers with or without restrictions.
Such discretion can be either in the form of value maximizing or opportunistic. EM happens
when managers use their judgment in financial reporting and in assembling transactions to
modify financial reports either to misinform some investors about the fundamental economic
performance of the company or to influence contractual outcomes that depend on reported
accounting numbers (Healy & Wahlen, 1999).
In the present study, EM is viewed as a purposive involvement of managers in the external
financial reporting process, to mislead some stakeholders about the underlying economic
condition and performance of the company. From all the definitions of EM, they have
highlighted some standard features. Firstly, they underline the fact that EM behaviour refers
to purposeful and deliberate actions of the management with the sole objective to alter
reported earnings figure. Thus, EM is different from unintentional errors committed in the

course of accounting. Secondly, EM is executed through the accounting system or business

transactions of the company. The former is known as accounting-based EM and the latter is
real EM; this involves manipulation of actual operations to alter reported earnings so that
objective is achieved. An earning the "bottom line'' figure of the income statement is a
comprehensive measure of the overall performance of an enterprise, which indicates the
extent of the company's value-added activities. On account of the said importance of
earnings, the management of the company is always interested in their reporting where
management exercises choices in reporting of earnings figure. EM is in existence along with
the emergence of an accounting system. Empirical studies suggested that managers mainly
engage themselves in EM with four specific objectives, namely (a) external contract
incentives, (b) management compensation contract incentives, (c) regulatory motivations and
(d) capital market motivations (Healy & Wahlen, 1999). However, EM does not always
mean upward or downward estimation of financial figures in the financial statements.
Instead, it may be a combination of the upward and downward estimate without suppression
and elimination of any item for private or public interest. Therefore, EM could be broadly
categorized in to three kinds viz; white (Demski et al., 1984; Beneish, 2001; Sankar &
Subramanyam, 2001), which enhance the transparency of financial reporting; black
(Schipper, 1989; Levitt, 1998) involving outright misrepresentation and fraud; and grey
(Fields et al., 2001) is a management of report within the compliance framework, which
could be either opportunistic or efficiency enhancing. Again, upward or downward
estimation of earnings can also be made depending upon the nature of the industry, either
Service or Non-service (Goel, 2012).
In this backdrop, empirical research on EM in emerging markets like India is of paramount
importance as there is an increasing demand for capital by companies from global markets.
Foreign institutional investors play an important role in mobilizing the capital. The sustained
flow of foreign capital (portfolio capital) into the Indian capital market is possible only when
investors are protected from such accounting frauds, financial misconduct and deceptive EM
practices (Ajit et al., 2013). Moreover, there is a substantial segment of retail investors in
India who are unsophisticated and depend on financial reports of companies for making
investment decisions and regulators have a fiduciary duty to protect these inexperienced and
gullible investors. Considering the above mentioned scenario, this study is undertaken to

address the prevailing unsettled issues related to unfair financial reporting and CG scams.
1.2 Statement of the Problem
In the fastest growing global economy accounting information communicated to the external
users is expected to be relevant and reliable. In the accounting context, a piece of
information is said to be reliable when it is generated from the authenticated source or have
an authentic paper document regarding the transaction taken place in the past. But here
relevant means the reported information is made available to the users on time so that they
can take the informed decision. However, in accounting practice, relevant and reliability of
any accounting information is somewhat mutually exclusive in their occurrence. Therefore,
when the reliability of data increases, it loses its relevance due to the passage of time and
when data presented on time (For instance, the market value of fixed assets) it may not have
a reliable source (Glautier et al., 2000).
Thus, trying to mitigate this contradictory situation of accounting information, Generally

Accepted Accounting Principles (GAAP) allows the flexibility in the hands of managers to
use their judgment to make subjective assessment while recording the transactions,
preparation and presentation of financial statements. For instance, company management has
to use their professional discretion while estimating the working life of depreciable assets,
making the provision relating to non-collection of receivables, the timing of declaring the
obsolete assets and so on. Likewise, there are many other flexible areas of accounting where
managerial judgments are necessary for preparation presentation of accounting information.
Furthermore, in case of open and free enterprise economy, financial reporting is becoming
more market-oriented based on fair value accounting rather than historical accounting, thus,
growing the degree of management discretion in accounting information processing and
reporting mechanism. In view of the above, it has been realised that the use of judgment and
subjectivity in accounting is utmost essential and desirable to ensure that company
management is able to apply their professional expertise and judgment as well as take into
account the context of general economy and factor inside the company for proper recording
of business transactions (Parfet, 2000). Hence, discretion is allowed in accounting to reduce

the information asymmetry by enhancing the relevance and timeliness of financial

information. Unfortunately, in most of the corporate accounting scandalsii It was found that
this kind of discretion is abused by the management to maximize their self-interest negating
the interest of stakeholders. This sort of misuse of accounting discretion for the interest of
the management is known as EMiii and reduced the confidence of users in published
financial information.
Now, the essential question is whether the stakeholders hold such stands to see such
opportunistic management practices from the published report or they are misguided by such
practices? Although not explicit, there is evidence which indicates those stakeholders are to
some extent misleading by abuse of accounting choices, but ramification is exposed to the
public after the fraud surfaced (Gakher, 2014). For instance, Teoh et al., (1998) stated that
investors are deceived by pre-issue management of reported earnings by seasoned equity
iv
issues. Since profits are often managed through accruals , which further indicates that
ordinary users of accounting information are unable to watch over the abuse of accounting
discretions (Sloan, 1996). Therefore, it is expected to have constant vigilance over the
widely held firms where the public is substantially interested. Because, Gakher, (2014)
claimed that EM practice is widespread in financial reporting across the globe. But the
public notices the same only when bubble bursts in the form of big screen corporate scams
like Satyam in the year 2009, which is the biggest auditing fraud in the Indian corporate
history. On account of the said inherent inability of users of financial information, it has
been of interest for the accounting scholars to develop the tools to detect EM. Although there
is a considerable number of models that have been developed for detecting such
management practices starting from Healy, (1985), the most commonly used method for
detecting EM practices across the globe is multiple regression based Jones, (1991) model.
Later on, the Jones model was modified by Dechow et al., (1995). The fundamental reason
for modification of the Jones model is that it fails to consider the accruals arising out of
receivable, which is treated as normal accruals required by the business activities. Therefore,
in the present study modified Jones model developed by Dechow et al., (1995) is used for
estimation of DA (a standard proxy for EM), which is an inverse measure of financial
reporting.

1.3 Earnings Management Concepts and Definition
Before going to define the term, EM let me clarify the term ‘earnings,' which is a portion of
revenue left after adjustment of all relevant expenditure including taxes spared for realizing
of such revenue. A company always focus on generating the profit, as no doubt it is the
primary goal of any business organization to make money. But still, company management
not only focuses on to have a profit at the end of every accounting period, but they also want
the company's financial statements to look as good as they can. After all, the financial
statements are the mirror at which potential investors and creditors look while deciding
whether or not to lend the company money or to become an investor where the concept of
EM comes into play. The EM, in a nutshell, is the creative use of different accounting
techniques and methods to make financial statements looks better. The EM is associated with
accruals accounting and it deals with managers' choice of accounting policies for achieving
reporting goal.
Though there is no single accepted definition of EM, it implies the technique through which
management interferes in the financial reporting process to achieve the predetermined target
by overturning some information to conceal the actual financial position and performance
from the external users. Healy & Wahlen, (1999) defined EM as a "manager's judgment in
financial reporting and structuring transactions to modify financial reports to either mislead
some stakeholders about the underlying economic performance of the company or to
contractual stimulus consequences that rest on reported accounting numbers." Further,
Mulford & Comiskey, (2002) defined EM as "active manipulation of earnings towards a pre-
determined target." Therefore, EM arose in the pursuit of managerial interest set against the
owners' interest (Jensen & Meckling, 1976). From the above, it is clear that EM focus on
personal judgment on the choice of accounting methods and economic choices that might be
used to impact reported earnings to meet the programmed target. Managers generally resort
to manage reported earnings when they face a situation, which demands better reporting the
earnings results for the fulfilment of investors' expectation because companies that meet or
beat market expectations generally get rewarded through valuation premiums reflected in
their stock prices (Brown & Caylor, 2005; Rajpal, 2012). On the contrary, companies that

report earnings lower than the market expectations generally experience a fall in their stock
prices.
Therefore, an earning figure is an essential item of financial statements signifying the value,
which is being created by the business process for the shareholders in particular and other
stakeholders in general. On account of the said importance of earnings, the management of
the companies are always fascinated in their reporting (Goel, 2012) that is where
management exercises choices for reporting of earnings. The recent accounting scams like
Waste Management in 1998, Enron in 2001, WorldCom in 2002, Lehman Brothers Scandal
in 2008, Satyam in 2009 and others are prime examples of misuse of flexibility in choosing
the accounting methods and treatments by the management. EM occurs when managers use
discretion in financial reporting and in structuring transactions to secure private gains.
Although there is no single most definition of EM, many scholars define the term EM in
innumerable ways-
One of the most commonly used definitions is "EM occurs when managers use judgment in
financial reporting and in structuring transactions to alter financial reports either to mislead
influence contractual outcomes that depend on reported accounting numbers" (Healy &
Wahlen, 1999). In other words, EM generally engages in the selection of accounting
methods, procedures and estimates that conform to GAAP. That means, firms committed to
this kind of involvement would stay within the bright line of acceptable accounting
principles and would not be indulging in fraudulent behaviour. In other words, EM is an
accounting practice that may follow the letter of the rules, regulations and standards of
accounting, but undoubtedly diverges from the actual spirit of those rules, regulations and
standards (Gakher, 2014).
1.4 Execution of Earnings Management
EM may be classified into two broad categories, such as Real Earnings Management (REM)
and Accrual-based Earnings Management (AEM). The REM means that the management
chooses a series of economic activities to influence the financial statements (Heemskerk &

Van, 2006). This type of EM commonly affects cash flows. Roychowdhury, (2006) stated
that REM is a series of management actions that diverge from usual business practices,
undertaken with the primary objective of meeting certain earnings thresholds. An example of
REM is the reduction in discretionary expenses, such as Research and Development (R&D)
costs, selling, advertising, travel, maintenance, indulge in overproduction or timing of the
sale of assets to increase the reported income (Cohen et al., 2008). Another example is to sell
products or services with a high discount to increase the sales volume in the short term. So,
REM is about managing the real activities of the company. Since this will be less visible for
accountants and other third parties, this method of EM is harder to detect than AEM and in
fact, it might be technically impossible to detect in practice (Roychowdhury, 2006). In other
words, REM refers to real decisions taken by the managers to affect actual activities
resulting in changes in cash flows and earnings. They may also give price discounts or offer
lenient credit terms to the customers to increase sales. Therefore, the definition of REM
extended by Healy & Wahlen, (1999) who stated that EM as a managers' judgment in
financial reporting and structuring transactions to alter financial reports to either mislead
influence contractual outcomes depending upon reported accounting numbers. These actions
are taken to avoid losses or to meet/beat earnings benchmarks (Baber et al., 1991; Jackson &
Wilcox, 2000; Herrmann et al., 2003; Roychowdhury, 2006; Cohen et al., 2010; Gunny,
2010) or to avoid violation of debt covenants (Bartov, 1993).
However, AEM involves the GAAP and accounting conventions, which are followed for the
preparation of financial statements (Dechow & Skinner, 2000). Accounting principles permit
managers adopting the accounting practices in the particular alternative decision in the shape
of choosing the method or treatment of any transaction such as revenue recognition,
especially in the context of rich in information asymmetry as mentioned in disclosures. AEM
includes the change in accounting methods or the use of opportunistic estimates to produce
the earnings figure to meet the previous expectations or desired target. However, such
practice of EM does not have any effect on cash flows. Examples include reporting fictitious
revenues, booking sales with a right of return, reducing the provision for bad debts, avoiding
or delaying obsolete assets and inventories write-offs and so on (Gakher, 2014). These

techniques affect the timing of the recognition of earnings and thus, such accruals reverse.
For example, a sale of goods booked in the year ‘t’ on which customer holds right to return
will increase the earnings in the year ‘t.' However, if the customer returns the goods in the
year ‘t+1’, accounting for this return will lead to a decline in the earnings in year ‘t+1’.
Alternatively, if managers decide not to account for this return in year ‘t+1’ balance of
account receivables remains constant. Likewise, some studies stated that EM occurs due to
the availability of different acceptable accounting accrual choices to be applied for
determining reported income (Healy & Wahlen, 1999; Dechow & Skinner, 2000). In other
words, AEM is about the discretion of management in the process of selecting accounting
methods and in the process of estimating accounting numbers. The study of Roychowdhury
(2006), explained that accrual management is manipulating the accounts with no direct cash
flow consequences. The accruals can be an indication for EM because the discretion of the
management is needed for the recognition of some items. For example, the manager intended
to reduce expenses in the current period might defer scheduled routine maintenance of
equipment until the next accounting period. This exercise results in higher income reported
in the current period, but the maintenance delay, of course, could be detrimental to the
company's future operations.
Also, a company may vary the timing of performance reporting. Recording inventory
obsolescence is required under GAAP, for example, but choosing when to record
obsolescence is relatively subjective. A manager may know some part of the company's
inventory has become obsolete, but if earning in the current period is lower than desired, he
might defer recording the loss, or "write-down," until a future period. Besides, the timing of
these items is subject to management discretion; for example, the assets write-off can be
delayed as a part of EM practice in financial reporting (Roychowdhury, 2006). Gakher,
(2014) opined that the accrual basis of accounting allows managers a great deal of discretion
in estimating the actual earnings of a firm reported in any given period as compared to the
cash basis of accounting. To some extent, managers can alter the timing of recognition of
revenues and expenses by advancing recognition of sales revenue through credit sales, or
delaying recognition of losses or obsolescence of stocks (Teoh et al., 1998).

1.5 Types of Accruals
As per mercantile system of accounting (i.e., the accrual concept of accounting), we record
revenues on credit sales even when the actual cash is yet to receive (in case of long term
construction contract). Similarly, we do not consider the revenue in the books of the account
even after received of cash (where buyers hold the right to return the goods). The similar
situation is also applicable for expenditure, where we record the amount of expenditure in
the income statement but actual cash has not yet been paid (outstanding expenditure) and
some expenditure we could not recognize in the books of the current period even after actual
cash payment, which is related to the forthcoming year (pre-paid expenditure). On account
of the said principles income figure appeared in the bottom of the income statement is
composed of cash flow and accrualsv. As per EM literature, these accruals can be
decomposed into two components, such as Non-Discretionary Accruals (NDA) and
Discretionary Accruals (DA). NDA is the part of accruals, which represent the state of
business activities and varies with changes in business policy like increase or decrease in
credit terms, raising or repayment of loans, the redemption of debenture or bonds and so on.
It also depends upon nature of business activities (e.g., manufacturing business requires
holding of solid raw materials, which represent current assets but construction business
requires a tremendous amount of investment in sophisticated machinery, which represents
fixed assets). Therefore, NDA is a function of revenues because, revenue growth usually
increases accounts receivables (Goel, 2012).
In contrast, DA is not at all related to business activities; rather, they represent the degree of
discretion that management exercise for achieving their benefits. In other words, DA is the
results of management choices regarding operating and accounting decisions.
Mathematically speaking TA is equal to DA plus NDA.
TA = DA + NDA
1.6 Root Cause of Earnings Management
Agency theory suggested that in the federal structure of Joint Stock Company where there is
a departure of ownership and the control of a firm from owners to managers, the possibility

for agency problems prevail because of the conflicts of interest between principals and
agents. Essentially, the agency theory explains the corporate relationship between the owners
of corporations and management, where the principal (owners) elects the board, who in turn
choose the management team (agents) to carry out the routine business activities and execute
the decisions (Abdullah & Valentine, 2009; Patricia & Joseph, 2013). The delegation of
ownership power to corporate agents exaggerates the chances of moral hazard to exist.
Because, the agency theory assumes that, agents are an opportunist, self-serving, with
motivation to satisfy their objective (Podrug, 2010). And due to the separation of power,
principals are unable to corroborate whether the agents' actions conform with the best
interests of the shareholders (Hendry & Kiel, 2004). The theory also assumes that when
management has different decisions, the principal or agent selects the best option that
increases their self-interest (Davis et al., 1997). Against this backdrop, Hashim & Devi,
(2008) claimed that two key problems are associated with owners and management
relationship, namely, Moral Hazard and Information Asymmetry. Moral Hazard refers to the
lack of effort on the part of management to act in the owners' best interests. While
Information Asymmetry implies that the management has inside information about the actual
economic condition of the firm, which they may or may not share with outside stakeholders
(Pergola, 2005). To have a guarantee that, managers act for the best interest of shareholders,
the mechanism has been established where remuneration of managers is linked according to
share price movement or accounting based performance of the firm. Consequently, managers
are interested in manipulating the earnings figure, which is linked with their bonus,
incentives, promotions and award of executive stock options for senior managers (Peasnell et
al., 2005). Thus, managers may manipulate reported earnings to avoid unfavourable wealth
consequence from an adverse earnings outcome. A study by Healy, (1985) documented that
managers manage accruals to maximize earnings-based bonuses. Therefore, the CG
mechanism is employed to reduce the agency cost that arises as a result of the conflict of
interest between managers and shareholders (Uwuigbe et al., 2014).

1.7 Significance of the Study
The results of this study could contribute several benefits to the knowledge of existing
literature on examining the impact of CG on EM in the developing countries in general and
India in particular. Firstly, this study has explored the nature and extent of EM measured
through DA across the firms and over the period under review. This research, further,
provides a novel contribution to EM literature, as it is the first study from the developing
country like India to examine the effect of various CG variables on EM practices in financial
reporting along with several firm-specific characteristics such as firm's size, profitability,
leverage and growth. Not only focusing on firm-specific traits, but the study is also extended
up to investigate the distribution of EM-based on industry classification. And the impact of
the application of CA, 2013 on EM has also been assessed in the present study, which is
quite a new approach in the Indian economic scenario.
This study covers 5 (five) year time period of cross-sectional analysis over a wide range of
14 (fourteen) important industries working in the Indian economy. It offers a more
comprehensive analysis using panel data than previous studies and therefore, may add
knowledge and contribute to a better understanding by the users of financial statements.
In this backdrop, the primary objective of the present thesis is to examine the linkage
between CG and EM propensity in financial reporting practice in the Indian corporate sector.
In short, the aim is to assess the impact of CG in constraining EM. In doing so, the present
study has attempted to bring several nobilities to the existing literature. Firstly, I have
selected a sample primarily based on the volume of turnover, which is a clear cut departure
from the conventional parameter like market capitalization as a primary factor of the
selection of the sample. The turnover-based selection approach justified in the context of the
study of EM, because, it is presumed that, revenue is the single most important factor having
direct bearings on changes in profit, which is otherwise known as earnings. Because of the
said importance, managers are fascinated by the volume of turnover and earnings to meet the
investors' expectations.
Given the above facts, initially, the companies within the top 500 ranks of Economic Times-

500 (ET-500) list prepared based on the volume of revenue in the year 2012 is considered for
selection of sample company. Again, the choice of a sample period of five years from 2011-
12 to 2015-16 enabled the present study to associate the impact of the application of CA,
2013 on the efficiency of CG mechanism to curb EM propensity in financial reporting
practice. This is again adding a new feather to the existing body of CG literature where the
study is yet to be undertaken to assess the impact of CG mechanism in limiting EM after
application of CA, 2013.
1.8 Organisation of the Thesis
The present chapter has discussed the problem statement, background and also provided a
general understanding of the nature of EM and what are the techniques involved in EM. The
connotations of this study have also been highlighted in the last part of this chapter.
The remainder of this thesis is organized as follows-
Chapter 2 provides a comprehensive review of the literature on the association between EM

and CG attributes along with firm-specific characteristics. The review of the literature
concludes with formulation of the hypothesis, identifying the research gap, research
questions, and direction to set the objectives of the current study.
Chapter 3 presents the scope of the sample, criteria for the sample selection and sources of
relevant data collection for the study. The chapter further outlines the methodological issues
adopted in this study and describes methods of measuring the selected dependent variable
(EM) and independent variables (CG attributes). The chapter also mentions about the use of
different statistical tests and their justification thereof.
Chapter 4 discusses the distribution of nature and degree of EM practices measured through
DA across the different industry corresponding to the first objective of the study.
Chapter 5 provides the results on the association between EM practices and CG attributes
under study. More specifically, it presents the results of the tested models and the inferences
drawn from tests of the hypotheses.

Chapter 6 presents the status of gender diversification in the boardroom of ET-500 listed
NFCs and also measures the nexus between women representation in the boardroom and EM
practices.
Chapter 7 outlines the influence of AC characteristics on EM practices. Further, the present

findings are compared with previous research findings and differences are explained.
Chapter 8 summarises the thesis, draws conclusions and implications. It also highlights the
potential limitations of the study, along with recommendations for different stakeholders and
avenues for future research.
--------

CHAPTER 2
Review of Literature
2.1 General Overview
Chapter one introduced the research problem, formulated the research questions and then
presented the connotations of the present study. This chapter reviews and discusses the prior
literature related to examining the impact of CG mechanism on EM for identifying the
research gap as well as for the development of the research hypothesis.
The CG mechanism is concerned with ensuring the balance between the economic and social
goals of a corporate organisation encouraging the efficient and effective use of resources
aiming to align the interest of individuals, corporations and society at large. According to
Nobel Laureate Economist Milton Friedman, "the CG is to conduct the business in
accordance with the owner's or shareholders' desires to make as much money as possible
while conforming to the basic rules of the society embodied in law and local customs". As
per agency theory of Jensen & Meckling, (1976) CG is considered as a safeguard mechanism
to the shareholders from agency problems arising out of the appointment of the management
team to carry out the business on their behalf. In recent decades, consequent upon a series of
corporate scandals, the CG has received substantial attention among regulators, policy
makers, academicians and practitioners. Following the various giant corporate collapses
around the world, US was the first country to come up with Sarbanes-Oxely Act in the year
2002 as a token of revision in the corporate laws to restore the trust of shareholders in the
company. Several studies (Iqbal et al., 2015; Daghsni et al., 2016) considered board
attributes as an apex part of CG mechanism responsible for monitoring management
activities to harmonise the interest of managers and shareholders together.
Apart from the monitoring of management activity, financial reporting is also considered as
a fundamental responsibility of CG (Ayemere & Elijah, 2015). Keeping the objective of
providing quality financial information, a subcommittee call AC is formed with the board of
directors to monitor and provide adequate supervision on financial reporting process to
ensure accurate and timely disclosure with the highest level of transparency, integrity and

FRQ. The AC oversees the work carried out in the financial reporting process. Therefore, the
characteristics of AC also play an important role in the overall CG mechanism.
2.2 Corporate Governance in India
There has been much talk on the CG in India since the appointment of Kumar Mangalam
Birla Committee on 7th May, 1999. It was not for the first time that thought was given to
good CG with the constitution of the said committee. Sachar Committee in 1978 also went
into the question of CG and stressed upon proper and adequate disclosure requirements on
the part of the companies. The committee viewed that "In the environment of modern
economic development, the corporate sector no longer functions in isolation. The company
must behave and function as a responsible member of society like any other individual". The
objective of the business has to be proper utilization of resources for the benefits of
stakeholders (Kapoor, 2015). Profit is still a necessary part of the total picture, but it is not
the primary purpose. Bhattacharyya (2012), rightly pointed that the company has to make
profit for sustainability, growth and adequate return capital to attract investors. Therefore,
responsibility of the CG lies in ensuring that the claims of various interests which will have
to be balanced, not on the narrow ground of what is best for the shareholders alone but from
what is best for the community at large. With the constitution of SEBI, a large number of
guidelines have been issued by the SEBI since 1992 for the interest of the investors'
protection. These guidelines contain requirement concerning initial public offers by with
company goes to the public, the disclosure of quarterly results, timely disclosure of material
and price sensitive information.
However, a full-scale debate on CG issue dominated in Indian scene since the submission of
its report by Kumar Mangalam Birla Committee constituted by SEBI on 7th May, 1999. Out
of which, most of its recommendation was notified by SEBI on 21st February, 2000 as
guidelines for good governance and primarily sought to be enforced through a listing
agreement. Consequently, Clause 49 of the listing agreement has been amended quite a few
times after that keeping in line with the development in the corporate administration system.
Later on SEBI constituted Narayan Murthy Committee in the year 2002 to review the Clause

49 of listing agreement and evaluate the adequacy of the then CG practices. The said
committee recommended for strengthening the audit committee responsibilities, improving
the FRQ, introducing the responsibilities on the board of directors as a mandatory criteria.
Consequent upon several corporate debacles in the USA in 2001, followed by the stringent
enactments of Sarbanes Oxley Act, Government of India appointed Naresh Chandra
Committee in 2002 to examine and recommended drastic amendments to the law pertaining
to auditor-client relationships and the role of IDs in the corporate administration. The
committee recommended for the minimum board size of all listed companies as well as
unlisted public limited companies with paid-up share capital and free reserves of ₹ 10 crore
and above, or turnover of ₹ 50 crore and above, should be seven, of which at least four
should be independent directors.
2.3 Survey of Literature
There is mixed evidence in the CG literature about the impact of CG on EM across the
globe. Therefore, the present section reviews the country-wise contemporary studies related
to the present study.
2.3.1 Pakistani context
Shah et al., (2009) examined the relationship between quality of CG and EM. A set of listed
companies have been investigated to analyse the association for the year 2006. The result
indicates the presence of a positive relationship between CG and EM, which is
unconventional. The study opined that this result might have stemmed from the reason of
transition phase through which the Pakistani companies are passing through after
promulgation of a code of CG in 2002 which has created a tendency to increase DA as a
risk-averse measure.
Naz et al., (2011) scrutinized the impact of firm size and capital structure on EM considering
five years data from the year 2006 to 2010 for 75 companies across Cement, Sugar and
Chemical sectors of Pakistan. The study witnessed that capital structure exercise significant
adverse impact on EM. Thus, the study, therefore, concluded that firms with debt
concentrated capital structure exercise check and balance over EM practice; however, the

study found no significant association between firm size and EM.
Naveed et al., (2012) studied the impact of EM on the profitability of 98 non-financial

Karachi Stock Exchange listed companies of Pakistan from the year 2002 to 2006. The study
revealed that EM has an adverse impression on the profitability of the companies. Kamran &
Shah, (2014) conducted a study to examine the impact of CG on EM considering a sample of
372 firms listed in the Karachi Stock Exchange over the period from the year 2003 to 2010.
Results indicated that institutional investors play a significant role in constraining EM
practices, but the study does not found any evidence that CEO-duality (CEOD)vi, auditing
firm's size, BDS, and ownership concentration influence EM. Among the control variables,
they find that more profitable firms, are growing, or have higher leverage actively manage
their earnings, while EM decreases with increase in age of the firm.
Likewise, Akram et al., (2015) compared the situation of India and Pakistan about EM and
firm performance taking a sample of 20 companies from each country for the period from
the year 2009 to 2013. The study concluded that there is a significant negative relationship
between EM and organizational performance in Pakistan, but no such association was found
in the Indian context.
Latif & Abdullah, (2015) investigated the effectiveness of CG qualities through board
characteristics, AC characteristics, and ownership structure in limiting EM practices
considering a sample of 120 Karachi Stock Exchange listed NFCs during the year from 2003
to 2012. The study observed that while AC independence is adversely associated with EM,
whereas, CEOD and institutional shareholding were positively linked with EM. Moreover,
the study concluded that CG efficiency in curtailing EM differs across higher and low-
growth firms.
The study of Iqbal et al., (2015) assessed the impact of CG mechanism on EM practices in
NFCs listed in Karachi Stock Exchange of Pakistan for a period of 10 years from 2003 to
2012. The results witnessed a noteworthy negative association between ACI and DA and
provided evidence of a significant positive association between CEOD and DA. However,
the study found no meaningful relationship between BDS and EM.

2.3.2 Nigerian Context
Fodio et al., (2013) considered the effect of CG mechanisms on reported earnings quality of
listed Insurance companies in Nigeria considering 25 quoted insurance firms during the
period from 2007 to 2010 and the study regressed five CG variables on reported earnings
quality proxy. Using the multiple regressions study found that board size, board
independence and ACS are negatively and significantly associated with EM. However, ACI
and independent external audit have a positive relationship with DA.
Madawaki & Amran, (2013) evaluated whether AC is allied with improving FRQ for a
sample of Nigerian listed companies before and after a CG code directed new regulations for
AC in the year 2003 in Nigerian. Considering a sample of 70 companies listed on the
Nigerian Stock Exchange, this study uses archival data in the form of companies' annual
reports to measure the association between AC and improved FRQ. The results indicate that
the formation of AC was positively associated with enhanced FRQ. It was also found that
AC having an independent chair and AC expertise was positively associated with FRQ.
However, other AC characteristics examined were found to be not significantly associated
with FRQ.
Ugbede et al., (2013) investigated the likelihood of EM in listed Nigerian banks and
Malaysian banks for the year 2007 to 2011. The study documented that in the case of
Nigerian banks, the EM has a negative mean, which means that Nigerian banks are more
involve in income-decreasing EM. On the other hand, total accruals have a positive mean for
Malaysian sample banks and hence engage in income-increasing EM. Later on Uwuigbe et
al., (2014) discussed the effects of CG mechanism on EM considering a sample of 40 listed
firms in the Nigerian stock exchange and annual reports for the period from 2007 to 2011.
Employing a regression analysis approach, the study documented that board size and board
independence has a significant negative impact on EM.
Dibia & Onwuchekwa, (2014) examined the association between CG mechanisms and EM
in Nigeria based on 90 companies selected through simple random sampling technique for
the period 2006 to 2011. The result indicated that board size is negatively associated with

EM. However, BDI, ACI, audit type and CEO shares were not associated with EM.
Similarly, Omoye & Eriki, (2014) examined the association between CG mechanisms and
EM considering a sample of 130 companies from quoted companies on the Nigerian stock
exchange over five years from 2005 to 2010. The study concluded that quoted companies in
Nigeria prefer to use high EM practices where board independence found to have a positive
and significant impact on the probability of companies adopting absolute high EM.
However, ACI and board gender representation had a negative and significant influence on
the adopting absolute high EM, but BDS and CEO shareholding were found to be
statistically insignificant in influencing the likelihood adopting high EM levels. The control
variables; FRMS, auditors type and industry class, were found to be positive and statistically
significant in determining absolute high EM levels of Nigeria quoted companies. Later on,
Ayemere & Elijah, (2015) tried to examine the impact of AC attributes on FRQ measured by
DA. The study exposed that AC attributes prevent EM propensity in financial reporting.
Specifically, AC financial expertise, ACS, ACI, ACD showed a significant inverse
relationship with EM.
Bala & Kumai, (2015) examined the impact of board characteristics and EM of listed food
and beverages firms in Nigeria for a period of six years from the year 2009 to 2014
exploring the relevant data from the firms’ audited published annual reports and accounts.
The results from the analysis exposed an inverse relationship between board size, board
meetings and board financial expertise with EM, while board composition and women
directorship are positively related to EM.
Kantudu & Samaila, (2015) examined the impact of monitoring characteristics on FRQ of
the Nigerian listed oil marketing firms. Required data for the study was obtained from an
audited annual report and accounts of the sampled oil marketing companies for twelve years
covering 2000 to 2011. The result of the study proved that power separation (CEO non-
duality), IDs, managerial shareholdings and independent AC all monitoring characteristics
are influencing FRQ of quoted oil marketing firms in Nigeria.
Patrick et al., (2015) explored the influence of CG and EM practices in Nigerian quoted
companies using both primary and secondary data on a sampled of quoted Nigerian

companies' selected through purposive sampling technique between a period of four years
from 2011 to 2014. The research findings show that CG practices such as the board size,
firm size, board independence, and strength of the AC have a significant influence on EM
practices among Nigerian quoted companies.
2.3.3 Malaysian Context
Saleh et al., (2005) evaluated the effectiveness of board characteristics to monitor the
management behaviour for their encouragements to manage reported earnings. They
documented that EM is positively related to the existence of CEOD, after controlling for
firm size, leverage and performance. The study also indicated that multiple directorship
factors are negatively associated with EM proxy only in firms with negative unmanaged
earnings implying the fact that multiple directorship factors are effective to detect EM
practices to avoid losses. However, the study finds that the ratio of independent board
members is not significantly related to EM in firms with duality status.
Saleh et al., (2007) aimed to assess the effectiveness of AC characteristics, i.e. the ACI,
ACS, board meeting frequency and knowledge of the members to monitor management
behaviour concerning their incentives to manage reported earnings. They noted that the
presence of a fully independent AC helps to reduce EM practices in financial reporting. The
study also observed that firms which had more knowledgeable AC members and held more
AC meetings recorded fewer EM practices compared with other firms.
Rahman & Ali, (2006) studied to investigate the extent of the effectiveness of monitoring
functions of the board of directors, AC and concentrated ownership in curbing EM among 97
firms listed on the Main Board of Bursa Malaysia over the period from 2002 to 2003. The
result of the study indicates that EM is positively related to BDS.
Johari et al., (2008) examined the roles of independent members on the board, the CEO who
also hold as a chairman of the company, board competency and management's share
ownership on EM practices. The result of the study documented that excessive shareholding
beyond 25 percent by managers may induce managers to manage reported earnings, and
CEOD does not influence the practice of EM in Malaysian firms. The study also observed

that the minimum composition of one-third ID, as suggested by the Code of CG in Malaysia
is not adequate to monitor the management from EM practices.
Bukit & Iskandar, (2009) investigated the impact of Audit Committee Independence (ACI)
on EM considering 155 companies listed on the main board of Bursa Malaysia in 2001 and
concluded that independent AC helps companies to reduce income increasing EM practices.
Mohamad et al., (2012) made a study on examining the impact of CG over the EM practice
in Malaysian Government Linked Companies (GLCs) and also checked the effect of CG in
the post-transformation period. The study documented that CG variables are not significantly
associated with EM in GLCs in Malaysia except board meetings and leadership structure,
which were negatively linked with EM. Furthermore, the study also reveals that there is an
increase in EM activities in the post-transformation policy.
However, Chandrasegaram et al., (2013) examined the impact of AC characteristics on EM

based on 153 Malaysian Public Listed companies exploring secondary data derived from
Annual Reports of the year 2011. The study revealed that these AC characteristics, i.e.,
frequency of AC meetings, ACS and independence of AC, are not significantly associated
with the degree of EM. Therefore, the study suggested that AC characteristics were not a
sufficient deterrent to the practice of EM in Malaysian public listed companies.
Salleh & Haat, (2014) explored how AC impacted EM before and after the revision of the
Malaysian Code on CG (MCCG) in 2007 among the 280 Bursa Malaysian firms from 2005
to 2009. They found that AC plays an effective role in reducing EM after the revision of
MCCG. After controlling for firm size, board size and leverage, the study found that Audit
Committee Size (ACS) and AC meeting with the external auditor without the presence of
executive directors at least twice a year showed a significant association with EM.
An empirical study of Busirin et al., (2015) scrutinized the connection between BDI and EM
by use of data from 372 public listed companies in Malaysia from the year 2010 to 2013.
The result of the study observed that BDI has a significant negative relationship with EM,
which indicates that a higher number of IDs will diminish the tendency of EM.
Recently, Jamaludin et al., (2015) sought to examine the relationship between CG

mechanism being board structure and EM taking a sample of 26 Malaysian listed

Government Linked Companies (GLCs) from various non-financial industries over the study
period of 6 years from 2005 to 2010. The results provide significant support on the
association between boards of directors' composition towards EM. And Rassas & Kamardin,
(2015) discussed the influence of BDI, ACD and ACI on earnings quality proxy by DA
considering a sample of 508 firms listed in Malaysia Main Market from the year 2009 to
2012. The study documented that, ACI and ACD are related to higher earnings quality.
However, the BDI was associated with lower earnings quality.
2.3.4 Portugal Context
Sandra, (2011) investigated the impact of board structure on EM for 34 non‐financial

companies listed in Portugal for the years 2002 to 2007. The study observed a non‐linear
relationship between BDS and EM in financial reporting. The study also found that DA is
negatively linked with board composition between the executive and non-executive
directors. However, no evidence was found about the existence of an AC affects the levels of
EM.
2.3.5 Turkey Context
Aygun et al., (2014) examined the impact of corporate ownership structure and board size on
EM based on a sample of Turkish firms registered on the Istanbul Stock Exchange (ISE)
covering a period from the year 2009 to 2012. The study concluded that the institutional
ownership, board size and leverage had a significant adverse effect on the EM while the
managerial ownership and return on assets was positively linked with the EM.
2.3.6 Jordan Context
Azzoz & Khamees, (2016) investigated the impact of CG characteristics on earnings quality
and EM taking a sample of 73 Jordanian companies listed on the Amman Stock Exchange
(ASE) from the year 2007 to 2012. The results provided evidence that the ACS and AC
activity has a significant association with EM. Later on, Alzoubi, (2016) conducted the study
based on a sample of 86 companies listed on the ASE from the year 2007 to 2010. The result

of the study documented that there was a significantly negative association between audit
quality and EM.
2.3.7 Tunisia Context
The study of Chekili, (2012) has examined the impact of CG mechanisms on EM

considering 20 listed Tunisian firms over nine years from 2000 to 2009. The study observed
that the presence of external directors within the board, board size and presence of a CEOD
seem to have an impact on EM.
2.3.8 China Context
Liu & Lu, (2007) evaluated the relationship between EM and CG in China-based companies
during the year 1999 to 2005 and observed that firms with higher CG levels have lower
levels of EM. The study analysed two China-specific situations, in which the listed firms had
strong incentives to manage reported earnings to meet certain Return on Equity (RoE)
thresholds, and EM has been shown to be the most noticeable. Then, Noronha et al., (2008),
scrutinized to detect the underlying factors that encourage firms to engage in EM practice.
The study found that the size and form of ownership of companies substantially influenced
EM incentives in China. The study also documented that, companies coming under public
possession have stronger incentives to manage reported earnings for management
compensation, while private ownership companies pay more care to tax expense savings.
Gulzar & Wang, (2011) examined the efficiency of CG mechanism to control EM in

financial reporting among the listed firms of Shanghai and Shenzhen stock exchange of
China using a sample comprises of 1009 firms over 4 years from 2002 to 2006. The result of
the study observed that the CG mechanism play a vital role in reducing EM. Finally, the
result documented a significant positive association between EM and different CG attributes
such as CEOD, board meetings, female directors and concentrated ownership but fails to
establish any relationship between board size, director's shareholdings and proportion of IDs
with DA as well as between the ACD and DA.

2.3.9 Indonesian Context
Nugroho & Eko, (2011) reviewed the effect of board characteristics on EM in financial
reporting for companies listed in the Indonesian Stock Exchange during the year 2004 to
2008. The study showed that EM takes place in companies listed in the Indonesian Stock
Exchange during the period from the year 2004 to 2008, be they companies in general,
manufacturers, non-manufacturers, and companies that use AC services. The study
documented that the independent board of directors, the board size, managerial ownership,
board composition/multiple directorships, board tenure, and AC do not affect EM practices
in financial reporting. Notwithstanding, CEOD found to affects the EM practice in the
financial reporting process.
Swastika, (2013) evaluated the impact of the CG regulation and firm's size on the EM for
food and beverages companies in Indonesian Stock Exchange. Using data from the year
2005 annual reports of 51 food and beverages listed companies, including the composite
index; the results showed that two of the CG variables, namely board of director and audit
quality, as well as firm size was statistically significant in explaining EM.
2.3.10 Iranian Context
Roodposhti & Chashmi, (2010) examined the association between CG internal mechanisms
and EM practices in financial reporting taking a sample of 196 firms listed on the Tehran
Stock Exchange (TSE) over the period from the year 2004 to 2008. The study documented
that there is significant negative connotation between board independence and CEOD with
EM. The study also found a significant positive association between firm size and leverage
with EM.
Nahandi et al., (2011) examined the impact of the board combination on EM in Iranian
companies considering a panel of 480 firm-year observations the study found CEOD
positively motivates for EM. However, the study documented that board size and board
independence are not significantly linked with EM in financial reporting.
Nikoomaram et al., (2012) explored whether firms listed on TSE are engaged in EM and

examined the impacts of specific firm characteristics using a sample of 644 firm-year
observations across nine Iranian industries for 2003 to 2009. The results indicate that some
Iranian firms engage in EM and suggested that firms with the higher debt-equity ratio, larger
in size, more changes of CEO and a higher rate of return on assets are more likely to engage
in EM while there was no evidence of taxation effect on EM. Later on Bozorgmehrian et al.,
(2015) investigate the impact of the cash flow volatility and the financial leverage on the EM
in the context of 90 companies listed in TSE for the period from 2006 to 2011. The results
showed that cash flow volatility is positively linked with the EM and financial leverage is
negatively associated with the EM.
2.3.11 French Context
Lakhal et al., (2015) tested the effect of gender diversity in the boardroom and in top
management positions on EM by French-listed firms considering a sample of 170 firms over
four years. The results of the study advocated that the proportion of women on the board
standing as a director or a chair reduces EM. The study suggested that women are effective
in their monitoring role and are then considered as a crucial CG device. However, women
standing in CEO and CFO positions do not affect EM practices.
Daghsni et al., (2016) sought to test the effect of the board characteristics including its size,
independence, the CEOD and its activity on the EM in 70 French companies listed on the
SBF 250 over four years from 2008 to 2012. They found that the EM is adversely linked
with the BDS, suggesting that large boards are more effective in monitoring the management
activities. The study also observed that CEOD and board activities are positively associated
with the EM signifying the fact that by combining the role of the CEO and increased number
of board meetings increase the EM. However, the study found no significant impact of the
BDI on the EM.
2.3.12 Australian Context
Hutchinson & Percy, (2008) examined the effect of recent CG reforms on EM based on 200
firms listed on the Australian Stock Exchange (ASE) for the fiscal years ending on 31st
March, 2000 to 31st March, 2005. This study also scrutinizes the association between firms'

CG practices and the quality of financial reports as measured by the magnitude of EM. The
study documented that board independence and ACI is associated with lower DA. However,
increasing executive shareholdings provides incentives to manage the reported earnings.
2.3.13 Bangladeshi Context
Razzaque et al., (2006) tried to explore the extent of EM in listed cement companies in
Bangladesh over the period from 1992 to 2002 in Bangladeshi textile industry and
documented that most of the companies under considerations were engaged in EM in
financial reporting. Later on, Ahmed & Azim (2015) also explored the cement industry in
Bangladesh over five years from 2009 to 2013 and found same results in line with Razzaque
et al., (2006).
2.3.14 Rest of the world
Dimitropolos, (2011) analysed the effect of CG quality (namely board size, BDI, managerial
ownership, and institutional ownership and CEOD) on the EM behaviour of European
Union's football clubs over the period from 2006 to 2009. The result of the study
documented that CG quality mitigates aggressive earnings manipulation (income smoothing,
accrual manipulation and reporting small positive income) by football managers and
specifically clubs with increased board independence, managerial ownership and
institutional ownership and small board size are associated with high-quality financial
reporting through the weakening of EM behaviour. These findings dictate the necessity of
sound CG principles to protect the interests of shareholders and various stakeholders, and
prevent the expropriation of wealth by managers and maximize the clubs’ economic results
and social return.
Epps & Ismail, (2008) sought to explore the facts whether EM practices of a firm is
influenced by the firm's CG practices in US bases corporate business. Finally, the study
concluded that firms having annually elected small size boards, 100 percent independent
nominating committees, and 100 percent independent compensation committees have more
negative DA. However, firms with 75-90 percent independent board or firms with a board

size of between 9 and 12 have higher positive DA.
The study of Gavious et al., (2012) explored to uncover whether and how EM is affected by
the presence of female directors on the board of directors and the AC in high-technology
firms. The study established evidence for a negative relationship between the presence of
female directors and EM. The findings indicate that accounting aggressiveness is affected by
the proportion of women on the board of directors as well as on the AC. Furthermore, the
study observed evidence indicating that EM is lower when either the CEO or the CFO is a
woman director. Notably, in firms with higher female representation in boardroom and top
management, external monitoring by auditors and creditors seems to be weaker, yet earnings
quality is higher.
Iqbal & Strong, (2010) examined the effect of board structure, ownership structure, adviser
structure, and capital structure on current discretionary accruals as a proxy for EM for a
sample of size-controlled rights issuers of the UK based companies. The results of the study
suggested that firms with higher debt to equity ratios, with lower proportions of non-
executive directors, or with no large block owner, are more likely to use DA to manipulate
earnings around rights issues.
Iraya et al., (2015) examined the impact of CG practices on EM in companies listed at the
Nairobi Security Exchange (NSE) considering 49 companies that had been continuously and
actively trading at the NSE between January, 2010 and December, 2012. Secondary data was
extracted covering the period from 2010 to 2012 and analysed using linear regression to test
the effect of the independent variables on the dependent variable. The result of the study
found that EM is negatively related to ownership concentration, BDS and BDI but positively
related to board activity and CEOD.
Ngamchom, (2015) investigated the influence of board effectiveness on EM in Thailand. The

study observed that board effectiveness and proportion of directors having knowledge of
finance is negatively linked with EM, whereas, the number of the board meeting and AC
ratio are positively correlated with EM.
Peni & Vahamaa, (2010) investigated the linkage between EM and the women in the

executive position. They suggested that firms with female Chief Financial Officer (CFO) are
associated with income-decreasing DA, which proved that female CFO is following
conservative EM strategies.
Rauf et al., (2012) examined the impact of company characteristics and board characteristics
on EM practices among Malaysian public listed companies obtaining data from Annual
Reports of 214 companies for the year 2008. The study concluded that large size firm
encourages EM and cash flows from operating activities are found to have a significant
negative relationship with EM. However, findings also indicated that board size does not
influence the practice of EM.
Leventis & Dimitropoulos, (2012) made a study on nexus between CG and EM in the US
listed banks for a period from the year 2003 to 2008 and observed that well-governed firms
are less engage in EM.
Very recently, Habiba et al., (2017) undertaken a study to examine the impact of AC quality
on FRQ. They observed that AC quality enhance the FRQ.
However, Outa et al., (2017) studied the impact of CG on EM in listed NFCs from Kenya
and observed that DA, which is a proxy of EM is not significantly linked with CG.
Shen & Chih, (2007) attempted to assess the impacts of CG on EM by using the data
collected from Credit Lyonnais Security Asia (CLSA), of nine Asian countries. The study
concluded that firms with good CG likely to mitigate EM and also found that the FRMS and
FLEV exercise significant influence on EM. They observed that firms with higher growth
are more prone to engage in earnings smoothing and earnings aggressiveness, but good CG
can mitigate the effect.
2.3.15 Indian Context
Goel (2012), attempted to detect the presence of EM through accruals management and
found that most of the units are found to be exercising income-increasing DA, as verified by
their positive average and service sector firms are engaged in income-decreasing
management on an average basis, but non-service sector tends to be involved in income-

increasing EM. Similarly, Kaushal, (2013) investigated to discover the nature and extent of
EM through accruals estimation in Indian industry level and individual company level. The
study used a sample of 1035 firm-year observations from the year 2006 to 2010. The result
of the study affirmed that the EM, as depicted by DA, exists in the Indian companies. The
widespread existence of EM has also been documented by some other studies in Indian
scenario like Ajit et al., (2013) has noted around 2.9 percent, Kaur et al., (2014) found
approximately 17.58 percent. Goel, (2014) further urged for improvement in earning quality
consequent upon the presence of EM. Kaur et al., (2015) found the widespread variation in
nature and extent of EM in different industries. Kumari & Pattanayak, (2015) made an
extensive survey of literature and found wide differences in the factors influencing earnings
quality of public sector and private sector commercial banks in India. Mishra & Malhotra,
(2016) noted the widespread presence of EM in Indian companies which is around 5.6
percent of the total assets of the firms and also pointed out that consumer durable and energy
sectors are exposed to higher earnings manipulation, but large capitalisation companies are
found to experience a lower level of EM as compared to small capitalised firms.
Further, Ahmed (2016) studied the state of EM in BRIC Countries and found the strong
evidence presence of EM in financial reporting in those countries. Subsequently, Mangala &
Isha, (2017) found that BSE listed firms experience EM propensity in financial reporting to
the extent of 1.78 percent of total assets of the firm. Kapoor & Goel, (2017) documented that
profitability is an important variable which is a determinant factor in shaping the linkage
between AC independence and EM. They viewed that profitable company does not involve
in EM; therefore, AC independence is more effective for monitoring EM. However, IDs with
multiple directorships appeared as ineffective CG variables. Kumari & Pattanayak, (2017)
found that Indian commercial banks are engaged in income increasing EM. They also
documented that CG practice is effective in restricting variables for EM practices in
commercial banks in India. Similarly, a recent study of Kaur & Khanna, (2018) examined
the association between CG and EM in Indian 209 BSE listed companies for the period of 7
years from 2007 to 2014 and exposed that remuneration committee and IDs along with firm-
specific control variables such as FRMS are significantly discouraging the instances of EM.
However, some other variables like BDS, CEOD, director's independence, and women

directors have no significant role in curbing the EM practice.
Independent variables have been grouped into two broad categories, namely, board
characteristics and AC quality, considering the methodology adopted in contemporary
studies. Each class will be discussed in turn and the chapter will conclude with an overall
summary of the literature review.
2.4 Hypothesis Development
This section developed the hypothesis to be tested in the present study based on
contemporary reviews across the world.
2.5 Corporate Governance Attributes and Earnings Management
As per the existing literature around the globe, it has been documented that the EM practices
in the corporate financial reporting system largely depend upon the CG mechanism in
practice. The present section, therefore, identified some of the prominent CG attributes
which are expected to influence the EM practices in the Indian context.
2.5.1 Board Size and EM
According to agency theory, the departure of ownership and control motivates the managers
to take some action for their benefits which eventually creates information asymmetry
between the owners and the managers (Jensen & Meckling, 1976). The board of director is
considered to be the first defence for safeguarding shareholders interest against unscrupulous
management actions. The board of director is hired by the shareholders to monitor the
activities of management to ensure the fair utilisation of fund and to discharge the
responsibility towards all the stakeholders. However, in practice, it has been a matter of long
debate to ascertain the suitable and ideal number of board members in the board to curb the
EM propensity in financial reporting (Neville, 2011).
Agency theory assumes that larger boards are likely to be more watchful over the
management activities because, a higher number of experienced directors from a diversified
field of expertise can be hired in the board to oversee and review management actions (Kiel

& Nicholson, 2003). Further, larger boards are expected to deliver more expertise, diversity
in knowledge which eventually accelerates the board's monitoring ability (Dalton et al.,
1998). Again, larger boards are more likely to hire a considerable number of IDs with
valuable experience and, hence, they can delegate more responsibilities to board committees
than smaller boards; this also can prevent or limit opportunistic managerial behaviour (Xie et
al., 2003).
Some other contemporary studies, however, advocated that smaller board is more effective
because they have less difficulty in coordination (Jensen, 1993; Yermack, 1996; Eisenberg et
al., 1998) and smaller board may be less encumbered with bureaucratic problems whereas,
large board suffers from coordination problem and slow decision making (Lipton & Lorsch,
1992; Jensen, 1993). Moreover, an increase in board size leads to a problem of social loafing
and free riding (Lipton & Larsch, 1992), which ultimately undermine the monitoring
efficiency of the board. Therefore, Beasley, (1996); Vafeas, (2000); Peasnell et al., (2005)
Dimitropoulos, (2011) argued that smaller boards are positively associated with FRQ.
However, no such significant association was observed in the study of Rahman & Ali,
(2006); Mohamad et al., (2012); Iqbal et al., (2015); Elghuweel et al., (2017).
Therefore, from the above literature, it can be seen that contemporary empirical researches
have produced a mixed result about the association between board size and EM.
Notwithstanding inconclusive empirical evidence and following theoretical predictions, the
study, therefore, hypothesised that-
H11: There is a significant negative relation between board size and EM.
2.5.2 Board Independence (BDI) and EM
Independence of the board is an essential issue in the corporate governance mechanism.

They bring outside perspective and express their independent views in the boardroom
deliberation and monitor the executive management (Bhattacharyya, 2014). The IDs helps
the company to protect the interest of minority shareholders and ensure that the board does
not favour any particular set of shareholders or stakeholders depriving others. There has
been a growing importance of roles and responsibilities of IDs across the world. The IDs is

the trustee of good CG (Rath, 2009) because they ensure improving corporate credibility,
governance standards, and the risk management of the company. The whole and sole
purpose behind introducing the concept of IDs is to take unbiased decisions and to exercise
check and balance over various decisions taken by the management and to bring the
accountability and credibility to the board's decision. The CA, 2013 makes the role of IDs
very different from that of executive directors because they are vested with a range of
functions, duties and liabilities for good CG.
Therefore, BDI in carrying out its duties has also been linked to overseeing the financial
reporting process and disclosure of the company's financial information. However, there
have been long debates in empirical research about the effectiveness of directors'
independence in curbing EM (Klein, 2002). The Cadbury Committee (1992) and the Blue
Ribbon Committee (1999) deduced that IDs play more important monitoring roles than
executive directors as the IDs come from an independent source and therefore can offer
unbiased judgment over the functions of the management team. The IDs also has incentives
to develop a reputation as experts in decision control and monitoring (Fama & Jensen,
1983).
This finding has been empirically verified by the study of Beasley, (1996) who documented
that a higher proportion of IDs on board is linked with greater confidence of investors in
financial reporting. Mashayekhi & Bazaz, (2010); Baccouch & Omri, (2014); Uwuigbe et
al., (2014) found that an increased number of IDs strengthen the FRQ. Therefore, to make
the board effective to monitor financial reporting malpractice in the form of EM, the IDs
was given much importance and defined their responsibility in Indian CA, 2013.
Nonetheless, many studies (Rahman & Ali, 2006; Hashim & Devi, 2008; Mohamad et al.,
2012; Daghsni et al., 2016; Kapoor & Goel, 2017) have failed to establish any statistically
significant association between BDI and EM. They argued that the companies under
dominant control of family and promoter group, who are often the managers gain effective
control of a corporation and have the power to determine how the company is run and may
confiscate the rights of minority shareholders.Therefore, findings of the previous studies
examining the effectiveness of BDI in controlling EM do not provide any conclusive result.

Hence following hypothesis have been formulated for testing purpose-
H12: BDI is adversely associated with EM.
2.5.3 Board Diligence (BDD) and EM
A vital attribute linked with board effectiveness is the board's diligence, which represents the
commitment of board members towards monitoring of the management activities for the best
interest of the shareholders for which they were appointed. Vafeas (1999), contended that the
efficiency of the board of director is a function of time where numbers of board meetings
reveal the diligence of board members towards monitoring the management functions. From
the agency theory standpoint, it has been argued that monitoring function and financial
reporting process is more transparent when the board members are more attentive in
shouldering their responsibility (Carcello et al., 2002). The previous studies have
documented that, the board that meets regularly is more likely to address the problems of the
company effectively (Martin & Jay, 1992). More so, frequently meeting board members are
likely to have greater coordination among them and discuss the concerned issues and
monitor the management effectively to harmonise the shareholders interest with the interest
of management (Lipton & Larsch, 1992). Conger et al., (1998); Biao et al., (2003);
Mohamad et al., (2012) also supported that higher the board meeting frequency, more
effective will be the board’s monitoring function. Additionally, Chen et al., (2006) suggested
that active board that meets more frequently is more likely to perform their duties by the
interests of the shareholders and put more effort in monitoring the FRQ.
Therefore, more the frequency of board meetings, more the time is devoted to addressing the
issues such as EM and other financial reporting matters and vice versa (Xie et al., 2003).
Conversely, it is also debated that board activity is a function of firm size, where larger the
firm having a more complex structure, which in turn needs more time in the decision-making
process due to the information complexity in such organizations (Vafeas, 1999). Sarkar et
al., (2008); Mohamad et al., (2012) observed that the frequency of board meeting is
adversely linked with DA. Therefore, it is likely that an increase in the number of board
meetings will ensure a lower degree of EM in the financial reporting process. Accordingly,

the following hypothesis is developed-
H13: BDD is negatively associated with EM.
2.5.4 CEO-duality and EM
Boards of directors are entrusted to ensure that the Chief Executive Officer (CEO) of the
company carries out their duties in a way that serves the best interests of shareholders
(Vance, 1983). CEOD is a situation when the CEO also holds the chairman position in the
board (Finkelstein & D'Aveni, 1994; Abels & Martelli, 2013). Agency theory advocated
that the departure of duties between two individual at the top management may lead to
effective monitoring over the management decisions (Fama & Jensen, 1983; Jensen, 1986).
Because, in the absence of a separation between the chairman role (head of oversight and
monitoring function) and the CEO role (head of execution of all major functional decision)
the monitoring function of the board over EM may be under vulnerable condition as the
CEO would have the exclusive choice to influence financial reporting process (Finkelstein
& D'Aveni, 1994). In such a dual role situation, the CEO has more sovereignty over the
board without being supervised and judged by anyone else. In other words, partitioning of
CEO and Chairman Roles between two persons delivers greater independence to the board
and therefore, strengthens the checks and balances over the functions of top management
(Klein, 2002; Chen et al., 2006). Thus, CEOD principally weakens the independence of the
monitoring role from the executive decision making (Dechow et al., 1996; Sarkar et al.,
2008; Gulzar & Wang, 2011; Nahandi et al., 2011; Mohamad et al., 2012; Iqbal et al.,
2015).
On the other hand, organization theory which focuses on issues of structure, leadership, and
legitimacy, argued that consolidation of CEO and Chairman role to one person helps in
establishing a unity of command at the top of the hierarchy, with unambiguous leadership
clarifying decision-making authority and sending reassuring signals to stakeholders
(Finkelstein & D'Aveni, 1994). This alternative theory assumes that management as
trustworthy stewards whose sole objective is to execute decisions that benefit the entire
organization rather than personal gratification (Hendry & Kiel, 2004; Nicholson & Kiel,
2007; Filipovic et al., 2010). Proponents of stewardship theory explain that the integration

of duality roles establish a harmony between the board of directors, managers and
shareholders, which is more efficient and effective to attain the overall organisational goals.
The theory also assumes that the consolidation of two most senior management positions
viz; Chairman and CEO establish unity of command (Finkelstein & D’Aveni, 1994).
Nonetheless, Johari et al., (2008) examined the roles of a CEO who also serves as a
chairman of the company, and their result indicated that CEOD role does not influence EM
propensity in financial reporting. Therefore, from the survey of available literature on
CEOD it revealed there is no clear evidence on the association between CEOD and EM
instead documented a mixed association.
Therefore, given the mixed outcomes, the present study hypothesized that-
H14: There is a positive association between EM and CEOD.
2.5.5 Multiple Directorships and EM
There have been growing debates about the role of outside directorships for active
monitoring function over the financial reporting. In the current literature, it has been noted
that the outcomes of the researches on the association between multiple directorships and
EM are unsettled. Some studies advocated the busyness proposition, which contended that
serving in several other boards makes the directors over busy and less able to help in a
particular board. Role of directors in monitoring management activity is reduced as per the
busyness proposition. Therefore, EM is likely to be positively link with accumulation of
outside directorships (Morck et al., 1998; Li & Ang, 2000; Fich & Shivdasani, 2006;
Sarkar et al., 2008; Jiraporn et al., 2009; Sharma & Iselin, 2012; Pathak & Sun, 2013;
Baccouch & Omri, 2014). The proponent of busyness theory further argued that the
effectiveness of the director is a function of time. Therefore, the higher number of outside
directorships diverse the concentration of directors to many boards which eventually end up
with less time available with the directors for monitoring management function and results
into leaving more enormous scope in the hands of management for manipulation of
earnings figure at the time of reporting for personal benefits.

However, several other studies claimed that possession of directorships by the board
members in other board accumulates the diversified knowledge, experience and skill
together which act as a hurdle for managers intending to manage the earning while
reporting (Fama & Jensen, 1983; Ferris et al., 2003; Bedard et al., 2004). However,
Mohamad et al., (2012) failed to find out any statistically significant association between
busy directors in multiple other boards and EM.
Conflicting results of the previous studies do not provide any explicit association between
multiple directorship and EM. Thus, the present study hypothesised that-
H15: Multiple directorships is positively associated with EM.
2.5.6 Women Representation on Board and EM
Despite significant advances in the educational qualification of the women, they hold the
negligible leadership position in business across the globe especially in developing
countries (Damagum et al., 2014; Kanojia & Khanna, 2016). It has been argued that female
managers tend to take little risks than male counterpart (Powel & Ansic, 1997; Barber &
Odean, 2001). Likewise, studies concerning femininity and moral values postulated that
females are more ethical and rational in their judgments than males (Vermeir & Van
Kenhove, 2007). Thus, women directors are expected to report illegitimate acts of
management more than male director(s) (Miethe & Rothschild, 1994) and deceitful
financial reporting tendencies (Kaplan et al., 2009). Furthermore, the studies on gender
diversification reported that the presence of women improves the functioning and
efficiency of the board of directors besides firm's performance (Huse & Solberg, 2006;
Campbell & Vera, 2008; Adams & Ferreira, 2009). Research further suggested that the
quality of the oversight function of the board can be positively affected by increasing the
gender diversity in the board portfolio (Campbell & Vera, 2008). Several other studies have
documented that gender diversity on board has more significant influence over the
discretionary behaviour of management with regard to EM (Nielsen & Huse, 2010;
Ferdinand et al., 2011; Buniamin et al., 2012; Damagum et al., 2014; Lakhal et al., 2015;
Buse et al., 2016). Gavious et al., (2012) found that EM is negatively affected by women
participation on the board of directors and also when women directors occupy the CEO or

CFO position. On the contrary, Damagum et al., (2014) documented that presence of
female director in the board has no influence on the FRQ, nonetheless proportion of women
in the board decrease the degree of EM. Similarly, Bala & Kumai, (2015) documented the
significant effect of women directors on EM practice in financial reporting. Therefore,
considering the mixed outcomes of existing research work around the world, the present
chapter proposed to examine the following hypothesis-
H16: Gender diversity negatively influences EM practices.
2.5.7 Audit Committee Size (ACS) and EM
ACS is a crucial CG attribute which has a significant effect on monitoring the financial
reporting process and curtails EM propensity. The CA, 2013 requires that all listed
companies and other public limited companies satisfying capital, turnover and deposit
criteria shall have to form an AC with a minimum three directors who can read and
understand financial statements. After the Satyam reporting saga surfaced in the year 2009,
the CA, 2013 aimed to increase public confidence in the credibility and objectivity of
published financial statements. Large size AC brings diverse skills and versatile knowledge,
which may play a vital role in constraining the manifestation of EM. However, empirical
evidence appears to be inconclusive. Dalton et al., (1999) found a positive relation between
ACS and efficiency of the monitoring function. Rassas & Kamardin, (2015) suggested that
large ACS with frequent meetings is associated with lower EM propensity. Similarly, many
contemporary studies (Yang & Krishnan, 2005; Hamdan et al., 2013; Ayemere & Elijah,
2015; Mishra & Malhotra, 2016) supported that ACS exercise a negative influence on EM.
However, on the contrary, Xie, et al., (2003) did not note any significant connection between
ACS and EM. Therefore, following the diverse outcomes, the present study hypothesized
that-
H17: There is a significant negative relation between ACS and EM.

2.5.8 Audit Committee Independence (ACI) and EM
The ACI is a fundamental requirement in monitoring the management about financial

reporting. The Surbanes-Oxely (SOX) Act, (2000) in the US provides that all the members
of the AC must be the IDs. The CA, 2013 in India holds that AC should comprise of at least
three directors, the majority of whom including chairman has to be IDs. Therefore,
Companies and Allied Matters Act, 1990 in Nigeria, and SOX Act, 2002 in the US, the CA,
2013 in India and other listing regulation across the world have given emphasised on the
independence of AC over the last couple of years. Because the IDs are not having any
financial relationship with the company's affairs can ensure that the affairs of a company are
being run fairly and smoothly. Because, it has been observed that, the most prominent
corporate scam like Satyam (India) in the year 2009 was materialised due to negligence on
the part of auditors who failed to perform their duties independently (Van & Vanstraelen,
2008). Many of the existing studies have provided evidence on the association between ACI
and EM revealing diverse relation instead of any specific trend line, which is inconclusive.
Ahmed & Hasnah, (2015) and Rassas & Kamardin, (2015) found that ACI is related to
higher earnings quality in Malaysia. Similarly, several other studies (Hutchinson & Percy,
2008; Madawaki & Amran, 2013; Omoye & Eriki, 2014; Iqbal et al., 2015; Latif &
Abdullah, 2015) found that ACI is adversely associated with EM in financial reporting.
Saleh et al., (2007) shows that the presence of a fully independent AC helps to condenses
EM practices. However, Nugroho & Eko, (2011) and Fodio et al., (2013) found ACI and
independent external audit have a positive relationship with EM. Nevertheless, Rahman &
Ali, (2006) found no association between ACI and FRQ. Thus, given inconclusive findings,
the present study hypothesizes that-
H18: There is a significant negative relation between ACI and EM.
2.5.9 Audit Committee Diligence (ACD) and EM
The ACD signifies the conscientiousness of the AC in carrying out its oversight role in
financial reporting. Clause 49 of SEBI's listing agreement holds that AC should meet at least
four times in a year and not more than four months should elapse between two meetings. It is
said that AC sitting frequently get the greater opportunity to examine the accounts prepared

by the management on regular interval resulting in stringent monitoring over the FRQ and
therefore, protect the shareholders' interest. Ghosh (2006) stated that AC meeting frequency
signifies the level of diligence and scrutiny exercised by committee members. Some
contemporary studies have examined the association between AC meeting frequency and
EM (Van der Zahn & Tower, 2004; Vafeas, 2005; Chandrasegaram et al., 2013; Salleh &
Haat, 2014; Ayemere & Elijah, 2015) who found that AC diligence is inversely associated
with EM. Hamdan et al., (2013); Dakata et al., (2017) also provides evidence that high
regularity of AC meetings and attendance reduce EM. Although, Sundra (2011) find no
significant relationship between EM and ACD. Therefore, given inconclusive findings of
previous literature, the present study hypothesized that-
H19: There is a significant negative relation between ACD and EM.
2.6 Firm-Specific Characteristics and Earnings Management
Other than CG variables, there are many firm-specific characteristics which are equally
responsible for EM decision. This section demonstrates some of the firm-specific variables
considered in the present study, which are likely to influence EM decision of the firm.
2.6.1 Firm Size and EM
The size of a firm is expected to affect the degree of EM. It is contended that larger firms
have a healthier internal control system, high-quality auditing and concern for the loss of
business reputation in the event of EM being detected. Therefore, they are unlikely to
involve in EM practices. In this same line many recent study observed a negative relation
between EM and firm size (Chen et al., 2006; Charitou et al., 2011; Ajit et al., 2013; Ahmad
et al., 2014; Selahudin et al., 2014; Ali et al., 2015; Roy & Debnath, 2015b; Bassiouny et
al., 2016). On the contrary, it has also been argued that large-sized firms may be more likely
to manage reported earnings than small-sized firms owing to more pressure to meet or beat
the analysts' expectations and higher bargaining power with auditors (Metawee, 2003; Naz et
al., 2011; Mahdi et al., 2012; Rahmani & Akbari, 2013; Uwuigbe et al., 2014). At the same
time, the study of Llukani, (2013) failed to observe any significant influence of firm's size

over the EM propensity. Therefore, it is hypothesised that;
H110: There is a negative association between firm size and EM.
2.6.2 Firm’s Age and EM
Many theories and empirical studies have outlined that firms operating for more extended
period tends to show a better state of affairs than new firms operating in the same field. More
so, older firms are subject to strict vigilance by the commanding authority to follow the
stricture rules from time to time. Therefore, old firms always strive to improve their financial
reporting practices over time (Alsaeed, 2006) and they also try to enhance their reputation
and image in the market (Akhtaruddin, 2005). Therefore, EM is less practiced in older firms
than in the new firms in the financial reporting process (Bassiouny et al., 2016). However, in
the Indian context, it is yet to verify whether the same logic holds true or not? In this
backdrop, the present study, therefore, hypothesised that-
H111: There is a negative relationship between firm age and EM.
2.6.3 Firm Profitability and EM
Profitability is one of the most critical determinants of EM practice in financial reporting

(Mahdi et al., 2012; Ajit et al., 2013). Firms which are profitable in the market incline to
have a low level of EM than loss-making or less productive firms as they are concerned
about sustaining higher profits and maintaining market expectations. Moreover, profitable
firms always try to improve the transparency of financial reporting to enhance public
confidence in the market. In support of the above proposition, several prior kinds of
literature associated with the linkage between profitability and EM witnessed a negative
relation (Ajit et al., 2013; Roy & Debnath, 2015; Kapoor & Goel, 2017). On the contrary,
some studies, however, witnessed a negative association between profitability and EM
(Mahdi et al., 2012; Okougbo & Okike, 2015; Sadeghi & Zareie, 2015). Further, Roy,
(2016) ascertained that the firms with moderate profitability and strong liquidity normally
unbiased of financial reporting indiscretions.

Given the mixed findings of the existing literature, the present study hypothesised that-
H112: Profitability is negatively linked with EM.
2.6.4 Financial Leverage and EM
Apart from the firm’s size and age, the magnitude of leverage is also likely to affect the
extent of EM propensity in financial reporting (Chen et al., 2006; Charitou et al., 2011;
Selahudin et al., 2014). When a firm procured a higher amount of debt in capital structure, it
is subject to an inquiry from lenders and lender often induced spending restriction (Jensen,
1986). Moreover, sometimes, the firm is required to pledge some important assets with the
lender. Some of the recent empirical findings (Naz et al., 2011; Ajit et al., 2013; Gill et al.,
2013; Rahmani & Akbari, 2013) substantiated the proposition of negative association
between leverage and EM. While some other studies (Sun & Rath, 2009; Uwuigbe et al.,
2014; Bassiouny et al., 2016) denied such proposition and opined that leverage encourages
management to indulge into EM practice in financial reporting to cover-up the burden of
fixed liabilities of debt capital irrespective of fluctuation of corresponding income.
Given mixed findings, the present study hypothesised that-
H113: There is a negative association between financial leverage and EM.
2.6.5 Firm Growth and EM
Many studies sketched that EM practice initiates with a track record of success (Goel, 2012).
As because, once the company reports substantial revenue and income which leads to an
increase in their stock price henceforth, it becomes more challenge for the company to
sustain the sales and earnings growth and compel the management to opt for managing the
accounting figure to continue their right image at par with the market expectation when
actual growth is not at par with projected one. In line with the same, many studies support to
the fact that firm's growth is positively correlated with the EM (Kasznik & McNichols, 2002;
Brown & Caylor, 2005; Goel, 2012). However, another recent study of Sun & Rath, (2009)
witnessed no significant relationships exists between firm growth opportunity and EM. In
this juncture, the plea is that, whether there is any significant relationship between EM and

the firm's growth? From the above findings, it is hypothesised that-
H114: Firm growth is positively associated with EM.
2.7 Research Gap
After the survey of existing and accessible literature, it has been observed that the studies
examining the linkage between the effectiveness of CG mechanism and EM practices in
financial reporting systems are extensively done in the context of developed countries (Peni
& Vahamaa, 2010; Dimitropolos, 2011; Gavious et al., 2012; Mohamad et al., 2012;
Alzoubi, 2016; Rahman & Ali, 2006; Saleh et al., 2007; Outa et al., 2017). And another
group of literature on EM have been focused on effectiveness of CG in limiting the EM and
impact of particular events such as public offerings, seasoned equity offerings, import relief
investigations, debt covenant violations, mergers and acquisitions in connection with
developed countries (DeAngelo, 1986; Dechow et al., 1995; Easterwood, 1997; Rangan,
1998; Erickson & Wang, 1999; Hirst et al., 2003).
However, as of now the researches on EM literature in the Indian context are limited to
finding the nature and extent of DA (a standard proxy of EM) in the financial reporting
(Goel 2012; Kaushal, 2013; Goel, 2014; Kaur et al., 2014; Akram et al., 2015; Ahmed,
2016; Bal, 2016; Mishra & Malhotra, 2016; Das & Jena, 2017). Although, some
contemporary studies (Ajit et al., 2013; Mangala & Isha, 2017) tried to examine the impact
of firm-specific attributes on EM practices in financial reporting in India. Kumari &
Pattanayak, (2017) studies impact CG on EM considering limited number of public and
private banks. But as of now, no studies have made an attempt to examine the impact of CG
mechanism on EM in financial reporting in Non-Banking Financial Companies in the Indian
context. Therefore, the present study has tried to broaden the knowledge of EM literature by
examining the relationship between CG mechanism and EM propensity in financial reporting
practices in a fast-growing economy like India.

2.8 Research Questions
The present study intends to assess the linkage between CG mechanism and EM practices in
ET-500 listed NFCs over five years from 2011-12 to 2015-16 spread over 175 companies
from across 14 different industries. The sample in the present study is more recent and
widespread compared with the periods examined by existing studies.
The present study, therefore, raised the following research questions to realize the set
objectives:
 Does Earnings Management occur in Indian Non-Financial Companies?

Assuming that the definite presence of Earnings Management in Indian companies the
following research questions have been explored;
 What is the nature and extent of Earnings Management in Indian companies?
 Does board structure influence Earnings Management in financial reporting practices
in Indian companies?
 Is there any impact of women presentation on the board on Earnings Management in
the financial reporting process?
 What is the impact of Audit Committee attributes over Earnings Management in
financial reporting practices in Indian companies?
2.9 Research Objectives
Keeping in view of the problem addressed above the present study aims-
 To explore the nature, extent and pattern of Earnings Management in selected Indian
companies.
 To assess the impact of board attributes in restraining Earnings Management.
 To examine the impact of women representation on the board of directors on
Earnings Management.
 To evaluate the impact of Audit Committee attributes in limiting Earnings
Management.
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CHAPTER 3
Data and Methodology
This chapter described the data collection procedure and logical explanation for the
application of particular methods employed in this study. Section 3.2 formulated the research
design wherein it presents criteria for selection of sample under investigation. While section
3.3 explains the sources of data collection, population and final sample size and Section 3.4
presents the model used for the calculation of DA (a standard proxy of EM) as dependent
variable in the present study. Section 3.5 offers the description and measurement of the
independent variables used in the research and outlines the hypothesis in the study. Section
3.6 presents the measure of control variables. Section 3.7 summarises the dependent and
independent variables measurement, along with supporting literature. Section 3.8 outlines
the assumptions for the multiple regression analysis and explains how this study meets all
the assumptions. Section 3.9 presents the logical relationship between EM and CG Mechanism.
3.2 Research Design
The research design of the present study has been formulated corresponding to the objectives
and nature of the study.
3.2.1 Sample Selection Criteria
The present study is empirical research based on secondary data on CG practices and
accounting figures. The initial sample included data from top 500 ranking firm listed in
Economic Times-500 (ET-500) companies in the year 2012. The firm belonging to banking
and financial sector companies were not considered due to the separate regulatory
framework, reporting practice and strict control by the Government and monitoring body.
Public Sector Units (PSUs) were also not included in the study due to direct control over
reporting by the government and lack of performance-based incentives, which is primarily
responsible for motivation towards EM. More so, in the PSUs as well board of directors are
agents who manage the company, but there is no personal interest for running the company

efficiently. Since they get nothing for good governance, board structure and EM are
irrelevant for the present study. As the present study required data of each year for all the
variables under study, the firm with missing data could not be considered. To ensure the
sample from the uniform reporting regime, the firms do not maintain consistent accounting
year of twelve months closing on any other day other than 31st March were not considered.
Finally, the sample data are classified into 14 industry groups, based on classification made
in Capitalineplus Corporate Database. Consistent with prior research and to ensure unbiased
estimation of coefficient estimates, it is required that a minimum of 6 firms exist for each
industry in each year (Klein, 2002; Sarkar et al., 2008). Firms belonging to any industry with
less than 6 (six) units were excluded from the study. After considering all criteria mentioned
above the final sample yields as follows:
3.2.2 Sample Size
Table 3.1 shows the details criteria through which the final sample has been constituted.
Based on said criteria, the present study eventually selected a sample consists of 175 (one
hundred seventy-five) ET-500 listed NFCs operating in India covering five years data from
the financial year 2011-12 to 2015-16 for the analysis.
Table 3.1: Sample Selection

Sample Criteria Number of Companies
Top ET-500 listed companies in the year 2012 500
Less-Banking & Financial Companies 67
Less- Government Companies 26
Less- Companies with Missing Data 42
Less- Companies’ Year Ending other than 31st March 16
Less- Companies from industries with less than 6 units 174
FINAL SAMPLE 175
Source: Author’s work.
The total sample firms are categorised across the 14 (fourteen) industries based on the
classification made by the Capitalineplus Corporate Database as per their nature of the
operation.

Table 3.2 presents the complete picture of the classification of the industry considered under
the present study.
Table 3.2: Industry-wise distribution of sample companies

Sl. Percent
Industry Description Frequency Nature of Industry
No.
1 Automobile Industry 14 8.00 Non-service
2 Cement Industry 9 5.14 Non-service
3 Chemical Industry 6 3.43 Non-service
4 Computer Software Industry 13 7.43 Service
5 Construction Industry 19 10.86 Service
6 Electric Equipment Industry 7 4.00 Non-service
7 Engineering Industry 9 5.14 Non-service
8 Fertilizer Industry 7 4.00 Non-service
9 Personal Care Industry 8 4.57 Service
10 Pharmaceuticals Industry 18 10.29 Non-service
11 Power Generation Industry 10 5.71 Non-service
12 Steel Industry 22 12.57 Non-service
13 Telecommunication Industry 7 4.00 Service
14 Textile Industry 26 14.86 Non-service
TOTAL 175 100.00
Among the fourteen industries under consideration, Textile Industry and Steel Industry
represented the highest sample at 14.86 percent and 12.57 percent respectively. However,
the lowest representation was observed in Chemical Industry at 3.43 percent. All the
fourteen industries under consideration have been further reclassified into two groups based
on the nature of operation of rendering Service or Non-service. Here four industries have
been found to provide service and accordingly classified as service sector industry, whereas,
remaining ten industries were classified as non-service sector industry.
3.3 Data Collection
This section describes the source and scope of data collection and also deals with sample
selection.
3.3.1 Data Sources
Considering the nature of the study, it requires financial data as well as the data related to the

CG structure. Consequently, data pertaining to the CG characteristics have been collected

from the CG report disclosed as a part of the annual report under Clause 49 of the SEBI Act,
1992, which is obligatory for every company listed in the recognised stock exchange to
disclose a report on CG in their annual reports. Accounting and financial data have been
collected from Capitalineplus Corporate Database. All the CG and financial data have been
assessed at a single point of time, i.e., 31st March as disclosed in annual reports and
Capitalineplus Corporate Database as well. For accounting data, standalone modes of
financial statements have been considered. This exercise avoids the duplication and
overlapping of data in case of holding and subsidiary companies included in the sample
companies in the present study.
3.3.2 Time Period of the Study
The present study considered 5 (five) years' data from the financial year 2011-12 to 2015-16.
The study on the impact of CG for this period justifies for the reason that it follows many
significant corporate scandals viz; Satyam Computer Saga in the year 2009 was witnessed in
the Indian scenario. This period was also considered necessary for study because in between
this period significant changes have been brought to the Indian CG mechanism and financial
reporting practices replacing the old Companies Act, 1956 by new CA, 2013 as a remedial
measure to safeguard the stakeholders' interest from such corporate scandals and financial
reporting malpractice. Moreover, the introduction of the CA, 2013 makes it possible to
compare the effect of different CG provision on the FRQ by segregating total period under
study into the pre-application period that covers financial years 2011-12 to 2013-14 and the
post-application period that includes the year from 2014-15 and 2015-16. Again, due to a
large amount of data that has to be hand-collected for the CG variables, limiting the study
period to five years makes that task viable and also increases the possibility of getting annual
reports from the website of individual companies under consideration.
3.3.3 Sample Observations
To test the hypotheses of the study examining the nexus between the CG mechanism and
EM practices, various CG variables were identified through a literature survey in the
previous chapter. Concerning the objectives of the study, the CG related data has been

manually collected from the published annual reports of 175 companies under consideration
for five years from the financial year 2011-12 to 2015-16. Therefore, considering 175 firms
for five years finally yields 875 observations. Consequently, 875 annual reports have been
scanned to extract the required CG data of the present study. The annual reports have been
collected from the website of respective companies under consideration. For some
companies and some years as the Annual Reports were not available on their website, the
website of moneycontrol.com was considered for collecting the missing Annual Reports in
the respective company’s website. The financial data used in the study was directly extracted
in the Microsoft excel sheet from Capitalineplus Corporate Database through institutional
access facility provided by Central Library of Tripura University (A Central University).
3.4 Estimation of Discretionary Accruals
This section deals with the estimation of DA following the Modified Jones model developed
by Dechow et al., (1995).
3.4.1 Discretionary Accruals Models
Accrual is the component of total earnings, which does not represent direct cash flow. This is
because, in accrual accounting method, revenue is recognised and match to the expenses
incurred to generate them in the particular period irrespective of actual receipt of cash from
the customers or actual payment made to creditors. In other words, accruals are accounting
adjustments that represent the difference between economic activities and actual cash
received during the particular accounting period, which does not generate any cash flow to
the business. Accruals can be decomposed into two components, namely, NDA and DA. The
former one represents the business circumstances which are subject to the nature of business
and activities. However, the latter one does not link with the legitimate business reasons
instead result of management intention reflected in financial reporting.
But such accruals are not at all visible directly from the financial statements by the
shareholders and other stakeholders analysing the financial statements for specific decisions.
Managers use accruals as a proxy to quantify the EM.

Therefore, to catch such financial reporting malpractice, some prominent accounting

scholars have developed some models to estimate the discretionary portion of accruals.
3.4.2 Discretionary Accruals

Most of the previous accounting literature has estimated DA, sometimes known as
unexpected accruals with a degree of error to some extent. To measure the DA, the equation
begins with an estimation of total accruals, which is the difference between reported net
income and cash flow from operation. After that, total accruals are regressed on the variables
that are responsible for normal accruals (which is popularly known as non-DA in the
accounting literature) such as revenues and gross Property Plant and Equipment (PPE).
Abnormal or DA are thus residual (unexplained) components of total accruals (Agrawal &
Chaterjee, 2015; Mishra & Malhotra, 2016; Kapoor & Goel, 2017).
For bifurcation of normal and abnormal accruals, there are many statistical models have been
developed by the accounting literature. Following some contemporary studies (Sarkar et al.,
2008; Ajit et al., 2013; Kaur et al., 2014; Iqbal et al., 2015) that have been undertaken in the
context of developing country, in the present study, Modified Jones Model developed by
Dechow et al., (1995) has been deployed to calculate the discretionary model.
Modified Jones Model is an extended model of Jones (1991). But the major weakness of the
Jones model is its incompetence to capture the effect of turnover based manipulation since
changes in sales are assumed to result in a non-discretionary accrual (Dechow et al., 1995).
In an attempt to overcome this limitation, Dechow et al., (1995) proposed a modification to
the standard-Jones model. Therefore, the modified Jones model is identical to the standard
Jones model (1991) with the exception that the change in debtors (∆REC) is take off from
changes is sales (∆REV) at the second stage. Modified Jones model (1991) uses a three-stage
approach to split total accruals into discretionary (managed) and nondiscretionary
components. In the first stage, Total Accrual (TA) is estimated using the following
definitional equation: Total Accrual is the difference between net earnings and cash flow
from operations.
3.4.3 Measurement of Discretionary Accrual (dependent variable)

The dependent variable in this study is EM, which is considered as a counter proxy of FRQ.
The higher amount of EM signals for poor FRQ and vice-versa (Monem & Farshadfar,

2007). Accordingly, in the present study, EM is measured through Discretionary Accruals

vii
(DA) . Following the study of Sarkar et al., (2008); Ajit et al., (2013); Kaushal, (2013);
Kaur et al., (2014); Iqbal et al., (2015); Kapoor & Goel, (2017) Cross-section Modified
Jones (Dechow et al., 1995) model was used to estimate the DA. In the initial step, Total
Accruals were calculated using the cash flow approach where Total Accruals embodies
excess of Net Income over the Operating Cash Flow, and it is calculated in the following
formula:
TAt = NIt – CFOt ……………… (i)
Where, TAt = total accruals in the year t; NIt = net income in the year t; CFOt = cash flow
from operation in the year t.
Total accruals are then decomposed into DA and NDA, using the cross-sectional modified
Jones model (Dechow et al., 1995). To nullify the effect of firm size, all variables in
Equation (ii) are scaled by the total assets of previous year t-1. This exercise reduces the
problem of Heteroskedasticity in the regression residuals (Teoh et al., 1998; Kothari et al.,
2005; Sarkar et al., 2008; Iqbal et al., 2015).
Estimation of DA using the Modified Jones (1995) Model:
In the present model, the following equation has been formulated to isolate the discretionary
portion of accrual, which is treated as a proxy of EM.
TAit /Ait–1 = α1 (1/Ait–1) + α2 (ΔREVit – ΔRECit)/Ait–1 + α3 (PPEit /Ait–1) .….. (ii)
Here, α1, α2 and α3 are firm-specific parameters.

TAit = total accruals of firm i in year t, estimated as the excess of Net Income (NIit) of firm i
in year t over cash flow from operations (CFOt)in year t.
A it–1= total assets of firm i in year t-1.
ΔREVit = change in revenues of firm i in the year t-1 to year t.
ΔRECit = change in receivables of firm i in the year t-1 to year t.
PPEit = Property, Plant and Equipment of firm i in the year t.
i and t = subscripts for entity and time period respectively.
The coefficients (i.e., α1, α2 and α3) were estimated through the Ordinary Least Square
(OLS) method. The estimated values of total accruals, which represent non-DA (NDAit) is

obtained by putting the estimated parameters α1, α2 and α3 in the equation (ii). DA is then
workout after putting the values in equation (iii).
DAit /A it-1 = TAit /A it-1 – NDAit /Ait-1 ……….. (iii)
Nevertheless, taking the difference between the TA and NDA in equation …. (iii), i.e., the
residual amounts to the DA which is basically an inverse measure of FRQ (Akers et al.,
2004). Hence, the higher the value (regardless of sign) of DA, lower the FRQ and vice-versa
(Munter, 1999). However, positive DA indicates income-increasing EM, thus aggressive
financial reporting, while income-declining EM or conservative financial reporting is
represented by negative DA (Goel, 2012).
3.5 Estimation of Independent variables
Independent variable in the present study is CG. Therefore, to capture the impact of CG on
EM, various CG attributes were identified which are as follows-
3.5.1 Board Size (BDS)
BDS refers to the total number of directors on the board.
3.5.2 Board Independence
BDI refers to the proportion of IDs to the total number of directors on board.
3.5.3 Board Diligence
BDD refers to the total number of the board meeting held during a particular financial year.
3.5.4 CEO-duality
CEOD refers to a situation where the CEO also holds the position of Chairman of the Board
of Directors. The CEO Chair duality is taken as a dummy variable and assigned the value 1
(one) if the CEO is Chairman otherwise, the value assigned 0 (zero).
3.5.5 Gender Diversity
Gender Diversity refers to the proportionate representation of women directors on board.

3.5.6 Multiple Directorships
Multiple Directorships (MLD) imply the total number of outside directorships held by the
member of the board divided by the total board members. Sarkar & Sarkar, (2009);
Baccouch & Omri, (2014) argued that instead of the average number, the median value of
external directorships held by a director is more prudent because it has the advantage of
eliminating the extreme observations and reflecting the MLD of the majority of board
members. Therefore, in the present study, justification of Sarkar & Sarkar (2009) has been
followed for measurement of MLD by the median numbers of outside directorships held by
board members.
3.5.7 Audit Committee Size
ACS refers to the total number of directors nominated in the AC.
3.5.8 Audit Committee Independence
ACI Refers to the existence of IDs in the AC and it is calculated as a proportion of total
members of the committee.
3.5.9 Audit Committee Diligence
ACD refers to the total number of AC meeting held during a particular financial year.
3.6 Estimation of Control Variables
Though the present study focused on assessing the impact of the CG mechanism on EM in
financial reporting practice, EM is not only subject to the CG mechanism. Many other firm-
specific characteristics can affect the EM propensity in financial reporting. In other words,
EM decisions of a firm may be prejudiced by several factors other than considered in this
proposed study. Thus, the present study control for those variables which are expected to
influence the extent of EM in the estimation as follows-
3.6.1 Firm’s Size
The natural logarithm of total assets is taken as a proxy for the size of the firm.

3.6.2 Firm’s Age
Firm’s age is calculated from the year of incorporation to year of study.
3.6.3 Firm’s Performance
In this study, Firm's performance is measured through Return on Capital Employed (RoCE).
3.6.4 Financial Leverage
The term leverage is measured as total debt to total assets in the present study.
3.6.5 Firm’s Growth
In this study, the firm's growth is measured by assets growth and is calculated by the
following formula:
FRMG = (At – At–1)/ At–1
Where,
FRMG stands for Firm's growth; At for total assets of the current year; At-1 for total assets of
last year.
3.7 Summary of Dependent and Independent Variables

Table 3.3 summarises the dependent, independent and control variables and their
measurement along with the corresponding symbols used in the study. Table 3.3 also
presented the supportive literature which was followed in the present study for the
measurement of variables under consideration.
3.8 Assumptions for the Multiple Regression Analysis

Application of multiple regression analysis is based on certain underlying assumptions
which are presented in this section. Before using multivariate regression to test the research
hypotheses, regression assumptions were examined to verify the validity of data for analysis.
3.8.1 Normality Test

Normality is an underlying assumption of multiple regression analysis. Therefore, skewness
and kurtosis values were used to satisfy the normality assumption before application of

regression analysis, and data are considered reasonably normal if the values of kurtosis are
lower than 10 and the values of skewness are smaller than 3 (Kline, 1998) for all the
variables under consideration.
3.8.2 Multicollinearity Test
In the multiple regression models, if the predictor variables are correlated among themselves,
then we need to detect multicollinearity and treat it. Recognition of multicollinearity is
crucial because when two or more variables are correlated, which shows a strong
dependence structure between those variables and study is using correlated variables as
independent variables, which end up having a double effect of these variables on the
prediction because of the relation between them. If we treat the multicollinearity and
consider only variables which are not correlated, then we can avoid the problem of double
impact (Jeet & Vats, 2017).
To deal with such a problem in the data set the present study correlation test among the
selected independent variables have been carried out where no significant correlation was
found between them. This is because, as a rule of thumb, the degree of relationship between
any two independent variables to the extent of 0.80 or above causes the problem of
multicollinearity (Gujarati, 2010). Apart from the pairwise correlation result, the Variance
Inflation Factor (VIF) test has also been applied to avoid the problem of a multicollinearity
problem. As a rule of thumb, VIF value against any independent variable more than 10
indicates the existence of multicollinearity problem in the data set.
3.8.3 Autocorrelation Test
An autocorrelation test is used to determine if the dataset of a sample is generated from

random processes. Kazmier, (1996) stated that if the Durbin-Watson (DW) value is less than
1.4, a robust positive series problem exists, while a value of more than 2.6 indicates a strong
harmful autocorrelation problem.

Table 3.3: Summary of Variables Measurement and Literature Review

Name of Literature Reviewed
Symbol Description of Variables
Variables
DEPENDENT VARIABLE
Hashim & Devi, (2008); Kaushal, (2013); Kaur et al.,
The absolute value of the DA estimated (2014); Agrawal & Chatterjee, (2015); Ajay & Madhumathi,
Earnings
EM by the Modified Jones Model developed (2015); Iqbal et al., (2015); Kaur et al., (2015); Bal, (2016);
Management
by Dechow et al., (1995). Mishra & Malhotra, (2016); Alareeni, (2017); Das & Jena,
(2017); Mangala & Isha, (2017).
INDEPENDENT VARIABLES
Rahman & Ali, (2006); Epps & Ismail, (2008); Hashim &
Devi, (2008); Alves, (2011); Dimitropoulos, (2011); Sandra,
The total number of directors on the
Board Size BDS (2011); Mohamad et al., (2012); Iqbal et al., (2015); Arrora &
board.
Sharma, (2016); Alareeni, (2017); Elghuweel et al., (2017);
Kapoor & Goel (2017); Waweru & Prot, (2018).
Ghosh, (2006); Rahman & Ali, (2006); Hutchinson & Percy,
(2008); Sarkar et al., (2008); Iqbal & Strong, (2010); Alves,
Board The proportion of IDs to the total (2011); Dimitropoulos, (2011); Sandra, (2011); Mohamad et
BDI
Independence number of directors on board. al., (2012); Arrora & Sharma, (2016); Alareeni, (2017);
Kapoor & Goel (2017); Waweru & Prot, (2018).
Sarkar et al., (2008); Mohamad et al., (2012); Arrora &

Sharma, (2016); Kapoor & Goel, (2017); Waweru & Prot,
The number of the board meeting held
Board Diligence BDD (2018).
during a particular year.


Variables
A dummy variable equal to 1 when the Rechner & Dalton, (1991); Finkelstein & D’Aveni, (1994);
same person holds both the CEO and Ghosh, (2006); Sarkar et al., (2008); Dimitropoulos, (2011);
CEO- Duality CEOD
board chairperson positions in a Gavious et al., (2012); Mohamad et al., (2012); Abels &
corporation and 0 otherwise. Martelli, (2013); Arrora & Sharma, (2016); Alareeni, (2017).
Sarkar & Sarkar, (2009); Peni & Vahamaa, (2010); Gavious et
The proportion of women directors to
Gender Diversity GEND al., (2012); Routray & Bal, (2016); Elghuweel et al., (2017);
the total number of directors.
Waweru & Prot, (2018).
Multiple The median value of external Sarkar et al., (2008); Mohamad et al., (2012); Baccouche &
MLD
Directorships directorships held by the director. Omri, (2014); Kapoor & Goel, (2017).
Audit The total number of directors in the Ghosh, (2006); Saleh et al., (2007); Hamdan et al., (2013);
ACS
Committee Size audit committee. Mishra & Malhotra, (2016); Elghuweel et al., (2017)
Audit Ghosh, (2006); Rahman & Ali, (2006); Saleh et al., (2007);
The proportion of IDs to the total
Committee ACI Hutchinson & Percy, (2008); Mohamad et al., (2012); Mishra
number of directors in AC.
Independence & Malhotra, (2016); Kapoor & Goel (2017).
Ghosh, (2006); Rahman & Ali, (2006); Saleh et al., (2007); Qi
Audit
The total number of AC meeting held & Tian, (2012); Hamdan et al., (2013); Mishra & Malhotra,
Committee ACD
during a particular financial year. (2016).
Diligence


Variables
CONTROL VARIABLES
Hashim & Devi, (2008); Noronha et al., (2008); Alves,
(2011); Mohamad et al., (2012); Ajit et al., (2013); Ajay &
Log value of the total asset is taken as
Firm’s Size FRMS Madhumathi, (2015); Alareeni, (2017); Elghuweel et al.,
a proxy of firm size.
(2017); Habiba et al., (2017); Outa et al., (2017); Waweru &
Prot, (2018).
Kamran & Shah, (2014); Ajay & Madhumathi, (2015);
Calculated from the year of
Firm’s Age FRMA Okougbo & Okike, (2015); Arrora & Sharma, (2016); Kapoor
incorporation to year of study.
& Goel, (2017).
Return on Capital Employed (RoCE) Saleh et al., (2005); Rahman & Ali, (2006); Arrora & Sharma,
Firm’s
FRMP is taken as a proxy of firm (2016); Mishra & Malhotra, (2016).
Performance
performance.
Rahman & Ali, (2006); Epps & Ismail, (2008); Hashim &
Devi, (2008); Iqbal & Strong, (2010); Alves, (2011); Arrora &
Financial Total debt to total assets ratio is taken
FLEV Sharma, (2016); Alareeni, (2017); Habiba et al., (2017);
Leverage as a proxy of leverage.
Kapoor & Goel (2017); Outa et al., (2017); Waweru & Prot,
(2018).
Growth in total assets in the current Ajay & Madhumathi, (2015); Iqbal et al., (2015); Alareeni,
Firm’s Growth FRMG
year from last year. (2017).
Source: Author’s literature survey.

3.8.4 Regression Models
Considering the dependent and independent variables discussed above, the present study has
formulated the three regression models. Board structure and AC composition are
complementary mechanisms to ensure the achievement of common organisational goals and
check and balance over financial reporting malpractice in the form of EM so that accurate
financial information can be delivered to the stakeholders for taking informed economic
decisions. Therefore, their effectiveness is measured through separate regression models in a
separate chapter. Apart from the above, since the gender diversification in the board room is
made mandatory by the CA, 2013 which is new phenomena in Indian CG arena, the impact
of gender diversification on EM propensity has been assessed in a separate chapter in an
independent model.
As the data in the present study has been collected from across 175 companies (cross-section
data structure) over 5 years (time series data structure) together combines the cross-section
as well as time-series data in a single frame. Therefore, the whole data set has been declared
as panel data series through stata software before application of statistical analysis,
especially before running the multiple regression techniques. The study proposed the
following models to assess the impact of CG on DA (a standard proxy of EM and inverse
measure of FRQ). Model 1 analyses the association between board attributes and EM. Model
2 examines the nexus between gender diversity on board and EM. Finally, Model 3 evaluates
the linkage between AC characteristics and EM.
3.8.4.1 Model A: Board Attributes and EM
DAit = β0 + β1(BDSit) + β2(BDIit) + β3(BDDit) + β4(CEODit) + β5(MLDit) + β6(FRMAit) +

β7(FRMPit) + β8(FLEVit) + eit …. A
3.8.3.2 Model B: Gender Diversification and EM
DAit = β0 + β1(WDit) + β2(WPit) + β3(ACSit) + β4(FRMAit) + β5(FRMSit) + eit ….. B

3.8.4.3 Model C: Audit Committee Attributes and EM
DAit = β0 + β1(ACSit) + β2(ACIit) + β3(ACDit) + β4(FRMSit) + β5(FRMGit) + eit ….. C
Where, DA stands for Discretionary Accruals; BDS for Board Size; BDI for Board
Independence; BDD for Board Diligence; CEOD for CEO-Duality position; GEND for
Gender Diversity in the boardroom; MLD for Multiple Directorship; ACS for Audit
Committee Size; ACI for Audit Committee Independence; ACD for Audit Committee
Diligence; FRMS for Firm Size; FRMA for Firm’s Age; FRMP for Firm’s Performance;
FLEV for Financial Leverage; FRMG for Firm’s Growth; ‘e’ for error term; β0 for
intercept of the equation; β1 to β8 for coefficients; ‘i’ and ‘t’ subscripts for entity and time
period respectively.
Hence, based on the above findings of the existing literature below mentioned associations
are expected to be observed between dependent and independent variables under
consideration and summarised in Table 3.4 below.
3.9 Logical Framework of EM and CG Mechanism
The following logical diagram described how the EM practices in financial reporting come
into picture and how it can be mitigated through the CG mechanism within the system.

Figure 3.1: Logical Relationship between EM and CG Mechanism
Separation of Ownership and

Management
Promotes
Earning Management
Controls
Monitoring
Mechanism
Source:
Audit Committee
Board Attributes
Attributes

Table 3.4: Summary of Research hypotheses development and literature support

Variables Name of Symbols Expected Alternative Basic Argument in Favour of Previous Studies in favour of framed
Nature Variables Relationship Hypothesis the Hypothesis Hypotheses
with EM
Board Size BDS Negative (-) H1 1 The higher number of directors Dalton et al., (1998); Xie et al., (2003);
accumulates diversified Neville, (2011).
expertise and knowledge.
Board BDI Negative (-) H1 2 IDs reduce partiality in decision Mashayekhi & Bazaz, (2010); Baccouch
Independence and monitoring process. & Omri, (2014); Uwuigbe et al., (2014).
3
Board BDD Negative (-) H1 Diligent board members are Xie et al., (2003); Sarkar et al., (2008);
Diligence capable of monitoring the Mohamad et al., (2012).
management more efficiently.
4
CEO-duality CEOD Positive (+) H1 The concentration of power to a Dechow et al., (1996); Sarkar et al.,
single person leads to misuse of (2008); Gulzar & Wang, (2011);
Independent Variables
liberty without responsibility. Nahandi et al., (2011); Mohamad et al.,

(2012); Iqbal et al., (2015); Daoud et al.,
(2018).
Gender GEND Negative (-) H1 5 Women carry more ethical and Nielsen & Huse, (2010); Ferdinand et
Diversity responsible behaviour than the al., (2011); Buniamin et al., (2012);
male counterpart in the Gavious et al., (2012); Damagum et al.,
corporate decision making (2014); Bala & Kumai, (2015); Lakhal
process. et al., (2015); Buse et al., (2016).
Multiple MLD Positive (+) H1 6 Accumulation of higher outside Morck et al., (1998); Li & Ang, (2000);
Directorship directorship makes the director Fich & Shivdasani, (2006); Sarkar et al.,
over busy, resulting in less (2008); Jiraporn et al., (2009); Sharma
responsible towards the & Iselin, (2012); Pathak & Sun, (2013);
particular board. Baccouch & Omri, (2014).
Audit ACS Negative (-) H1 7 The higher number of directors Yang & Krishnan (2005); Hamdan et
Committee accumulates diversified al., (2013); Ayemere & Elijah, (2015)
Size expertise and knowledge. Rassas & Kamardin, (2015); Mishra &
Malhotra, (2016).

Name of Symbols Expected Alternative Basic Argument in Favour of The Previous Studies in favour of
Variables Relationship Hypothesis Hypothesis framed Hypotheses
with EM
Audit ACI Negative (-) H1 8 The IDs reduce the internal Saleh et al., (2007); Ahmed &
Committee influence in the internal decision and Hasnah, (2015); Rassas &
Independence monitoring process. Kamardin, (2015).
Audit ACD Negative (-) H1 9 Diligent board members are capable Van der Zahn & Tower, (2004);
Committee of monitoring the management more Vafeas, (2005); Chandrasegaram et
Diligence efficiently. al., (2013); Ayemere & Elijah,
(2015).
Firm’s Size FRMS Negative (-) H110 Large firms are more concern about Ajit et al., (2013); Ahmad et al.,
market reputation and business (2014); Ali et al., (2015); Roy &
ethics than a small firm. Debnath, (2015); Bassiouny et al.,
(2016).
Firm’s Age FRMA Negative (-) H111 Firm working for a long time is Akhtaruddin, (2005); Alsaeed,
expected to follow ethical financial (2006); Bassiouny et al., (2016).
Control Variables
reporting practice.
Firm’s FRMP Negative (-) H112 The profit-making company would Mahdi et al., (2012); Ajit et al.,
Performance have little need to (2013); Sadeghi & Zareie, (2015);
modify their earnings. Kapoor & Goel, (2017).
Financial FLEV Negative (-) H113 The highly levered firm is Naz et al., (2011); Ajit et al., (2013);
Leverage conservative in financial reporting Gill et al., (2013); Rahmani &
than less levered firm. Akbari, (2013).
Firm’s FRMG Positive (+) H114 Firms having higher growth face Kasznik & McNichols, (2002);
Growth more pressure to meet the investors' Brown & Caylor, (2005); Goel,
expectation and thus influence in (2012).
financial reporting irrespective of
actual performance.
--------

CHAPTER 4
State of Earnings Management Practices in India
4.1 Introduction
In the accounting practice, the GAAP permits the management and accountants to select any
particular accounting method from various alternatives while computing the net
income/earnings and other accounting treatment to make the accounting information relevant
and representative of the actual underlying economic status of the organisation. Generally,
the quality of financial information (i.e., the product of accounting process) is measured by
how well the accounting numbers reflect economic reality or fundamental underlying
economic situation. Does the company manage reported earnings when they face a situation,
which demands how to report attractive result, rather than how to report economic reality?
Therefore, EM basically involves in selecting the accounting methods within the permissible
limit of the GAAP, which concern for good appearance of the financial health of a company
rather than the actual underlying economic situation. Therefore, EM has a negative impact
on earnings qualityviii and it is a big threat to FRQ (Munter, 1999). Because it includes subtle
techniques such as changing reported earnings through performance timing. For instance,
managers seeking to reduce in the current period expenditure might defer scheduled routine
equipment maintenance until the next accounting period. This would give rise to higher
reported earnings in the current period, but the schedule maintenance delay, of course, might
be detrimental to the company's future operations.
As a result, in the recent decades of globalisation, various developed and developing

economy proficient a financial crisis during which several reputed corporate enterprises like
Enron, Xerox, WorldCom and Satyam have been suddenly collapsed resulting in a massive
loss to the investors. These unexpected events exposed serious gaps in accounting and
financial reporting practices and questioned about the FRQ. The research suggested that the
failure of this magnitude resulted from improper accounting practices exercised by the
managers to manage reported earnings for presenting better performance through accrual
accounting (Chandrasegaram et al., 2013; Rani et al., 2013). EM is a practice of personal
intervention in the process of cooking the books of account by the management to arrive at

the desired level of profit for their own benefits (Schipper, 1989). As already mentioned,
managers enjoy some liberty while choosing the method of accounting among the available
alternative for the treatment of business transactions to make accounting information best
representative of economic circumstances (Scott, 2006). They always attempt to influence
the reported earnings figure to meet the investors' expectation for the sake of their benefits.
Therefore, managers use these sorts of liberty of choosing the accounting methods for their
benefits at the cost of the larger interest of stakeholders. This divergence in the interest of the
two parties gives birth to agency problem (Jensen & Mecklin, 1976).
Moreover, managers in a company often remain under pressure, which demands "how to
report the attractive or anticipated results, rather than to report actual underlying economic
reality" because their compensations are linked with the firms' performance (Mishra &
Malhotra, 2016). Therefore, EM concerns for good appearance of the financial health of a
company rather than the economic reality without violating the prescribed bright line of the
GAAP. This practice deteriorates the quality of financial information due to loss of its
relevance and reliability, which eventually leads the investors to take the decisions based on
the information, which does not reflect the actual underlying economic reality of an
organisation (Kam, 1990; Glautier et al., 2000). Thus, EM is the biggest threat to the FRQ,
which involves manipulation of information within the malleable bright line of the GAAP
for attaining the desired target at the cost of the original result (Munter, 1999). Barth et al.,
(2008) claimed that EM challenges the quality of accounting information. Therefore, the
lower level of EM ensures fair reporting of accounting information. In developing market
economies like India, where there is a high demand for funds in the companies, investors
need to be guaranteed that, they are sheltered from accounting scams and financial reporting
malpractices. Ensuring the continued flow of funds and flourishing capital markets require
regulators to put in place specific stringent systems that check and determine financial
misuses and promote a sense of confidence in financial reporting practices. Regulators
would also want to maintain that the reported accounting figures are tally with their real
economic values because, information asymmetry between managers and shareholders
empower the managers to use discretionary judgment of economic transactions while
reporting the earnings of a company to increase their benefits (Fama & Jensen, 1983;

Nahandi et al., 2011). Market regulators are interested to know about EM practices, which
reduce the quality of financial information, for protection of minority shareholders' interests,
and improve the functioning of capital markets. The US financial regulators have attempted
to check over EM propensity by the firms through the Regulation of Fair Disclosure (RFD)
Act, 2000 and the Sarbanes-Oxley (SOX) Act, 2002. Malaysian Government implemented
the Malaysian Code on CG 2000 (Saleh et al., 2007) and many other countries developed the
robust governance mechanism to check over EM. In India, the Companies Act, 2013,
mandated strict norms for the CG code including formation of AC, responsibility of IDs,
compulsory appointment of at least one women directors in the board and other disclosure
requirement, with a view to ensure transparency in financial reporting and curb tendency of
manipulating financial reports by managers for securing private gains. Ronen & Yaari,
(2008) argued that regulatory interventions result in lower EM by firms, which was noted
through the passage of RFD and SOX in the US. Similar with developed nations, a recent
study (Ajit et al., (2013) of EM has undertaken based on 2229 listed Indian NFCs during
2008-2011 marked average DA as 2.9 percent of total assets. The occurrences of EM in
Indian companies are also found by many other recent studies (Goel, 2012; Kaushal, 2013;
Kaur et al., 2015; Kumari & Pattanayak, 2015) which are of inconclusive. Similarly, the
recent study of Dayanandan & Sra, (2016) observed that on an average EM in the non-
financial corporate sector of India is around is 1.5 percent of the total assets of these firms in
the previous year with an annual average growth of 1.7 percent during 2002-2011. They also
found that extent of EM is higher in small business compared to medium and big size firms
and rate of growth in DA among small firms were higher than those of medium and large
firms, therefore, they observed that firm size is negatively associated with EM.
Therefore, the present chapter has been dedicated to address the issues of EM in financial
reporting process across the ET-500 listed Indian companies during the year 2011-12 to
2015-16 considering a total of 175 NFCs spread over 14 industries having a significant
impact on the Indian economy. The present chapter also attempts to explore the pattern of
EM concerning industry classification. The chapter further describes the pattern and degree
of EM measured by DA corresponding to the period before and after implementation of CA,
2013. Also, the study attempts to discover whether the behaviour of managers in the service

sector differs from managers in non-service industries. Hence, the present study is unique
and most specifically, it is the first study to focus on the impact of the legislature on EM in
Indian context after application of CA, 2013.
4.2 Status of Earnings Management Practices in the Indian Context
There are several studies undertaken to examine the state of EM concerning developed
countries during the 20th century. However, very few studies are available in the context of
developing counties, especially in India. Some of the contemporary studies like Kaushal,
(2013) explored the nature and extent of EM of 1035 firm-year observations from the year
2006 to 2010 in Indian industry level and individual company level wherein the study
affirmed that the EM as depicted by DA exists in the Indian companies. While Kaur et al.,
(2014) based on large sample also witnessed the incidence of EM, Goel, (2012) found that
most of the units under study were exercising income-increasing EM as verified by positive
average accruals. However, when sector-specific DA is considered over five years period it
was found that service sector firms were involved in income-decreasing EM, but non-service
sector tends to be engaged in income-increasing EM and subsequently, the same result was
also witnessed by others (Roy & Debnath, 2015; Mangala & Isha, 2017). An extensive study
by Ajit et al., (2013) identified that average EM in NFCs was 2.9 percent of the total assets
in India over the period from 2008-2011 and pointed out that the maximum EM was
construction and mining sector. Despite of strict monitoring of Reserve Bank of India (RBI)
in banking and financial sectors in India, a recent study by Kumari & Pattanayak, (2015)
confirmed the occurrence of income increasing EM exercise in private sector and public
sector commercial banks in India based on 32 commercial banks from the year 2003 to 2013.
Sarkar et al., (2008) stated the EM could be better checked and prejudiced by CG in India.
Also, Agarwal & Chatterjee, (2015) found that distress of the firm was an influential factor
for engagement of EM. Goel, (2014) confirmed the incidence of EM in their report and
claimed for improvement in the quality of earnings in Indian firms.
Given the above findings of inconclusive nature, the present study is undertaken to bridge
the gap and identified the magnitude and pattern of EM corresponding to industry
classification and time period.

4.3 Objectives of the Chapter
Given the preceding survey of existing literature, the present study is set to examine the
incidence and pattern of EM in ET-500 listed non-financial Indian companies during the
year 2011-12 to 2015-16. More specifically the study endeavoured-
 To explore the extent of DA (a standard proxy for EM) in ET-500 listed non-financial
Indian companies;
 To discover the variation of Earnings Management concerning different industries;
 To examine the pattern of DA (a standard proxy for EM) over five years under
consideration.
4.4 Results and Discussions
Concerning the first objective, the study deployed descriptive statistics of DA calculated
through cross-section modified Jones model (Dechow et al., 1995) to describe the degree
and variations of EM practices in financial reporting across the firms during the study period
under consideration.
Table 4.1 presented the descriptive statistics of DA (a proxy of EM in the present study)
estimates for the sample companies for five years from 2011-12 to 2015-16. The average DA
is estimated at (-) 1.409 percent of the average total assets. This result proved to be the
definite incidence of EM across the firms over the period under study, which is in line with
the outcome of many previous studies (Kaushal, 2013; Goel, 2014; Kaur et al., 2014;
Mangala & Isha, 2017). They have observed that the degree of EM to be prevailing across
different industries in a developing country like the Indian corporate sector. Here negative
sign associated with the amount of DA indicated that the majority of the firms under
consideration were engaged in income decreasing EM to avoid future reporting uncertainty.
However, the present result was a little bit of lower side with a recent study of Ajit et al.,
(2013); Dayanandan & Sra, 2016; and Mishra & Malhotra, (2016) who have found that the
average EM in the Indian corporate sector was 2.9 percent, 1.5 percent and 5.6 percent
respectively, which is comparable to the estimates in the US, Europe, and elsewhere in the
world around 1 to 5 percent. The result of the present study was also consistent with the

findings of one recent study of Bal, (2016) who has documented that oil companies in India
restoring to income declining accruals to manage their earnings in order avoid the
implication of new policies, taxes and political pressure to claim for less subsidies.
Table 4.1 presents the values of Skewness and Kurtosis regarding DA, which is a proxy
measure of EM in the present study. The value pointed out that DA does not follow any
normal distribution pattern across the firms under consideration.
Table 4.1: Descriptive Statistics of Discretionary Accruals

Average Post-Application of CA, 2013 Pre-Application of CA, 2013
Statistic
DA 2016 2015 2014 2013 2012
Mean -0.01409 -0.0345 -0.03152 0.001343 0.014074 0.01984
Median -0.01513 -0.0304 -0.01736 -0.00686 -0.01129 -0.00853
Mode NA NA NA NA NA NA
SD 0.258214 0.1876 0.180747 0.199491 0.414717 0.231233
CV -18.3239 -5.4355 -5.73364 148.5681 29.4674 -11.6541
Skew. 8.75885 -0.3136 0.680901 3.74679 10.33748 -1.32088
Kurt. 172.7245 9.4382 5.351546 28.48152 124.6786 29.48427
Count 875 175 175 175 175 175
Source: Author’s calculation
The negative and positive values of DA for every year diverge for every sector, and no
consistent sketch has been observed.
Moreover, the value of CV (-18.32) and SD (0.258214) indicate the massive inconsistency of
DA among the firms under study. Non-normality was anticipated since DA is the dependent
variable calculated through industry-wise as well as year-wise cross-section analysis. The
observations represent positive and negative value; therefore, the outliers cannot be
removed. Normality is one parametric test assumption, so it is not appropriate for this study
(Alzoubi, 2016). Kao & Chen, (2004) stated that the regression of OLS is not applicable
since a dependent variable is DA (absolute value).
Figure 4.1 further shows that the levels of DA over the five-year study period from the year
2012 to 2016. The distribution of DA shows that it did not follow any specific pattern over
the period under consideration. From the distribution pattern, it reveals that DA was lowest

in 2014 (0.13 percent of total assets) followed by 1.41 percent in 2013, 1.98 percent in 2012,
3.15 percent in 2015 and finally highest in 2016 at 3.45 percent. From Figure 4.1, it is clear
that after the application of CA, 2013, DA, which is a proxy of EM turned to negative shape
from positive shape earlier. Positive DA indicates income increasing or aggressive EM and
negative DA implies income declining or conservative EM (Goel, 2012; Ajit et al., 2013;
Mishra & Malhotra, 2016). This finding indicates that after the application of CA, 2013, the
managers of the company under consideration become more conservative in financial
reporting. Therefore, they are engaged in income-declining EM to avoid future reporting
loss. From such an outcome, it may be argued that the negative value of DA indicates CA,
2013 influence the EM behaviours of managers in financial reporting. However, it would
take at least another few more years to make the concrete decision whether the new CG
norms have been operative in curbing discretionary managerial involvement in the financial
reporting process. Therefore, the present finding opens up the scope for further research in
the area of application of CA, 2013 and FRQ.
This result affirms that though in the last two years, the overall incidence of EM is adverse,
the extent of disparity of EM among the sample firms reduces. This outcome may be on
account of the application of CA, 2013 which started the implementation at the beginning of
the financial year 2014-15 in phase manner where all companies are not counted under the
umbrella of CA, 2013 till date for financial reporting purpose.
Though the arithmetical mean presents group picture together about the degree of EM
measured by DA, Table 4.2 presented the degree of EM found to be prevailing across
different industries in the different year under consideration in the context of Indian
corporate sector.
This result affirmed that though in the last two years, the overall incidence of EM is
negative, the extent of disparity of EM among the sample firms reduces. This outcome may
be on account of the application of CA, 2013 which started the implementation at the
beginning of the financial year 2014-15 in phase manner where all companies are not
counted under the umbrella of CA, 2013 till date for financial reporting purpose.
Though the arithmetical mean presents group picture together about the degree of EM

measured by DA, Table 4.2 presented the degree of EM found to be prevailing across
different industries in the different year under consideration in the context of Indian
corporate sector.
Figure 4.1: Pattern of Average DA from 2012 to 2016

Average DA
1.98
1.41
0.13
2016 2015 2014 2013 2012
Post Application of CA, 2013 Pre Application of CA, 2013
-3.15
-3.45
Source: Author’s work
Table 4.2 presented industry-wise incidence and magnitude of EM in Indian companies

through DA estimation during the period under consideration (2011-12 to 2015-16). The DA
for each industry have been calculated for the individual years and all the five years have
taken together. The incidence of EM is measured through DA both in the negative and
positive direction and indicates the alternation in accounts.
From Table 4.2, it is evident that there is a high inconsistency in the magnitude of DA
among the industries under consideration. The highest magnitude of DA was found in
Electric Equipment Industry to the extent of (-)18.52 percent of total assets followed by
Fertilizer Industry at (-)17.20 percent respectively. However, the lowest degrees of DA have
been observed in the Pharmaceuticals Industry, which is to the extent of 0.14 percent of total
assets only.
The sector-specific analysis revealed that the Chemical Industry, Computer Software
Industry and Steel Industry had experienced positive DA in all the years of the study period.
Such a positive value of DA signifies that earnings have been managed in an upward
direction depicting aggressive accounting practices adopted by the management in those

industries during the period under consideration. While Automobile Industry, Cement
Industry, Construction Industry, Electric Equipment Industry, Fertilizer Industry,
Telecommunication Industry and Textile Industry have retained the negative DA throughout
the study period. The negative value of DA shows their conservative nature of accounting
estimation as earnings have been managed downward.
However, rest four industries, namely, Engineering Industry, Personal Care Industry,
Pharmaceuticals Industry and Power Generation Industry, experienced a mixed trend over
the study period. Some industries have shown income-increasing EM whereas others are
found to be engaged in income-declining EM as verified by their positive and negative value
of DA, respectively. The results indicate the alteration in accounts as evident from the
presence of DA, both positive and negative across the industries.
The extent of DA of all the industries taken together is 1.41 percent, which is the weighted
average mean of DA of all the industries where weights are the number of companies in each
sector under consideration. Therefore, the present finding is in line with result of previous
research on EM and FRQ (Kaushal, 2013; Goel, 2014; Bal, 2016; Dayanandan & Sra, 2016;
Mangala & Isha, 2017; Kaur & Khanna, 2018) who have documented the evidence of
widespread existence of EM in Indian corporate financial reporting system.
In the above discussion, the study examined the distribution pattern of DA across the
different industry under consideration. Goel (2012) identified that service sector firms
experienced higher degrees of environmental uncertainty and a restricted opportunity
structure and thus, more conservative in managing reported earnings than manufacturing
sector firms. The environmental risk is more apparent concerning the market for labour.
However, the non-service sector uses its market power and high amount of funds to achieve
a high degree of profitability. In this section, therefore, an attempt has been made to explore
discrepancy of EM across the service providing sector and non-service sector.

Table 4.2: Industry and Year-wise Average Discretionary Accruals (percentage of total assets)
Sl. No. of % of Year of Study 5 Years’
No. Name of Industry Companies Sample 2012 2013 2014 2015 2016 Average
1 Automobile Industry 14 8.00 -1.08 -3.22 -2.90 -5.92 -6.09 -3.84
2 Cement Industry 09 5.14 -1.82 -0.38 -1.05 -2.92 -3.56 -1.94
3 Chemical Industry 06 3.43 13.67 9.50 9.50 10.06 2.95 9.13
4 Computer Software Industry 13 7.43 10.32 6.39 10.93 5.07 5.03 7.55
5 Construction Industry 19 10.88 -5.84 -0.46 -3.90 -2.29 -3.40 -3.18
6 Electric Equipment Industry 07 4.00 -14.89 -23.04 -9.25 -24.71 -20.71 -18.52
7 Engineering Industry 09 5.14 7.69 -3.33 0.32 3.74 3.73 2.43
8 Fertilizer Industry 07 4.00 -0.47 -11.07 -30.86 -24.47 -19.12 -17.20
9 Personal Care Industry 08 4.57 1.65 -1.02 7.35 3.47 4.26 3.14
10 Pharmaceuticals Industry 18 10.29 -18.78 20.27 11.18 -7.16 -4.83 0.14
11 Power Generation Industry 10 5.71 3.50 2.50 0.17 0.90 -0.77 1.26
12 Steel Industry 22 12.56 2.20 8.75 6.97 11.73 8.63 7.66
13 Telecommunication Industry 07 4.00 -6.70 -14.27 -16.63 -22.88 -28.51 -17.80
14 Textile Industry 26 14.85 -3.63 -1.61 -2.78 -8.48 -7.30 -4.76

Considering a sample of 175 companies spread over fourteen industry groups are further
split-up into the service sector and non-service sector as per the classification made in
Capitalineplus Corporate Database. While a small portion (26 percent) of the selected
companies was identified as service sector firm, extra bulk (74 percent) of the sample
companies are marked as non-service sector.
Table 4.3: Average Discretionary Accruals of service and non-service sector

Sl. No. of Sample No. of No. of Average
Name of Sector
No. Firms Industry Observation DA (%)
1 Service Sector 47 04 235 -1.31217
2 Non-service Sector 128 10 640 -1.44478
Table 4.3 presents the magnitude of DA (which is considered as a proxy of EM in the

present study) between the service sector and the non-service sector industry. From the Table
4.3, it is evident that degree of EM in the service sector is 1.31 percent which is a bit lower
than that of in non-service industry where it was found at 1.44 percent, although, in both the
case it was a negative sign. From the analysis, it is clear that irrespective of nature of
industry all are engaged in income decreasing EM in the financial reporting process.
Table 4.4: Company-wise extreme positive Discretionary Accruals during the period
under study
Year Name of Company Industry DA (%)
2012 Force Motors Ltd. Automobile 6.41044
2013 Southern Petrochemicals Ltd. Pharmaceuticals 5.03204
2014 Strides Shasun Ltd. Pharmaceuticals 13.66527
2015 National Steel and Agro Industries Ltd. Steel 9.81919
2016 National Steel and Agro Industries Ltd. Steel 3.82933
Source: Author’s Calculation
Therefore, the result is in line with the previous study (Goel, 2012) and it may be affirmed
that EM behaviour of managers in the service sector diverges from managers in non-service
industries because of future risk and uncertainty attached that is being experienced.

Table 4.5: Company-wise extreme negative Discretionary Accruals during the period
under study
Year Name of Company Industry DA (%)
2012 Southern Petrochemicals Ltd. Pharmaceuticals -1.8393
2013 Wockhardt Ltd. Pharmaceuticals -9.4951
2014 Coromandel Ltd. Fertilizer -2.4245
2015 Southern Petrochemicals Ltd. Pharmaceuticals -6.6009
2016 GTL Ltd. Telecommunication -6.1024
Source: Author’s Calculation
Table 4.4 reports the extreme positive abnormal values of DA in each year under study.
From Table 4.4, it can be seen that Automobile, Pharmaceuticals, and Steel industry
experienced positive abnormal DA during the year under consideration.
In Table 4.5, abnormal negative values of DA in each year under study were presented. From
Table 4.5, it is evident that in all the year under study Fertilizer, Pharmaceuticals, and
Telecommunication industry witnessed the abnormal negative value of DA. Moreover, only
the Pharmaceuticals industry witnessed the highest negative DA in the year 2012, 2013 and
2015.
4.5 Concluding Remarks
The present chapter has attempted to examine the EM propensity through nature and extent
of DA being a proxy parameter in ET-500 listed NFCs in India during the year 2011-12 to
2015-16. The results of the study endorsed the incidence of EM and its inconsistent
magnitudes across different industries under consideration. The average DA is estimated at
(-)1.409 percent of the average total assets. This result proved to be the definite presence of
EM across the firms over the period under study. The result is in line with the judgments of
many previous studies (Kaushal, 2013; Goel, 2014; Kaur et al., 2014; Mangala & Isha,
2017) that have observed the extent of EM prevailing across different industries in the
corporate sector of a developing country like India.
However, the result is a little bit of lower side with a recent study of SEBI's DRG (authored
by Ajit et al., 2013; Dayanandan & Sra, 2016; and Mishra & Malhotra, 2016) who have

found that the average EM in the Indian corporate sector is 2.9 percent, 1.5 percent and 5.6
percent respectively. The result of the present study is also consistent with the findings of
Bal (2016) who have concluded that oil companies in India are restoring to income-declining
accruals to manage their earnings in order avoid the implication of new policies, taxes and
political pressure to claim less subsidies. The present study, therefore, has documented that
the firms under consideration are engaged in income declining EM, which is evident from
the negative sign of average DA during the study period. The sector-specific investigation
exposed that incidence of higher EM in the Electric Equipment Industry whereas, the
minimum level of EM was found in Pharmaceutical Industry out of a total of fourteen
industries under consideration. Further, as per the classification of service and non-service
industry, the result showed that the magnitude of EM in the service sector industry is slightly
lower than that of its corresponding non-service sector. Therefore, it is affirmed that the
prevalence of EM varies based on industry type.
In a nutshell, the study documented widespread presence of EM propensity in financial

reporting practices among Indian corporate sector firms during the year under consideration,
which is essentially intimidation to the FRQ. Analysis of distribution pattern of DA revealed
wide variations over the years under study where the magnitude of DA in the year 2014-15
and 2015-16 witnessed at the maximum level compared to preceding three years under
consideration and minimum was observed in the year 2012-13 and 2013-14. However, from
the financial year 2014-15 (first year of application of CA, 2013), the pattern of DA changed
to negative shape from the positive mode in the preceding three years under consideration.
This paradigm change situation may have stemmed from the application of CA, 2013, after
which the management become more conservative in financial reporting. However, the
examination of the impact of CG mechanism on EM practices will provide the tangible
evidence whether the CG measures are crucial to deter EM propensity in financial reporting
by the managers for their interest by compromising the FRQ. Financial reporting ushered in
the CA, 2013 have been successful in controlling discretionary involvement of managers in
EM, which will eventually ensure the purity of the reported accounting information.
--------

CHAPTER 5
Association between Corporate Governance Attributes and
Earnings Management Practices in India
The EM practice has captured a significant amount of attention from corporate stakeholders
across the globe during the last couple of years in the CG literature. Information asymmetry
between principal and agents resultant into agency problem and agency problem is one
which has given birth to the EM (Alzoubi, 2016). The CG mainly involves balancing the
interests of the many stakeholders in a company, including its shareholders, management,
employees, customers, suppliers, lenders, government and other associated communities. It
deals with how suppliers of finance to corporations assure themselves of getting the return
on their investment (Shleifer & Vishny, 1997).
However, in the recent decades, CG received immense attention of policymakers,

practitioners, academician, researchers due to debacles of large corporate enterprises like
Enron and WorldCom in abroad and Satyam in India leading to huge demolition investors'
trust and wealth in the corporate world and implicated the need for robust CG mechanism.
Not only that, the quality of the CG mechanism is somehow restricted in developing
countries because of inadequate regulatory monitoring and sanctions on company
behaviour and the presence of political rent-seeking practice (Alzoubi, 2016). Demirag
(1995) associates such corporate failures to weak CG mechanism as weak CG system
promote agency cost and offers private benefits to managers (Klein, 2002). Many countries
have come up with some crucial reforms in CG systems through the enactment of new Act
like Sarbanes Oxely Act (SOX), 2002 in the US and CA, 2013 in India to safeguard the
interest of the stakeholders (Das & Das, 2015). The board of directors is most important
CG dimension (Gompers et al., 2003), who is entrusted with the supervision of top
management decision-making process to ensure that interest of management does not run in
conflict with the interest of investors. In the last few decades, the board of directors'
monitoring role has been acquiring a great deal of interest in financial literature (Johnson et

al., 1996; Lin et al., 2014). In fact, the effectiveness of the board of directors reflects on
ability to perform its role in the firm accurately, primarily the oversight role comprises of
monitoring the decisions of management and ensuring the quality of financial information
reported to stakeholders (Vienot Report 1995). According to this report, the board of
directors must control management and ensure the credibility and clarity of the information
are made available in the publicly accessible domain, which may enhance the investors'
confidence in the capital markets. The board is, thus, responsible for monitoring the quality
of financial information reported to the stakeholders (Klein, 2002; Hazarika et al., 2012).
So, the effectiveness of the board of directors may refer to their ability to monitor the
quality of financial information disclosed and to curtail EM effectively in financial
reporting. Studies have documented that the board of directors is monitoring devices which
are established to align the interest of managers and shareholders in the same line (Fama &
Jensen, 1983). Weisbach, (1988) described the board as "the shareholders' first line of
defense against incompetent management." Further, Monks & Minow, (2004) regarded the
board as "a fulcrum between the owners and the managers of the corporation."
Fama & Jensen, (1983) have argued that the transparency, reliability and credibility of
financial statements of a company depend on the effectiveness of CG practices in the
organisation. Similar to other developed and developing countries, underprivileged CG
practice has also been noticed in India as many of the corporate malpractice and accounting
scams like Harshad Mehta Case in 1992, and Satyam Computer scam in 2009 and many
others that occurred in recent decades. This phenomenon has raised the suspicions on FRQ
in the corporate enterprise (Kanchanapoomi, 2005; Ebrahim, 2007) and resulted in
deterioration of investors' confidence over the prevailing CG mechanism in India. The
accounting scams and corporate misconduct in large and reputed business units in the past
have held responsible for the personal intervention of managers in manipulating the
reported financial statements (Rani et al., 2013). The problem, however, despite the
presence of CG machinery, there have been several cases of malpractice in financial
reporting, which suggest that mere presence of CG mechanism is not adequate to supervise
financial reporting and to protect the interest of shareholders. Consequently, the
effectiveness of CG has come into limelight because of increasing concern about the non-

compliance of standards of financial reporting and accountability by the board of directors

and management of corporate inflicting heavy losses to the investors. Thus, interest and
emphasis in the free enterprise economy are on the robustness of CG mechanism to
improve stakeholders' confidence in financial statements ensuring the accountability of the
board of directors to all stakeholders of the corporation towards giving the corporation a
fair, efficient and transparent administration.
Financial reporting is the communication of economic information of a corporate house to

various decision makers and the responsibility for preparing and furnishing this accounting
information lies with the firms' managers. On account of information asymmetry between
managers and external users, the situation allows managers to use their discretion in
preparing and reporting accounting information for their own advantages, which is
commonly known as EM. The CG mechanism has been established in the corporate system
across the world, which mostly involves balancing the interests of many stakeholders in a
company to protect the shareholders from financial reporting malpractice by the
management. But numerous questions have been raised by the investors regarding the
effectiveness of CG in safeguarding their interest consequent upon a series of business
scandal around the world. While the correlation between CG attributes and EM has been
examined widely in developed economies, much less is known about this relationship in
developing countries, particularly in Asian countries. More remarkably, the results of a few
studies on this ground in developing countries diverge depending on several factors such as
industry type, sample size, length of the time period and economic environment and so on.
5.2 Background of the Chapter
In a joint stock company structure, shareholders are the owners who supplied funds to the
business and want to obtain maximum utility from management acting on their behalf
(Kalbers & Fogarty, 1998). The management is supposed to work in the best interest of the
shareholders. However, in practice, it may pursue its agenda and that leads to the agency
conflict. Assuming economic self-interest, there is a possibility of opportunistic actions by
the management for their benefits, which are detrimental to the interest of the shareholders.
In such a situation, due to departure from the administration, the shareholders are unable to

directly observe the actions of management (Jensen & Meckling, 1976). Moreover, in the
CG system, managers are provided with the liberty of choosing suitable accounting
treatment from alternate ways of accounting for business transactions to best adapt with
economic circumstances and to make the financial statements a fair portrayal of the
economic consequences of transactions. However, managers utilise this litheness
unscrupulously while choosing the particular methods from available alternative to reap
personal benefits out of it and this is where EM takes place. In the agency theory, the board
is mainly considered as a control mechanism (Fama & Jensen, 1983). Various prior studies
have pointed out that the board of directors play a dominant role in restraining EM (Ronen &
Yaari, 2008). The board of directors is of the most important CG dimension who is entrusted
for the supervision of top management decision making process to ensure that interest of
management does not run in conflict with the interest of investors (Gompers et al., 2003). In
fact, the effectiveness of the board of directors depends upon monitoring management
decisions and ensuring the quality of financial information reported to stakeholders. In recent
decades, CG and EM have been increasingly drawing the attention of investors, regulators,
practitioner and researchers across the world. Therefore, this chapter is dedicated to assess
the influence of board characteristics that include BDS, BDI, CEOD, multiple directorships,
board meetings, and board diligence on EM.
The number of board of directors to carry out its monitoring duties has been discussed in
the literature since long back. In fact, Indian CA, 2013 was also precise about the BDS
which prescribed that public companies form the board of directors committee with the
maximum of 15 (fifteen) directors to ensure the due monitoring and supervision over the
financial reporting practices of the corporate system. The CA, 2013 further provided
greater flexibility to every company to appoint directors above the prescribed limit by
authorizing such increase through a special resolution. Because, it is presumed that the
increased number of directors in the board accumulates diversified knowledge, exposure
and expertise which can accelerate the FRQ curbing the discretionary behaviour of
management.
However, contemporary empirical literature does not provide any uniform pathway of the
association between BDS and the effectiveness of oversight function. Some studies argued

that smaller board is more effective because they have less difficulty in coordination
(Jensen, 1993; Yermack, 1996; Eisenberg et al., 1998) and the smaller board may be less
burdened with bureaucratic problems and provide better oversight on financial reporting.
On the contrary, a larger board is claimed to gather of massive expanded information and
expertise benefit over smaller boards (Fodio et al., 2013) and may be able to draw from a
broader range of experience (Xie, W, & P, 2003). Kouki, A, H, & S, (2001) and Campos,
R, & G, (2002) claimed that the optimal BDS is between five and nine members. They have
also argued that a large board suffers from coordination problem and slow decision making
(Lipton & Lorsch, 1992; Jensen, 1993; Rahman & Ali, 2006). However, Nugroho & Eko,
(2011) found that BDI has no significant impact on EM practices in financial reporting.
Frequency of the board meeting during a particular financial year indicates the extent of the
dedication of the board of directors to monitor the management decisions. Agency theory
believes that highly dedicated board members are more effective in controlling the
management decision and financial reporting (Jensen, 1993; Vafeas, 1999).
Considering the importance of dedication of board members towards monitoring function,

many countries across the globe have come up with a minimum requirement for holding
board meetings at a particular time intervals to ensure the proper diligence of board of
directors to protect the shareholders' interest. Accordingly, the Iranian code of CG requires
at least one meeting every month (Mashayekhi & Bazaz, 2010). Whereas, CA, 2013 in
India mandated for at least four meetings during the financial year and not more than 120
days shall elapse between two meetings. Despite of said importance of board meetings in
the CG, empirical findings across the glove is not homogenous rather, inconclusive where
some contemporary studies (Sarkar et al., 2008; Mashayekhi & Bazaz, 2010; Alves, 2011;
Mohamad et al., 2012) have claimed to have positive association between board meeting
frequency and FRQ. At the same time, another group of empirical research (Nugroho &
Eko, 2011) denies the proposition of linkage between a board meeting and FRQ and opined
that FRQ is apathetic of board meetings. On the other side, recently Ngamchom, (2015)
found that board meeting is positively linked with EM in Thailand.

Despite having a sufficient number of board of directors in the board, CEOD also plays an
important role in CG and consequently, financial reporting credibility. CEOD is a corporate
leadership situation wherein Chief Executive Officer (CEO) also the Chairman of the
Board. It is an important hierarchical setup of corporate management system where agency
conflict arises to a large extent and subject to many debate and disagreement in exercising
monitoring role over financial reporting. Therefore, proponents of agency theory believe
that agency conflict reduces when CEOD is split up between two separate persons (Abels
& Martelli, 2013). Studies have claimed that CEOD is associated with greater managerial
discretion (Cornett et al., 2008), which creates a situation in the CG system responsible for
agency problems in a joint stock company. Agency theory suggests that separation of duties
from execution to monitoring between two distinct persons leads to efficient control over
the management decision (Fama & Jensen, 1983; Jensen, 1986). In the absence of a
separation between the chairman role (who is the head of oversight and monitoring
function) and the CEO role (head of execution of all major functional decision) monitoring
function of the board over reporting practice may put to risk. Because, in such a situation,
the CEO has more autonomy and choice to influence the board and financial reporting
(Finkelstein & D'Aveni, 1994) without being overseen and judged by anyone else.
Therefore, by way of holding the supreme position in the board of directors CEO
predominantly weakens the independence of the monitoring role from the executive
decision making (Iqbal et al., 2015). A weaker monitoring system shows an increase of
opportunistic behaviour of management in financial reporting to achieve the desired goals.
However, stewardship theory argues that CEOD can encourage strong leadership instead of
weakening the BDI from management as well as its monitoring function (Sheikh et al.,
2013).
Against this backdrop, empirical findings of Dechow et al., (1996) reported that the
presence of EM is higher in the firms with CEOD. Carcello & Nagy, (2004) and Nahandi et
al., (2011) claimed that CEOD is positively allied with the probability of financial
statements fraud. Mohd et al., (2005) also provide evidence of a positive relationship
between CEOD and EM in Malaysian firms. Some other contemporary studies (Gulzar &
Wang, 2011; Uwuigbe et al., 2014) confirmed that CEOD is positively associated with EM.

However, Johari et al., (2008) and Kamran & Shah, (2014) examined the roles of a CEOD
who also serves as a chairman of the board and their result indicates that combined CEO
and Chairman role does not influence the EM practice in Malaysian firms. Concerning to
the developing the economy, Sarkar et al., (2008) documented that CEOD increases EM in
India. The study of Iqbal et al., (2015) witnessed a noteworthy positive association between
CEOD and DA in Pakistani firms.
After discussing CEOD position in the board, the corporate board is considered as the heart
of CG wherein shareholders provide authority to the board of directors to monitor and
control activities and decisions made by management (Fama & Jensen, 1983).
Accordingly, the primary objective of the board is to protect the interest of the shareholders
(Fama & Jensen, 1983). Therefore, the composition of the board of directors in terms of
executive and IDs while forming the board is an important factor of consideration. The IDs
are the directors who have no monetary association with the company and entitled nothing
except remuneration for attending the board meetings from the company. They are hired to
ensure balance in the corporate board decision making because, outside directors brings a
greater breadth of experience to the firm and are in a better position to monitor and control
managers, thereby reducing EM (Uadiale, 2012). They ensure that the executive directors
are not taking any decision by the influence of coalition with the management for deceiving
the outside shareholders. The significant amount of literature examined the linkage between
FRQ and BDI concerning developed economies, including the US, UK and other European
nations. However, very few studies have been undertaken for the developing country
where prevailing conditions are quite different with regard to the business environment,
accounting standards and so on.
The role of outside directors for safeguarding the interest of investors has been a subject of
much debate in the recent years, especially in the case of corporate setup in developing
countries where transparency in financial reporting is utmost necessary to support the
uninterrupted flow of funds in emerging capital market. To ensure the effectiveness of CG,
the corporate board must include outside IDs who are eminent professionals with expertise
in business, finance, law, marketing and other key functional areas and play a critical role
in enhancing balance to the board decision making processes. Besides these, they also

provide valuable inputs and act as arbitrators during debate and disagreement among
internal managers (Fama & Jensen, 1983). Cadbury Committee (1992) and the Blue Ribbon
Committee (1999) deduced that IDs play important monitoring roles as they come from an
external source having no material pecuniary association with the organisation. They also
bring independent judgment in the board's deliberations and decisions (Singh & Davidson,
2003). Revised Clause 49 of SEBI's listing agreement emphasize on the optimum
combination of executive and non-executive (independent) directors on board and
mandated that board should be made up with 50 percent IDs where the chairman of the
board is executive director and one-third when the chairman is a non-executive director.
Empirical research also provides evidence in the same line with the committee reports that
IDs can provide effective monitoring over management activities (Singh & Davidson,
2003). They keep watching on management decision to ensure that there is no collusion
between executive directors and top managers to confiscate stockholder wealth as they also
have incentives to develop a reputation as experts in decision control and monitoring as
well (Fama & Jensen, 1983). Executive directors bring insider knowledge along with them,
which is not available to outsiders, so they can exploit this edge for gaining the personal
advantage at the cost of other stockholders. Therefore, the presence of IDs on board is
needed to have unprejudiced supervision to avoid this problem (Nahandi et al., 2011).
Thus, information asymmetry reduces for the firms having a higher percentage of IDs on
the board (Uzun, S, & R, 2004).
However, empirical research yields a mixed result on the importance of IDs on the board
room over financial reporting. Where some contemporary studies have claimed that BDI is
associated with lower level of DA (Epps & Ismail, 2008; Hutchinson & Percy, 2008;
Cornett et al., 2009; Mashayekhi & Bazaz, 2010; Iqbal & Strong, 2010; Uadiale, 2012;
Uwuigbe et al., 2014; Iqbal et al., 2015; Kumari & Pattanayak, 2017; Kaur & Khanna,
2018). Whereas, Alareeni, (2017) documented the positive association between board
members independence and EM. At the same time other studies (Sarkar et al., 2008;
Hashim & Devi, 2008; Ali et al., 2009; Yang et al., 2009) however failed to find any
significant association between BDI and EM and disagreed to the views of association
between EM and BDI and stated that independent board member has nothing to do with

EM decision. Apart from the independence status, the busyness of the directors on the
board has been a crucial issue and subject of hot debate in the CG literature for a quite long
time. Many legislative initiatives, like the Council of Institutional Investors, recommended
that directors with full-time jobs serve not more than two other boards (Ferris et al., 2003).
The Australian Shareholders' Association (ASA) deduced that any director who holds more
than five boards is doing a disservice to the companies' shareholders (Kiel & Nicholson,
2006). In Malaysia, the Bursa Malaysia Listing Requirements is more liberal which permits
a director to hold up to twenty-five directorships out of which ten directorships are in
public listed companies and fifteen directorships in companies not listed in the recognised
stock exchange (Rahman et al., 2006). In India, CA, 2013 restricted multiple directorships
up to 10 board in other companies.
Against this backdrop, despite various legislative measure have been undertaken across the
globe for controlling multiple directorships position to a reasonable number to ensure
adequate time devoted by directors in a particular company. Existing empirical research
exposed that multiple directorships impact corporate reporting to a considerable extent, but
there appeared to be mixed evidence on the association between multiple directorships held
by the board of directors and EM. It has been argued by busyness hypothesis that serving on
numerous boards threaten available preparation time for board meetings, thus limit directors'
ability to provide useful advice (Harris & Shimizu, 2004). Hashim & Rahman, (2013) found
significant relationships between multiple directorship and EM. Baccouch & Omri, (2014)
found that the accumulation of many outside directorships makes the director no adequate
time for a particular firm. Therefore, their results prove that the board of directors cannot
deter EM effectively when its members held several additional outside directorships.
On the other hand, as per knowledge sharing hypothesis assumed that holding of multiple
directorships by the directors brings peripheral information about the economy and
eventually helps to monitoring the management discretions and activities adequately. In line
with the same proposition, some empirical research like Bedard et al., (2004); Norman et al.,
(2005) documented that the higher number of multiple directorships held by board members
is associated with the lower the likelihood of EM practice in financial reporting. Harris &
Shimizu, (2004) documented that overboarded directors may be an asset to the company due

to their expert advice and efficient decision making upon their experiences from other
boards.
However, Haniffa & Hudaib, (2006) failed to find any significant relationship between MLD
and the level of disclosure in Malaysia. Nugroho & Eko, (2011) reviewed the effect of board
characteristics on EM in companies listed in the Indonesian Stock Exchange during the 2004
to 2008 period and found that the MLD does not affect EM practices in the above
companies. A recent study of Alshetwi, (2016) examined the association between the
multiple directorships and EM based on a sample of 98 Saudi listed nonfinancial companies.
He finds that the multiple directorships held by the board members are not statistically
associated with a reduction in the level of EM.
Despite the controversy around the association between MLD held by the board of directors
and FRQ in the contemporary literature mostly based on developed economies, almost no
research studies have been undertaken in the context of developing country like India.
Given the dearth of literature in the Indian economy, the present study is unique which
extends the literature on board composition by providing evidence of whether the presence
of multiple outside directorships on board is associated with the FRQ. In short, the presence
of directors holding multiple directorships in other company can reduce the capacities of
the board of directors to monitor the opportunistic behaviour of managers effectively. Thus,
managers will be less watched and can have more liberty and opportunity to manage
reported earnings for their benefits (Jensen, 1986; Beasley, 1996; Klein, 2002). Hence, it is
presumed that the presence of a positive relationship between the accumulation of outside
directorships by board members and the level of EM in the financial reporting.
In this backdrop, in the present chapter, an attempt has been made to explore the fact about
how far the board attributed as a part of CG mechanism is useful in exercising check and
balance over the financial reporting anomalies in the present corporate scenario. In this
chapter, DA has been considered as a proxy of EM measure for quantifying the FRQ.
Therefore, it is the need of the hour to assess the robustness of the CG mechanism in
sustaining the FRQ conveyed to the external users.

From the preceding discussion, it appears that although the nexus between CG attributes and
EM (an adverse proxy of FRQ) has been the subject of extensive research in the developed
economy like the USA, UK, Australia and other European countries. However, the same
does not hold true in developing country like India where organisational structure, financial
reporting standard, economic and business environment is quite different from the developed
economies. Therefore, there is somewhat dearth in the literature concerning the developing
country on the impact of CG on EM. Hence, the present study tends to fill this gap in the
literature by assaying the effects of CG attributes on EM in financial reporting practice in
ET-500 listed Indian NFCs during the financial year 2011-12 to 2015-16. More specifically,
the present study endeavoured:
 To study the nexus between board attributes (BDS, BDI and BDD) and Earnings
Management in financial reporting.
 To assess the impact of CEO-duality and multiple directorships on Earnings
Management in financial reporting.
5.4 Independent Variables
The independent variable in this chapter was CG quality. Therefore, keeping in view of the
objectives, CG quality has been captured through different practice adopted in the course of
governance to ensure accurate, fair, accountable and responsible administration of
corporations for delivering a reasonable return to all the stakeholders so that they take an
informed decision. The variables which were considered in the present chapter comprised
of BDS, BDI, BDD, MLD and CEOD as independent variables.
Further, as we know that apart from the CG variables, there are various firm-specific
characteristics, which are likely to influence the FRQ of any firm to a considerable extent,
therefore, the firm's performance, firm's age and financial leverage have been used as
control variables to nullify their impact. Thus following the contemporary literature, the
regression equation adapted in the present study was modelled in the following functional
form as follows:

DAit = β0 + β1 (BDSit) + β2 (BDIit) + β3 (BDDit) + β4 (CEODit) + β5 (MLDit) + β6 (FRMPit)

+β7 (FRMAit) + β8 (FLEVit)+ eit ………. (iv)
Where,
DA = Discretionary accruals (proxy of FRQ); BDS = Board size representing total the
number of directors on the board; BDI = Board independence is the proportion of
independent to total directors on board; CEOD = CEO–duality is taken as a dummy
variable and is assigned the value 1 if the CEO is also chairman of the board otherwise, 0;
MLD = Multiple directorship held by the board members; FRMP = Firm's performance is
measured through Return on Capital Employed represents control variable; FRMA = Firm's
age counted from the year of incorporation to year of study; FLEV = Financial leverage; e
= error term; β0= intercept of the equation; β1 to β8 = coefficients; ‘i’ and ‘t’ = subscripts
for entity and time period respectively.
To assess the impact of the CG mechanism on FRQ, panel regression analysis was
conducted in three different stages. First, regression was run with the data for the whole
study period (i.e., 2011-12 to 2015-16) under consideration. After that, the whole period
under review was bifurcated into two sub-groups based on the application of CA, 2013 to
uncover the succeeding effect of the same on financial reporting. As it was declared that,
the financial year 2014-15 was the first year of reporting as per the CA, 2013, the financial
year, 2011-12 to 2012-14 was considered as pre-implementation period and 2014-15 to
2015-16 was taken as the post-implementation period in the present study.
This section presents the results and discussion of the data analysis corresponding to the set
objectives of the chapter.
5.5.1 Descriptive Analysis
As reported in Table 5.1, the mean value of BDS was 10 with a maximum value 21 and the
minimum value is 4, with a high standard deviation (SD) was 2.768 indicated that though the
composition of board of directors of the companies is in conformity with the requirements of

Clause 49 of the listing agreement of SEBI as well as CA, 2013. There appeared to have a
wide variation in the constitution of board among the companies under consideration as
indicated by a higher value of standard deviation (2.768). Moreover, the average value
speaks about group information, when we consider the individual company statistics,
minimum BDS is only of four directors, which indicated some companies were there during
the study period that could not appoint or retained the base number of board of directors as
required by the listing agreement of SEBI.
Likewise, Table 5.1 depicted that the mean value of BDI was 53.342 percent during the year
under consideration, which indicated that most of the companies' boards comprise the
majority of IDs. Therefore, the Board has an optimum combination of executive and non-
executive directors with majority forming the IDs. However, the minimum value of BDI was
16.67 percent and the maximum 100 percent. From the average value of BDI (53.342
percent), it seemed that the sample firms complied with the CA, 2013 and SEBI's listing
agreement clause about the composition of the board of directors. However, the minimum
value statistics suggested that during the year under consideration there were some firms
which could not follow the minimum requirements of CA, 2013 and listing agreement clause
of SEBI for appointing IDs to the extent of one-third of total directors in the board when the
chairman was non-executive director and one-half when the chairman was executive
director.
From the Table 5.1, it was also apparent that mean value of CEOD was 0.456, which
indicated that 45 percent case there was a situation where Chief Executive Officer (CEO)
was simultaneously holding the position of chairman in the board of directors. In other
words, in 55 percent case CEO was not occupying the CEO and the Chairman titles
concurrently in the companies during the year under consideration.
Furthermore, Table 5.1 showed that the average number of outside directorships held by
board members was around 5, which indicated on an average every single director held
directorship in five other companies simultaneously. So, we can say that on an average ET-
500 listed NFCs that constitute board with directors are busy by their engagement in other
companies. Previous literature emphasised that, the board in which the majority of directors

hold 3 or more directorships are busy (Sarkar & Sarkar, 2009; Baccouch & Omri, 2014).
More so, revised Clause 49 of SEBI stated that any person who is serving as a whole time
director in any listed company should not serve as an IDs in more than three other listed
company. Because, the busyness of the majority of its members may reduce their ability to
monitor the opportunistic behaviour of managers effectively, this might increase the level of
EM practice in financial reporting.
Figure 5.1: Conceptual Framework for Board Structure and EM
Board
Independence
Firm Board Size

Performance
Financial Earnings Multiple

Leverage Directorship
management
Firm Age Board

Meeting
CEO-duality
Similarly, on average, the board of directors met 6 times during the particular financial year
under consideration. The minimum number of the meeting held was only one, while the
maximum was about 34 meetings. It seems from the average statistics that the sample firms
complied with the requirements of CA, 2013 for holding at least three meetings each year.
However, the minimum meeting (one) held indicated that some firms violated the
requirements of holding at least four meetings in a financial year.
Table 5.2 presented the descriptive statistics of two separate periods (that is, before and after
application of CA, 2013) under consideration. From Table 5.2, it can be seen that during the
pre-application period on an average boards meeting held 5 times in a year. However,
minimum number of meetings held was 3 times and the maximum was about 34 meetings.
Referring to the post-application of CA, 2013, was observed that the average number of

board meetings held 6 times with one more meeting compared to the earlier period.
It seems from the average that the sample firms are in compliance with the laws of the land
and there was no substantial hike in the number of meeting after the application of CA,
2013. The maximum number of meetings held for the post-application period was about 19
meetings, which can be considered high. But, the minimum meetings held per year
indicated that at least one firm held only one meeting, which indicated for violation of the
requirements for holding at least 4 meetings in one financial year. Further, almost similar
situation has been observed in terms of other CG attributes, namely, BDS, BDI, CEOD and
MLD before and after application CA, 2013. It may, therefore, be concluded that the CA,
2013 has no substantial impact on holding of board meetings and composition of board
structure.
Table 5.1: Descriptive Statistics of CG Variables under consideration

BDS BDI BDD CEOD MLD FRMA FRMP LEV
Mean 10 53 6 0.456 5 36 14 2
Median 10 50 5 0 5 28 10.32 0.32
Mode 10 50 5 0 5 28 0.1875 0
Minimum 4 16.67 1 0 0 5 -20.05 0
Maximum 21 100 34 1 15 137 134.36 767.28
Range 17 83.33 33 1 15 132 154.41 767.18
SD 2.77 10.07 2.425 0.49 2.27 23.45 15.82 26.14
CV 3.61 4.96 2.062 0.00 2.19 1.194 0.652 0.01
Skewness 0.72 0.56 0.40 0.177 0.84 1.492 0.34 0.28
Kurtosis 1.03 1.94 3.05 -1.97 1.57 2.101 1.86 1.83
Count 875 875 875 875 875 875 875 875
Source: Author’s calculation.
Note: SD stands for Standard Deviation, CV for Coefficient of Variance
Figure 5.2 presented year-wise total strength of directors and IDs for the companies under
consideration. From Figure 5.2, it can be seen that the number of total directors during the
year under consideration varied from 1705 to 1740. Similarly, the total number of IDs
fluctuated from 984 to 944. From this scenario, it can be realised that throughout the study
period board strength and composition of IDs had no significant change rather, it was very
much stagnant and application of CA, 2013 had no impact on total size and structure of the
board of directors in the firms under consideration.

5.5.2 Correlation and Multicollinearity Analysis
Table 5.2 presented the Pearson correlation matrix for the explanatory variables during the
period under consideration.
Table 5.2: Descriptive Statistics before and after application of CA, 2013
Mean Standard Deviation Maximum Minimum
Variables Before After Before After Before After Before After
BDS 10 10 2.77033 2.76713 20 21 4 4
BDD 5 6 2.68008 1.97707 34 19 3 1
BDI 50 50 10.6698 9.06676 100 88.8889 25 16.6667
CEOD 0.45333 0.46 0.49829 0.49911 1 1 0 0
MD 4.625 4.27922 2.30452 2.17046 15.25 13.5 0.083333 0.25
FRMP 10.74 9.275 16.0009 15.5588 134.36 118.84 -20.05 -11.26
FRMA 1.44716 1.47712 0.27052 0.2458 2.13033 2.13672 0.698970 0.90309
Leverage 0.32 0.32 1.10273 41.3607 16.04 767.18 0 0
Source: Author’s calculation and compilation
Multicollinearity test is executed through pairwise correlation analysis to check the degree
and extent of association between independent variables. From Table 5.3, it can be seen that
there was no strong pair-wise correlation between the independent variables under
consideration. As per econometrics theory, the pairwise correlation between two or more
independent variables equal to or above 0.80 signals for problems of Multicollinearity
(Gujatati, 2010). But in the present study, none of the variables were correlated with any
other to the extent of 0.80.
As an overall remark, almost all variables had a low correlation among themselves, which
suggested for the absence of multicollinearity problem among the explanatory variables
selected to determine the effect of firm CG characteristics on EM practices in financial
reporting in Indian ET-500 listed NFCs during the period under consideration. To
substantiate the above result, the study conducted a VIF test against individual variables
under consideration. Since the correlation analysis only shows the association between the
variables but not suited for estimating causality between variables, the study proceeds to
conduct the regression analysis. The use of multivariate hypothesis test was based on the
assumption about the absence of multicollinearity among the explanatory variables.
Thus, to investigate the existence or absence of multicollinearity, the VIF for each of the

explanatory variables were depicted in Table 5.4. The mean VIF value of all the variable was
1.05 reported in Table 5.4, which was lower than ten (10), as well as VIF value
corresponding to all the individuals variables under consideration, were consistently less
than ten (10), a number that was used as a rule of thumb as an indicator of multicollinearity
problems. Moreover, the tolerance factor (TF), varied from 0.993571 to 0.930968, which
showed no signs of multicollinearity in the model. Thus, the results of regression analysis
can, therefore, be interpreted with a higher degree of statistical significance and confidence.
Figure 5.2: Board Strength and Composition of Independent Directors

1740 1731 1705 1725 1711
944
No. of Directors
929 906 914 894
2012 2013 2014 2015 2016

Year of study
Total Directors Independent Directors
Table 5.3: Correlation among Independent Variables
BDS BDD BDI CEOD MLD FRMP FRMA LEV

BDS 1
BDD -0.075 1
BDI -0.028 -0.059 1
CEOD 0.100 -0.125 0.166 1
MD 0.019 0.189 0.073 -0.100 1
FRMP 0.123 -0.016 0.094 0.071 -0.078 1
FRMA -0.014 -0.013 0.085 0.096 0.013 0.122 1
FLEV 0.015 -0.018 -0.035 0.042 -0.017 -0.048 0.006 1
5.5.3 Regression Results
To present the state of data structure under consideration, the study applied descriptive
statistical analysis. After that, the study also used some statistical test (VIF, Correlation
among the dependent variables, Tolerance Factor) to ensure that the regression analysis

assumption is not violated. Skewness and Kurtosis values were used to test the normality
assumption, and data are considered reasonably normal if the values of kurtosis are lower
than 10 and the values of skewness are smaller than 3 (Kline, 1998). All Skewness and
Kurtosis values of all the variables were within these thresholds. Therefore, it was affirmed
that the dataset used in the present study was normally distributed.
Table 5.4: VIF and Tolerance Test

Variables VIF Tolerance
BDS 1.04 0.96449
BDI 1.06 0.94516
BDD 1.06 0.94429
CEOD 1.07 0.93096
MLD 1.07 0.93870
FRMP 1.05 0.95056
FRMA 1.03 0.97170
FLEV 1.01 0.99357
Mean 1.05 0.95493
Hausman (1978) test has been applied to ascertain the applicability of the Fixed Effect
Model (FEM) or Random Effect Model (REM) in the panel regression model. After that, the
study applied the regression analysis to examine the impact of CG mechanism (independent
variables) on EM propensity in financial reporting. In the present study, the nature and extent
of EM were measured through DA calculated by cross-section modified Jones model
(developed by Dechow et al., 1995) and different attributes of CG mechanism have been
identified for quantification of governance quality.
Table 5.5 showed the result of the regression equation model used to test all the stated
hypotheses in the present chapter examining the impact of board attributes (quantified by
BDS, BDI, BDD, MLD and CEOD on EM (estimated through DA) practices in financial
reporting. The regression output table reported that F-statistic value 2.81908 with
corresponding p-value 0.0043, which indicated the fitness and statistical significance of the
model was well accepted. The adjusted R-square is the coefficient of determination, and its
value at 0.315947 showed that all the explanatory variables in the model jointly explained
the variation in the dependent variable (DA) to the extent of 31.59 percent. Therefore,

several other variables were responsible for the rest of the difference in the DA, which has
not been considered in this model is known as stochastic error. This result is almost similar
with previous studies (Kamran & Shah, 2014; Iqbal et al., 2015 and Qamar et al., 2015
found adjusted R-square is only 15 percent, 27 percent and 4 percent respectively in
Pakistan; in India Kaur & Khanna, 2018 observed 48 percent; Alareeni, 2017 documented
only 21 percent) wherein they have documented that, very small portion of EM is being
dictated by CG mechanism in developing country setup.
The findings of the estimation show that BDS affects the magnitude of DA negatively and
significantly at the 5 percent level (t-statistic=-2.37965; p-value=0.01754) indicating the
fact that EM is less pronounced in the company with larger boards of directors than in
smaller one. This outcome can be explained by the fact that the large size of the board
brings a higher amount of knowledge from the diversified field leading to more stringent
monitoring over the management decision and lower amount of EM. Hence, this study
proved that a higher number of directors in the board in Indian corporate system is indeed
supervising as a watchdog of investors where day to day business activities are carried out
by management. This result is similar with the findings of contemporary studies
(Mashayekhi & Bazaz, 2010; Uwuigbe et al., 2014; Alzoubi, 2016; Daghsni et al., 2016;
Alareeni, 2017) which found that BDS and EM (peroxide by DA) is negatively associated
with each other. However, this result also contradicts with the findings of another group of
studies (Beasley, 1996; Klein, 2002; Peasnell et al., 2005; Rahman et al., 2006; Rahman &
Ali, 2006) who have witnessed the existence of a positive relationship between BDS and
EM. And the same group of studies viewed that smaller board is more efficient in
monitoring the management because large boards suffer from coordination and slow
decision making process owing to multiple levels of authority and coordination among a
large number of directors. Therefore, the present findings have accepted the alternative
hypothesis (H11) of the negative association between BDS and EM.
Similarly, an empirical analysis revealed insignificant coefficient for BDI (t-statistic=0.5487;

p-value=0.58335). Thus, it has proved that there is no statistically significant association
between the proportions of IDs on the level of EM. This result implies that BDI exercises no
influence over EM in Indian. Hence, the study has accepted the null hypothesis (H02) which

stated that there is no significant association between BDI and EM practices in financial
reporting, and therefore, rejected the alternate hypothesis (H12). This result has raised up the
doubt about the findings of previous studies (Fama & Jensen, 1983; Beasley, 1996; Bartov &
Mohanram, 2004; Cheng & Warfield, 2005; Hutchinson & Percy, 2008; Mashayekhi &
Bazaz, 2010; Uwuigbe et al., 2014) based on the developed economies who have observed a
reverse association between BDI and EM. However, the finding concurs with some
contemporary empirical studies (Sarkar et al., 2008; Kapoor & Goel, 2017) that conducted
on Indian corporations and found that BDI has no effective role in constraining EM practice
in financial reporting. The insignificant association between BDI and EM implies that, due
to nature and complexity of running the business in the present competitive market IDs (non-
executive outside directors) hardly play any crucial rules to deter the EM because, they do
not have any direct attachment with the business affairs and inside information unlike
executive directors and managers.
Moreover, the apparent reason for IDs is seen as ineffective in discharging their monitoring
duties due to management dominance overboard matters and relative lack of knowledge in
the company's affairs (Rahman & Ali, 2006). Although there is a belief among the investors
and researchers that board leads to good governance when the board takes a collective
decision with IDs forming the majority and in the long run the firm will perform better in
comparison to firms having poor governance record (Routray & Bal, 2016). Most of the
reputed business houses in India are under dominant control of family ownership and
promoters group where they hold the majority of shares of the company. Therefore, there is a
minimal role for IDs to play to influence the board decision making process (Kumar, 2018).
Consequently, it depends upon how family owners and promoters want to run the business
and even if the independent board members go against any policy, the fact is that every
resolution needs shareholders' equal right vote, because in family or promoter dominated
business, the monitoring role of IDs is secondary and advisory role is primary
(Bhattacharyya, 2016). As a result, IDs has less scope to influence the board where larger
proportions of shares are under dominant control of family ownership and promoters group.
This situation is supported in some contemporary studies (Abdullah, 2004; Hashim & Devi,
2008) and viewed that competency of outside directors to discharge their monitoring and

oversight role is in a challenge when the management dominates and controls the board of
director.
Table 5.5: Multiple Regression results for the whole sample

Regression Statistics
Multiple R 0.567634
R Square 0.322208
Adjusted R Square 0.315947
Observations 875
Durbin-watson 2.07
Df. SS MS F (8, 875) Prob.> F
Regression 8 1.144 0.1430 2.819 0.0043
Residual 866 43.946 0.051
Total 874 45.091
Coefficients Standard Error t-statistic p-value
Intercept 0.127762 0.068 1.854 0.06397
BDS -0.06671 0.028 -2.379 0.01754*
BDD -0.07072 0.032 -2.186 0.02902*
BDI 0.0427 0.078 0.548 0.58335
CEOD 0.037939 0.016 2.394 0.01688*
MLD 0.04323 0.025 1.728 0.07527**
FRMP -0.000475 0.0004 -0.962 0.33614
FRMA 0.02759 0.0295 0.933 0.35077
LEV 0.000217 0.0002 0.744 0.45706
Source: Author’s calculation.

Note: * significant at 5 percent level, ** significant at 10 percent level
Therefore, this finding diverges from the expectation of agency theory, which believes that
inclusion of outside directors increases the board's ability to monitor the top management
and also ensures that there is no collusion among the executive directors and senior
managers to expropriate stockholder wealth (Fama & Jensen, 1983). These findings indicate
that the role of IDs are not effective in controlling the discretionary reporting practice by
managers and also making a difference or influencing the company's strategic decision
making choices in the ET-500 listed NFCs in the Indian context. Therefore, the results
warrant for further exploration of the nature of the role played by the IDs of companies in
the financial reporting process, to establish the link between board’s effectiveness and EM
practices in financial reporting.

Further, the regression analysis revealed that board meeting frequency is negatively
associated with the magnitude of DA and the association was significant at the 5 percent
level (t-statistic=-2.1868; p-value=0.02902). This result pointed out that if companies have a
higher number of board meetings, the board of directors get more scope to oversee the
preparation of the annual accounts and other financial disclosure matters. This result
supported the perception that the increased number of meetings by the board of directors will
get more time to evaluate the management decision and financial reporting process, which
ultimately reduce the EM practices in financial reporting. Therefore, this result can be
explained by the fact that directors' efficiency is a function of time where board meetings
reflect the board's diligence. Thus, agency theory suggested that diligent board of directors
will enhance the overall monitoring of the financial reporting process (Carcello et al., 2002).
Consequently, managers will have less liberty to manage the earnings of the firm by
increasing the DA. Hence, it can be concluded that the increased number of the board
meeting can reduce the degree of DA (a proxy for EM) in the financial reporting process.
On the other hand, the board, which occasionally meets might not be able to pay due
attention to the extent required on these issues and may act as the "rubber‐stamp of a
management plan" (Xie et al., 2003). Thus, the present result is consistent with the theory of
CG, which holds that highly diligent board members are instrumental in monitoring EM.
Therefore, this result acknowledged the proposition of alternative hypothesis (H13), which
stated that BDD is negatively associated with EM and it is very much consistent with
previous other empirical studies (Xie et al., 2003; Sarkar et al., 2008; Mohamad et al., 2012)
who have noted diligent board members reduce the extent of EM.
Similarly, regression analysis revealed the significant positive association between CEOD
and DA (t-statistic=2.39405; p-value=0.01688). This result indicated that the firm's
management structure where the CEO is also the Chairman of the board enjoys more
liberty in accounting decision and engaged in a higher level of EM (Sarkar et al. 2008). In
other words, splitting the role of CEO and Chairman of the board has an active role in
limiting the EM practices in financial reporting. The result is similar to Agency Theory,
which suggested that the separation of the role of decision making (CEO) from the control
process (Chairman) leads to a lessening in the power of the CEO and enables better

monitoring by the board (Jensen, 1993). Hence, this result is consistent with the findings of
various contemporary studies (Sarkar et al., 2008; Mohamad et al., 2012; Uwuigbe et al.,
2014; Iqbal et al., 2015) in the context of developing economies who found that EM is
higher in the company where the CEO simultaneously holds the Chairman position in the
corporate board. Because, given the situation above, CEOD is linked with greater
managerial discretions (Cornett et al., 2008) undermining the supervisory roles of the board
members.
Therefore, the study has accepted the alternate hypothesis (H14), which stated that CEOD is
positively associated with EM. These findings also support the notion of CG philosophy,
which emphasized for the separation of power of CEO and board Chairperson positions
between two separate individuals (Cadbury Committee Report, 1992) as the Chairman of
the board serves to monitor the CEO (Jensen, 1993). Therefore, the situation speaks about
the practice of splitting duality roles of CEO and Chairman in the Indian companies
minimise the agency cost and conflict, which enhance the symmetrical flow of information
between insider and outsider.
Similarly, regression analysis showed that the degree of multiple directorships held by the
board members is positively associated with the magnitude of DA in ET-500 listed Indian
NFCs during the period under consideration (t-statistic=1.7282; p-value=0.07527). Thus,
the present study confirmed the hypothesis and affirmed that the accumulation of outside
directorships held by board members increases the level of EM in ET-500 listed NFCs and
has accepted the alternative hypothesis (H15), which presumed that MLD is positively
associated with EM practices. The significant positive relationship, at 10 percent level can
be explained by the absence and the busyness of the board members as they are
simultaneously engaged in other boards as well, which can reduce the effort and the time
devoted by the directors to their monitoring tasks (Jiraporn et al., 2009). Therefore, such
situation weakens their oversight capacities and hence reduces the ability to deter EM
practices in financial reporting. This result implied, being less supervised, managers will
have opportunities to manage reported earnings to achieve personal gain. The outcomes of
the present study corroborate with the contemporary studies (Sarkar et al., 2008; Baccouch
& Omri, 2014; Kapoor & Goel, 2017) who witnessed a positive association between MLD

and the degree of EM practices in financial reporting.
Therefore, the study documented that, despite diversified expertise gathered from the
accumulation of outside directorships by board members, the magnitude of DA increases in
ET-500 listed NFCs in India. So, it is perceived that the level of EM in ET-500 registered
firm is more influenced by the adequate time devoted by directors to their monitoring tasks,
than by the expertise gathered from external directorships. This result can be further
explained by the fact that the monitoring of the financial reporting process and the quality
of financial information by the board requires expertise and mainly high availability of its
members to be executed effectively (Hashim & Rahman, 2013). Thus, the present finding
converges with the results of contemporary studies (including Pathak & Sun 2013) which
showed that the accumulation of outside directorships by directors reduce their ability and
time devoted to the board's monitoring tasks in the context of developed economies as well
as developing country like India. Given the continuous association of directors with affairs
of the company, Section 149(3) of the CA, 2013 provides that “every company shall have at
least one resident director who has stayed in India for a total period of not less than 182
days in the previous calendar year”.
Furthermore, consistent with the prior expectation negative relationship between FRMP
and DA was reported in Table 5.5 through the relation is not statistically significant. This
outcome is evident from the P>|t| (Prob.) value (0.33614) corresponding to firm
profitability and the value of coefficient is equal to 0.33614, which indicates that the
profitability of the firm does not have any substantial impact on EM practices in financial
reporting during the year in the firms under consideration. This finding, therefore, had
rejected the alternative hypothesis (H112) corresponding to the profitability, which stated
that there is a significant negative association between firms’ profitability and DA
following the previous findings (Mahdi et al., 2012; Sadeghi & Zareie, 2015).
Again, varying with the prior expectation positive relationship was found between firm age
and DA though the association is not statistically significant (t-statistic=0.9336; p-
value=0.35077). This result indicated that the age of the firm has no impact on EM decision.
This result, therefore, raised doubt about the previous findings, which observed a negative
link between EM and the firm’s age (Alsaeed, 2006; Bassiouny et al., 2016) and thus,

rejected the alternative hypothesis (H111) which assumed the negative relationship between
EM and FRMA.
Table 5.6: Multiple Regression results for Pre and Post-Application of CA, 2013
Pre-application period Post-application period
Coef. t-statistic P>|t| Coef. t-statistic P>|t|
Intercept 0.24975 0.239 0.810 0.3128 4.441261 0.0000
BDS -0.0412 -0.951 0.342 -0.9440 -3.47765 0.005171*
BDD -0.11263 -2.482 0.013* -0.2449 -2.14117 0.021844*
BDI 0.0123 1.092 0.275 -0.1040 -1.22922 0.219835
CEOD 0.4602 1.887 0.059** 0.2729 1.77132 0.077401**
MLD -0.0487 -0.923 0.355 -0.0372 -1.06608 0.287143
FRMP -0.033 -0.422 0.673 -0.0068 -1.37469 0.17013
FRMA 0.042 0.949 0.342 0.0611 0.198758 0.842571
FLEV -0.049 -0.445 0.656 0.0018 1.040066 0.299046
R-square 0.139 0.224
Adj. R-square 0.126 0.206
F-Statistic 1.808 3.295
Prob. (F-Statistic) 0.073 0.001
Number of Obs. 525 350
Source: Author’s calculation. Note: * significant at 5 percent level, ** significant at 10 percent
level. Note: Dependent variable is DA, a proxy measure of EM.
Likewise, an insignificant association between financial leverage and DA was observed in

the regression analysis (t-statistic=0.74403; p-value=0.45706). It implies that the capital
structure decision of a company has no significant impact on the EM in Indian companies
during the study period. The present findings also contradicted with the conclusions from
Ujah & Brusa, (2014) who witnessed a significant negative association between EM and
financial leverage. Results of this study can be explained by the facts that, the decision of
EM behaviour is not subject to the extent of capital structure. In other words, this firm-
specific variable does not influence the EM practice in financial reporting.
Table 5.6 demonstrated the regression results for a period from the year 2012 to 2014 (pre-
application of CA, 2013) in the left panel and post application period (from the year 2015
to 2016) in the right panel. It can be seen from Table 5.6 that the results showed an
improvement in CG effectiveness in the post-application period compared to the period
before the application of the CA, 2013. The adjusted R-square is about 20.59 percent as
compared to the pre-application period when it is 12.61 percent. The F-statistic value is

3.29 with corresponding p-value 0.0000, which is significant at 5 percent level.
Table 5.6 further presented the regression results of two different periods (post and pre-
application of CA, 2013) under consideration. From Table 5.6, it can be observed that the
Prob. (F-Statistic) is 0.073 in the pre-application period and 0.001 in the post-application
period. This outcome clearly showed that all together, the explanatory variables under
consideration are expressively associated with the EM in both the time period under
review. Moreover, the adjusted R-square value (20.59 percent) of the post-implementation
era is much higher than that of the pre-implementation age (12.61 percent). In a nutshell, it
implied that the CG variables could better explain the value of the dependent variable (EM)
after application of CA, 2013, which emerges with the new form of CG compared to the
earlier period.
Another significant finding of the study is that in the 1st phase (i.e., before application of
CA, 2013) BDS was an ineffective variable associated with EM, but after implementation
of the new Act, 2013 BDS emerged as a negative significant influencing CG variable.
Given the above findings, it may be concluded that the quality of the board of directors has
increased in terms of monitoring function after implementation of CA, 2013. Therefore,
this finding gives a good signal about the consequence of CA, 2013 over the CG across the
country. Moreover, BDD was significant negative influencing variables in the pre-
application period as well as in the post-application period. Likewise, the CEOD was
found to be a positive function of DA in pre-application as well as post application period
indicating that diversion of Chairman and CEO role between two separate persons instead
of assigning on dual responsibility to the single individual increasing FRQ.
However, among the control variables, all of them were found not exercising any
statistically significant influence over the changes is DA and there has been no significant
change between these periods under consideration.
This chapter basically analysed the effects of CG mechanisms on FRQ measured by the
magnitude of DA (which is considered as an inverse measure of FRQ) in ET-500 listed
NFCs in India during the financial year from 2011-12 to 2015-16. The study used

hypotheses in testing the relationship between CG attributes and EM proxy by DA. In all
the cases, DA is used as the criterion for measuring EM in representing the FRQ. On the
other hand, BDS, BDI, BDD, MLD and CEOD were used to represent the board attributes
as independent variables. The results from the estimation test indicated that changes in EM
in financial reporting could be better explained by CG variables considered in the present
chapter. The study exposed positive association between CEOD and EM implying the facts
that when a single person holds two positions simultaneously (i.e., CEO and Chairman of
the board) enjoys more discretionary powers without being supervised by anyone else
leading to greater involvement in the higher discretionary decision in the financial reporting
and thus EM. Similarly, BDS had a significant discouraging impact on the EM of listed
firms in India. This outcome deduced that the inclusion of a higher number of directors on
board brings diversified knowledge in the board portfolio. Thus, it gives least opportunity
for management to use freedom of choice of accounting methods and techniques to a more
significant extent in estimating the reported earnings to meet the desired target even
substantial deviation from the underlying economic position and progress resulting into EM
and reporting anomalies. On the other side, the study revealed that BDI is negatively
associated with the DA signifying the facts that the inclusion of more IDs in board
composition reduces the extent of EM and eventually enhances the FRQ. Again, analyses
exposed that MLD is positively associated with DA, which implies that the accumulation of
outside directorship by the directors encourage managers to engage in EM.
Hence the findings from the current chapter have concluded that those firms with larger
boards having sincere and knowledgeable IDs are more likely to be useful to control EM in
financial reporting than smaller boards. Moreover, the phase-wise analysis revealed that
CG mechanism becomes more forceful after application of CA, 2013 in monitoring the
FRQ and concluded that CA, 2013 is instrumental in exercising the monitoring function
over the financial reporting. Therefore, this study adds to the body of existing knowledge
by investigating the impact of CG mechanisms on the EM of listed firms in the developing
country, especially in India.
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CHAPTER 6
Relationship between Women Participation in Board and
Earnings Management Practices in India
6.1 Introduction
Gender combination in top corporate positions has been receiving growing attention in the
last couple of years consequent upon legislative reforms, financial crisis, corporate
governance scandals and financial reporting malpractices across the globe. Hence, the
relationship between women participation in boardroom and FRQ has been a growing debate
the recent years among practitioners and researchers after the series of corporate scandal
across the world like Enron, Xerox in the US and Satyam and Kingfisher in India. Some
contemporary accounting researches have blamed these incidences are consequences of the
failure on the part of CG practice (Demirag, 1995). Despite significant progress in the
educational qualification of the women, they hold the negligible leadership position in
business across the globe especially in the developing countries (Damagum et al., 2014;
Kanojia & Khanna, 2016). In India, the appointment of women directors as a part of the CG
system is a matter of tokenism as because, few large size firms engaged women directors in
their governing board (Kanojia & Khanna, 2016). As a result of intrinsic “Glass Ceilingix"
issues in society, they get very less opportunity to climb to the top position in the corporate
world.
Brown et al., (2002) stated that "women on the boards are not just the right thing, but the
bright thing." Considering the importance of women directors in board composition, CA,
2013 and revised Clause 49 of SEBI’s listing agreement in India brought a new provision for
every listed company and every other public limited company having paid up capital ₹ 100
crore or more or turnover ₹ 300 crore have to appoint at least one woman director in the
board composition compulsorily (Jhunjhunwala, 2014). Norway was the first country to
bring mandatory provision to make the women directors sit on a corporate board and now it
has the highest percentage (about 40 percent) of women seats at the company’s major stock
index across the world (Kaur & Khanna, 2018).

However, women representation in boardroom across the world mostly depends on the
social, political, educational and economic setup of any country (Kanojia & Khanna, 2016).
As per the Catalyst report based on Fortune 500 companies in the year 2012, women held
about 17 percent of the board seats in the US, 19 percent in the UK, 15 percent in Israel,
7.8 percent in Germany, 10 percent in Spain, 12 percent in the Netherlands, 13 percent in
Canada, 18 percent in Denmark, 26 percent in Finland, 27 percent in Sweden. However, in
India, it is roughly 7 percent of the directors on listed companies which is still a very
dismal percentage (Adams & Ferreira, 2009; Gavious et al., 2012). The previous studies
have documented that, women managers have less propensity to take risks than their male
counterpart (Powel & Ansic, 1997; Barber & Odean, 2001) and therefore, women
executives in the firm makes better decision for investors (Huse & Solberg, 2006;
Campbell & Vera, 2008; Adams & Ferreira, 2009; Campbell & Vera, 2010; Huang &
Kisgen, 2013), because females are more ethical and rational in their judgments (Vermeir
& Van, 2007).
Ferdinand et al., (2011) advocated that gender diversity in boardroom serves as a surrogate
mother in the CG system. In the same line of research in the US supported that having at
least one women director in the boardroom helps to minimise the risk of bankruptcy and
enhance the accountability (Bernardi et al., 2002). Studies have suggested that women are
more diligent towards the board as they participate more board (Adams & Flynn, 2005),
therefore, having the gender mix in the boardroom brings diverse views and judgement
which enhance transparency in CG mechanism (Terjesen et al., 2009), because, they are
defensive, risk-averse and as well diligently prepare for the meeting (Obert et al., 2015).
Therefore, the presence of women on boardroom is expected to mitigate illegitimate acts of

management (Miethe & Rothschild, 1994) and monitor deceitful financial reporting
(Kaplan et al., 2009). Campbell & Vera, (2008) stated that the monitoring function of
directors could be positively influenced by increasing the gender diversity in the board.
Several empirical and theoretical studies (Nielsen & Huse, 2010; Ferdinand et al., 2011;
Buniamin et al., 2012; Damagum et al., 2014; Bala & Kumai, 2015; Lakhal et al., 2015;
Buse et al., 2016) have documented that gender diversity on board have greater influence
over the discretionary behaviour of management with regard to EM. In a contemporary

study, Gavious et al., (2012) found that when either CEO or CFO positions are held by
woman director, EM is less compared to other firms holding the topmost executive
positions by male person and reports conservative earnings, which are corroborated by
subsequent study of Simon et al., (2015). Bernardi et al., (2002) shows that having at least
one women director on boardroom reduces the risk of bankruptcy and enhance
accountability. Rosener, (2003) advocated that companies with a higher number of women
directors have robust CG than those with few or no women on the board. Peni & Vahamaa,
(2010) documented that the gender of the firm’s executives may affect the quality of
reported earnings.
However, Sun et al., (2011) scrutinised the role of women directors in AC in restraining
EM and thus their usefulness in overseeing the financial reporting process considering a
sample of 525 firm-year observations over the period 2003 to 2005 and they documented
that there are no significant rules of women directors in AC in limiting the degree of EM.
Later on, Damagum et al., (2014); Bala & Kumai, (2015) identified the similar insignificant
linkage between female directors and degree of EM practices in financial reporting.
Considering the findings of inconclusive and mix outcomes of previous studies, which
failed to provide conclusive linkage between gender diversity in board and EM, the present
study raised the question that what is the effect of gender diversity in the boardroom on EM
practice?
Against this backdrop, a significant amount of literature has examined the impact of
women directors on EM practice in financial reporting in the context of developed
countries. However, there have been no empirical studies in a developing country like
India, which is known as one of the fastest growing economies in the world. Therefore, the
present chapter is devised to analyse the impact of women directors on EM practices in
Indian ET-500 listed NFCs.

 To report the status of women representation in the boardroom in the Indian corporate
sector.
 To assess the impact of gender diversification in the boardroom on Earnings
Management practice in financial reporting.
6.3 Data Analysis and Discussion
6.3.1 Descriptive Statistics
The descriptive statistics in Table 6.1 reveals that on an average 7.95 percent of the
boardroom of ET-500 listed NFCs are occupied by women directors in the selected
companies during the year under consideration. This result is similar to the report published
by The Catalyst in the year 2012, which showed that around 7 percent of the corporate
boards were occupied by the women directors in Indian corporate scenario. However, this
proportion is reasonably low as compared to France, Norway and other European countries
(Lakhal et al., 2015). Apart from the percentage form, absolute presence of women
directors were also presented in the Table 6.1, which reported that median and mode value
is 1 (one) indicating the fact that in most of the boards one women director is appointed
merely to comply with the rules, which is appropriately termed as tokenism by Kanojia &
Khanna, (2016). The descriptive statistics also depicted that the degree of women
participation in boardroom varies from 0 to 5 directors. However, the minimum value of
women representation indicated at least some companies had not appointed any women
director in their board portfolio and the maximum is only five women directors. Therefore,
the disparity in the participation of women director made no significant difference in the
gender diversification across the boardroom of selected companies during the period under
consideration.
The study (reported in Figure 6.1) further documented that large boards (where at least ten
directors are present, otherwise small board) employed women directors on an average 8.16
percent of total directors, which is slightly higher than the small boards where 7.59 percent
women directors were appointed. This result is consistent with the findings of Kanojia &

Khanna, (2016) that women directors are more in the larger board than the smaller one.
Table 6.1: Descriptive Statistics

Statics WR WD BDS ACS FRMA FRMS
Mean 7.951 1 9.842 3.938 36 3.573
Median 8.333 1 10 4 28 3.513
Mode 0 1 10 4 28 3.774
SD 7.441 0.741 2.767 1.000 23.44499 0.520
Covariance 0.935 0.947 0.281 0.254 0.646937 0.145
Kurtosis 1.312 2.883 1.032 6.759 2.101135 -0.127
Skewness 0.841 1.164 0.717 1.849 1.491799 0.321
Maximum 50 5 21 10 137 5.129
Minimum 0 0 4 2 5 2.255
Source: Author’s work. Note: WD stands for Women Directors; WR for
Women Representation in percentage form.
Figure 6.1: Board Size and Women representation

Women Directors
8.50% 8.16
8.00%
7.59
7.50%
7.00%
Large Board Small Board
The average age of the sample firms was 36 years. The variation here was also more
significant; the youngest firm was only five years old while the oldest has been in existence
for 137 years. Similarly, the disparity was also observed about the size of the firms under
consideration during the study period.
Table 6.2: Women Representation in Service and Manufacturing companies

Sl. No. Industry Observations Women Representation
1 Service 235 10.09 percent
2 Manufacturing 640 7.14 percent
From the Figure 6.5, it was observed that highest participation of women director in the
boards in the Textile Industry (14.86 percent) followed by Steel Industry (12.57 percent)
and 10.86 percent in Construction Industry. However, the lowest representation of women

directors was found in the Chemical Industry at 3.43 percent, Electric Equipment Industry
and Telecommunication Industry at 4.00 percent.
Table 6.2 portrayed the state of women participation in boardroom in the service sector and
manufacturing sector companies. From Table 6.2, women participation in service sector
companies was exposed to the extent of 10.09 percent, which is a higher percentage than
the manufacturing sector, where women participation is only 7.14 percent.
Figure 6.2: Year-wise Total Number of Women Directors across the Firms under
Consideration
197 209
Number of Directors
88 93 98
2012 2013 2014 2015 2016

Women Directors
This result might have stemmed from the fact that service sector firms are more exposed to
future uncertainty compared to the manufacturing industry and consequently, more
conservative in financial reporting practice (Goel, 2013; Roy & Debnath, 2015). Therefore,
they are engaging more women leaders who are less likely to take the risk in running the
business than that of their male counterparts (Powel & Ansic, 1997; Barber & Odean, 2001;
Bernardi et al., 2002; Obert et al., 2015).
Figure 6.3: Trend of Women Representation (%) in Boardroom
12.22
11.42
5.37 5.75
5.06
2012 2013 2014 2015 2016

Women Directors (%)

Figure 6.2 presented the year-wise women directors across the firm under consideration.
From Figure 6.2, it appears that, up to the year 2014 from the initial year 2012, annual total
women directors appointed for all the ET-500 listed NFCs under consideration were limited
to 98 only. However, in the year 2015, the total number of women directors raised to 197,
followed by a further increase up to 209 in the year 2016.
This paradigm change over the years is a reflection of the new provision relating to the
compulsory appointment of women directors in the board brought under Section 149(1) of
CA, 2013.
The Figure 6.3 reported that the average proportion of female directors on the board is 5.06
percent, 5.37 percent, 5.75 percent, 11.42 percent and 12.22 percent for 2012, 2013, and all
the three years, respectively. From this, it was evident that in the first three years (2011-12,
2012-13 and 2013-14) of the total period under consideration women director's share in the
board continued roughly around 5 percent only. However, in the last two years, that is in
the year 2014-15 and 2015-16 women director’s representation in the boardroom was to the
extent of 11.42 percent and 12.22 percent, respectively. This paradigm changed scenario
may be explained as the application of CA, 2013 wherein a new provision has been injected
in connection with the compulsory appointment of at least one women director in the board
for all listed public companies and other non-listed public companies fulfilling paid-up
capital and turnover criteria.
So from the above scenario, it could be concluded that the appointment of women directors
in India is not a fashion, but it is purely compulsion on the part of the corporate
organisation.
Figure 6.4 presented the women representation in the boardroom of the selected corporate
organisation before and after the application of CA, 2013.
However, one more interesting fact is that, even though there was a significant increase in
women representation in the boardroom after application of CA, 2013 before that also there
is a slightly increasing trend throughout the pre-application period. This paradigm change
in the pattern of women directors in the board is nothing but the impact of the new
provision as inserted in the CA, 2013, which mandated for every listed company and other

public limited companies satisfying paid-up capital or turnover thresholds criteria required
to appoint at least one woman director in the board composition.
Figure 6.4: Women Representation before and after application of CA, 2013
Women Directors Participation (%)
15.00%
11.81
10.00%
5.39
5.00%
0.00%
Pre-Application Post-Application
In the present study total period of five years from 2011-12 to 2015-16 was split up into
two time zones to test the impact of application CA, 2013 on women participation in the
boardroom. Since the financial year, 2014-15 was the first year of application of CA, 2013,
the last two years under consideration, i.e., 2014-15 and 2015-16 have been considered as
post application period and first three years, i.e., 2011-12 to 2013-14 have been taken as the
pre-application period.
Figure 6.5: Industry-wise Women Representation (%) in the Boardroom

16 14.86
14 12.57
12 10.86 10.29
10 8.00 7.43
8 5.71
5.14 5.14 4.57
6 3.43 4.00 4.00 4.00
4
2
0
Figure 6.4, confirmed that women representation was only 5.39 percent in the board before
application of CA, 2013, which is less than half as compared to the post-application period
where women directors have been occupying the board seat to the extent of 11.81 percent.

Therefore, it is a clear indication that such an increase in women participation in the

boardroom is being influenced by the new provision of the CA, 2013. This phenomenon
substantiated the proposition of Kamalnaath & Peddada, (2012) who suggested for
mandatory quota approach to address the problem of gender diversity in Indian corporate
boardrooms.
6.3.2 Regression Analysis
This section presents the result of regression analysis to assess the impact of gender
diversity in the boardroom on EM practices in financial reporting. Table 6.3 reported that
F-statistic value 4.807 with a corresponding p-value 0.0000 which is statistically significant
at 1 percent level and indicated that the hypothesis of a significant linear relationship
between the dependent and independent variables could not be rejected. So, the study
affirmed that all explanatory variables included in the regression model well explain the
dependent variable (i.e., DA as a proxy of EM).
The summary output of the regression analysis was reported in Table 6.3. From the Table
6.3, it can be seen that the adjusted R-square value was 0.2164477, which indicated that
21.64 percent of the variation in the DA being dependent variable is explained by the
change in the independent variables of the regression model under consideration. Hence, it
is affirmed that the goodness of fit of our model is relatively good.
Regression analysis showed that the presence of women director is adversely associated with
the magnitude of DA in ET-500 listed NFCs during the study period under consideration.
The negative relationship was found statistically significant at the 5 percent level, which can
be seen from corresponding p-value (0.000076) in Table 6.3. Thus, the result asserted that
the accumulation of more women directors in the boardroom could discourage the EM
behaviour of managers in the financial reporting process. Hence, the present result supported
the alternative hypothesis (H15), which assumed the negative association between EM and
gender diversity. This result substantiates with the outcomes of Gavious et al., (2012) and
Damagum et al., (2014) who have found that financial reporting credibility improves as the
proportion of women in the board increases.

Similarly, the present study investigated the presence of women directors with dummy
variable 1 when there is at least one or more women director(s) otherwise 0, analysis reveals
that the mere presence of women director in the boardroom exercise no significant influence
to curb EM in the financial reporting process, which is evident from p-value (0.6472063) in
Table 6.3. This finding again supported the result of Damagum et al., (2014) who also
observed that mere presence of a female director does not particularly improve the FRQ.
However, the empirical analysis exposed that mere presence of women director in the
boardroom exercises no significant influence to curb EM practices in financial reporting,
which corroborated with the findings of Sun et al., (2011) who observed that there is no
significant impact of gender diversity on EM. Damagum et al., (2014) also documented
that the presence of a women director in the boardroom does not improve the FRQ.
Table 6.3: Multiple Regression Output

Multiple R 0.4709805
R-square 0.2218268
Adjusted R-square 0.2164477
Observations 875
Durbin Watson 1.98
DF SS MS F-statistics p-value
Regression 6 1.450268 0.2417 4.807606 0.00000
Residual 868 43.64031 0.0503
Total 874 45.09058
Intercept 0.3700165 0.0732567 5.050956 0.0000212
Women Director -0.204121 0.0262535 -7.775 0.000076*
Women Presence 0.0045233 0.3225719 0.014023 0.6472063
BDS -0.365801 0.0714341 -5.12082 0.000022*
ACS -0.028743 0.0079462 -3.61715 0.000539*
FRMA 0.0237447 0.0291706 0.813992 0.4158723
FRMS -0.06651 0.0156997 -4.23634 0.000034*
Source: Author’s work. Note: *significant at 1 percent level
Furthermore, the result found a significant negative association of BDS, ACS and FRMS
with DA indicating that larger firm with a bigger board and reliable AC exercise more

stringent supervision over the financial reporting to mitigate EM practices in financial

reporting by the managers. The firm's age was found to have no significant impact on EM
practice in the financial reporting process.
Likewise, the regression analysis also provided evidence of a significant adverse

association between BDS and EM, which showed that firms with a large number of
directors in the boards are able to monitor the management decision in a more active
manner leaving lesser scope in the hands of management to engage in EM practice while
financial reporting and vice-versa.
This result contradicted with the recent study of Iqbal et al., (2015) with no significant
association between BDS and EM in the context of Pakistani firms. The regression analysis
also exposed that ACS and EM are negatively linked with each other, which is evident form
p-value (0.0000) and coefficient statistics.
This result was quite in line with the existing literature and philosophy of CG, which
assumes that higher number of members in the AC accumulates the broader experience and
exposure, which can ensure the unbiased FRQ of accounting information. However, firm age
was found to be exercising no significant influence over EM decision of the firms under
consideration. The FRMS is also considered as a key factor in the gender diversity and EM
relationship because literature has documented that larger firms are less engaged in EM (Ajit
et al., 2013; Dayanandan & Sra, 2016) due to fear of losing market reputation. There may be
a possibility that larger firms would have bigger boards. Some contemporary studies have
argued that the larger board have the number of women directors (Sealy et al., 2007; Kanojia
& Khanna, 2016).
The FRMS in this study has also been documented as a significant negative variable in
predicting FRQ, which contradicts with the findings of Debnath & Roy, (2017) that FRMS
positively influence the EM. This could have stemmed from the fact that larger firms tend
to monitor corporate performance better as larger firm usually have gender friendly board
and also do appoint well-established auditing firms. These factors have the potentiality to
restrict the likelihood for EM practice by the managers.

This chapter focused on uncovering the status of women representation in corporate board
and investigating the impact of women involvement in the boardroom on EM in India for
five years from 2011-12 to 2015-16. The study classified all the sample firms under
consideration into 14 industries as per classification made in Capitalineplus Corporate
Database. All those 14 industries were further split up into two groups, namely, the service
sector and the non-service sector. After classifying the industries, it was observed that
service sector industries under consideration retained the higher representation of women
directors in their board compared to non-service sector industry. Under the service sector
industry, the Telecommunication Industry retained the highest proportion of women
directors in the board, followed by Personal Care Industry and in the Computer Software
Industry. However, the lowest representation of women directors was found in Engineering
Industry followed by Power Generation Industry and Automobile Industry. This might be
steam from the reason that service sector firms are exposed to more future uncertainty in
doing business than manufacturing sector firms (Goel, 2013). The study also revealed that
firms with large boards are engaging more women directors compared to small boards.
Further, the trend analysis of women representation in boardroom revealed that women
participation has increased with double rate to the extent of 12 percent after application of
CA, 2013 compared to first three years under consideration, which is considered as the pre-
application period. In the later stage, multiple regression analysis has been used for the
estimation of the impact of women participation in the boardroom over EM practices in
financial reporting. The empirical results have provided evidence of the substantial
negative association between women directors and degree of EM signifying the facts that
increase the number of women directors on the board discourage EM in financial reporting.
Hence, it leads to affirming that women directors are effective in exercising check and
balance over EM behaviour of managers involved in financial reporting. However, the
analysis further revealed that the mere presence of single women director could not deter
EM practice in financial reporting effectively. Hence, present findings may explain that
female directors constrain and prevent EM more than men. Therefore, the overall reaction
of the board can be affected by the women present, who will raise the flag of morality,

strengthening the firm's internal monitoring by putting a heavier weight on the ethical
considerations in the board's decisions.
The FRMS in this study has also emerged as a significant variable in predicting FRQ.
However, the FRMA is found to have no significant association with EM. Therefore, even
though the present study is based on the limited number of sample firms with five year time
period, it is indeed the first empirical research to assess the impact of gender diversification
in the boardroom over EM practices in financial reporting in the Indian context. Thus,
present findings enriched the limited literature on women representation in CG and EM.
Hence, it would be very much informative to regulators, policymakers, inventors, analysts,
researchers and creditors as well as other players in the capital markets, as it presents a new
aspect that necessities to be well-thought-out while evaluating the quality of firms'
accounting information. However, generalisation or applicability of the present findings
over other industries having different incentives for pampering into managing the earnings
figure in financial reporting or other industry-specific factors is expected to be explored in
future research.
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CHAPTER 7
Nexus between Audit Committee Attributes and Earnings
Management Practices in India
7.1 Introduction
Consequent upon the collapse of several reputed business houses around the world
challenge the trustworthiness of the audit function in the CG system. Many empirical
studies had been motivated to figure out the affirmative connection between audit quality
and FRQ in listed firms in a developed economy like the US, UK and other European
countries. Amongst these empirical studies, an increasing number of reports had
specifically addressed EM issue in financial reporting (Sun et al., 2011). Financial
reporting is considered as an indispensable responsibility of corporate units and one of the
principal activities of the CG machinery. Financial reporting serves as the principal
medium for communicating financial and economic affairs of companies with the external
stakeholders (Ayemere & Elijah, 2015). In the era of globalisation, CG concerns about
sustaining financial reporting credibility to regain the confidence of investors after the
disaster being reported in case of a reputed corporate enterprise like Xerox, Enron,
WorldCom, and Satyam across the world. Fama & Jensen, (1983) proposed that
preparation of transparent and reliable financial statements rest upon the efficiency of the
checking function of governance mechanism. Therefore, the role of AC becomes a very
significant concern in financial reporting. In the CG structure, an AC is a sub-committee of
the board which is specialised in accounts and financial matters and, therefore, entrusted
with the oversight role over the reporting and disclosure of its financial information to
ensure that the financial statements are correct, sufficient, credible and free from material
misstatement (Lal, 2009). Thus, the credibility and integrity of financial reporting largely
depend upon how reliable is the internal control mechanism of the firm in general and
internal AC in particular. It has been noted by previous empirical studies that companies
with weak internal controls are more prone to such fraudulent financial reporting practices
(Bloomfield, 2002; Gakher, 2014). Virtually the AC functions as an interface between the
independent auditor(s) and the managers, which quickens the monitoring process by
curtailing information asymmetry between the external independent auditor and insiders

(Swai, 2016). Likewise, the Blue Ribbon Committee (1999) suggested that the AC is an
essential constituent of governance mechanism concerning the appointment of audit
firm(s). AC is accountable for contracting the external auditor and for overseeing the
quality of audit that is being carried out by the independent auditor(s). Therefore, well-
functioning AC is crucial in justifying the independence of auditor(s) and higher FRQ. The
primary objective of the AC of the company is to monitor and provide adequate supervision
of the management's financial reporting process to ensure accurate, timely and proper
disclosures maintaining transparency, integrity and FRQ.
Thus, the AC assists the board in discharging its responsibility for overseeing the quality
and integrity of the accounting, auditing and reporting practices of the company and its
compliance with legal and regulatory requirements. The committee ensures the objectivity,
credibility and correctness of the company's financial reporting and disclosure processes,
internal control system, risk management policies and procedures, tax policies, compliance
and legal requirements and associated matters. Section 177 of CA, 2013 specified that the
AC should comprise at least three directors with IDs forming the majority.
Reason for the establishment of ACs can be found in agency theory, where it is presumed
that shareholders are principal who strives for attaining maximum benefits from
management performing on their behalf (Kalbers & Fogarty, 1998). But assuming
economic interest, there is the possibility for opportunistic activities by the agent, which is
inconsistent with the interest of principal (shareholders). Because of the departure of day to
day business activities from shareholders (Principals) to managers (Agents), the
shareholders are not in a position to monitor the day to day activities of the management
directly (Jensen & Meckling, 1976). Therefore, on behalf of shareholders, the system of CG
mechanism is established to exercise check and balance over managers' discretionary action
from pursuing their benefits that do not align with the interest of shareholders. In other
words, the justification for the implementation of the CG mechanism goes to either aligning
the interests of managers with shareholders or limiting the opportunistic activities of
managers (Dellaportas et al., 2005). An AC is one such crucial CG window through which
the shareholders exercise monitoring over the financial reporting.

Bradbury, (1990) stated that the purpose of AC is expected to enhance the quality of
information flows between principal and agent where there are high agency costs.
Considering the substantial importance of internal audit, the formation of AC has been
widely envisaged in new Indian CA, 2013 as well as in the revised listing agreement of
SEBI as an essential means of enlightening the FRQ to protect the investors from
accounting and reporting saga. The CA, 2013 mandated for every listed company and other
public companies have to form an AC comprising of at least three directors, the majority of
whom to be independent and financially literature to read and understand the financial
statements. Primarily, the objective of CA, 2013 and SEBI being the regulator of financial
markets of the country has intended to enhance the standards in CG in India. Similarly, the
Malaysian Code on CG was launched in March, 2000, where it was stated that AC should
comprise of at least three directors (Saleh et al., 2007).
Even though several studies have been undertaken to assess the impact of AC
characteristics in various developed and few developing countries, but no research is
conducted to evaluate the effects of AC attributes on EM in financial reporting in Indian
context so far. Therefore, in the present study, an effort have been made to uncover the
impact of AC attributes namely ACS, ACI and ACD to control the managers’ discretionary
behaviour in financial reporting and thereby EM. Precisely, the study endeavoured to
investigate how AC characteristics exercise influence in constraining EM in financial
reporting in ET-500 listed NFCs in India. Therefore, the present study is unique by its
nature and would cater to the need of the hour as there is an increasing demand for the
rebuilding of stakeholders’ confidence to be assured in the credibility of financial
information of corporate sector in India.
7.2 Context of the Study
Despite the presence of AC in CG mechanism, there have been several instances of

manipulating financial information which advocated that mere formation of an AC is not
sufficient enough to alleviate the inclination towards financial reporting malpractice by the
management for their interest. Therefore, concern and emphasis in the recent CG
mechanism are on increasing the effectiveness of the AC to develop stakeholder's

confidence in reported financial statements. The Blue Ribbon Committee, (1999) noted that
the AC is the most crucial part of CG mechanism concerning internal audit, internal control
and independent audit firm appointments because AC is exclusively responsible for
maintaining external FRQ. In this regards, CA, 2013 and many other empirical studies
(Klein, 2002; Mohamad et al., 2012; Mishra & Malhotra, 2016; Elghuweel et al., 2017;
Kapoor & Goel, 2017) have encouraged a number of characteristics which are imperative
for an AC to effectively accomplish its objectives viz; audit committee size, independence
and diligence.
The primary responsibility for preparing financial statements rests with company
management and board. Queries have also been raised about the quality and independence
of AC upon which monitoring over reporting function is vested. Regulators and standard-
setters have attempted to enhance audit quality through rules affecting auditor. Mandatory
formation of AC with IDs forming majority under CA, 2013 is imposed for improving audit
quality through maintained independence and new ‘‘fresh eyes" on audit independence.
The fundamental objective of financial reporting is to provide information about the
financial performance and position that are useful for economic decision by the
stakeholders. A monitoring committee is often put in place to serve as a watchdog to
ensure that the company provides relevant and reliable information which will eventually
protect the interest of investors and helps to achieve FRQ. The AC is a vital committee
which is accountable for the conserving the quality of such information and many previous
studies suggested that AC attributes exercise significant influence on FRQ (Saleh et al.,
2007; Chandrasegaram et al., 2013; Hamdan et al., 2013; Ayemere & Elijah, 2015; Bala &
Kumai, 2015).
Thus, the total number of directors in the AC plays a critical CG mechanism to monitor
financial reporting practices. Blue Ribbon Committee (2000) recommended that AC should
be independent, minimum in size and members should be financially expert. The CA, 2013
in India came up with similar policy and specified that a public limited company should
form an AC consisting of at least three directors who can read and understand financial
statements. The Act, 2013 aimed to increase public confidence in the credibility and
objectivity of published financial statements. Large size AC may play a vital role in

constraining the occurrence of EM. However, empirical evidence appears to be

inconclusive. Rassas & Kamardin, (2015) examined the association between AC
characteristics and earnings quality and suggested that large AC size with frequent
meetings are associated with lower EM. Yang & Krishnan (2005); Ayemere & Elijah,
(2015); Mishra & Malhotra, (2016) also supported that AC size exercises a negative
influence on EM. However, on the contrary, Xie, et al., (2003) did not note any significant
connection between AC size and EM.
The AC monitors the financial reporting process, as well as the internal control mechanism
within the organization (Saleh et al., 2007). Similar with the board of directors, the
monitoring function on behalf of shareholders is better when the independence of the
committee increases (Deli & Gillan, 2000) to ensure the fair disclosure of financial
information reducing the information asymmetry between the insiders and outsiders. The
Sarbanes-Oxley (SOX) Act, 2002 provides that all the members of the AC must be IDs.
The CA, 2013 in India holds that the majority of AC members have to be independent of
the organisation. Therefore, Companies and Allied Matters Act, 1990 in Nigeria, and SOX
Act, 2002 in USA, CA, 2013 in India and other listing regulation across the world has
given emphasised on independence attributes of AC over the last couple of years to ensure
the management and affairs of a company is reported fairly as the IDs are not having any
pecuniary relationship with the company's affairs. Many of the existing studies have
provided evidence on the association between ACI and EM revealed diverse relation
instead of any specific trend line, which is inconclusive. Ahmed & Hasnah, (2015); Rassas
& Kamardin, (2015); Iqbal et al., 2015 and Dakata et al., (2017) found that ACI is related
to higher earnings quality in Malaysia. Several other studies (Hutchinson & Percy, 2008;
Madawaki & Amran, 2013; Omoye & Eriki, 2014; Latif & Abdullah, 2015) across the
world observed that ACI is adversely correlated with EM. Saleh et al., (2007) documented
that the presence of a fully independent AC help to minimise EM practices. However,
Fodio et al., (2013); Nugroho & Eko, (2011) found ACI and independent external audit
have a positive relationship with DA.
Apart from the ACS and ACI, ACD signifies the conscientiousness of the AC to carry-out
its oversight role over the financial reporting process to ensure that the financial

information communicated to the stakeholders represents the actual underlying economic

situation of the organisation. Clause 49 of SEBI's listing agreement holds that AC should
meet at least four times in a year and not more than four months should elapse between two
meetings. Studies which have examined the association between meeting frequency and
EM (Van der Zahn & Tower, 2004; Vafeas, 2005; Chandrasegaram et al., 2013; Ayemere
& Elijah, 2015; Dakata et al., 2017) found that ACD is inversely associated with EM.
Because it is expected that when AC members are holding more meeting in a frequent
interval more, they will be evaluating the accounting and financial report preparation
progress, which leads to a reduction in DA thereby EM. Dakata et al., (2017) also provides
evidence that high regularity of AC meetings and attendance reduce EM.
7.3 Composition and Role of Audit Committee
7.3.1 Composition of Audit Committee as per CA, 2013
Section 177 of the CA, 2013 and Rule 6 and 7 of Companies (Meetings of Board and its
Powers) Rules, 2014 deals with the AC constitution and composition wherein it has been
stated that, the board of directors of every listed company and other public limited
companies having paid up capital of ₹10 crores or more or having turnover of ₹100 crores
or more or having in aggregate, outstanding loans or borrowings or debentures or deposits
exceeding ₹ 50 crores or more shall have to form an AC. The paid up share capital or
turnover or outstanding loans, or borrowings or debentures or deposits, as the case may be,
as existing on the date of last audited financial statements shall be taken into account for
this rule.
As per the guidelines, the AC shall consist of a minimum of three directors with IDs
forming a majority. Moreover, the majority of members of AC, including its Chairperson,
shall be persons with the ability to read and understand, the financial statements. The
Board’s report under Section 134(3) shall disclose the composition of an AC and where the
Board had not accepted any recommendation of the AC, the same shall be disclosed in such
report along with the reasons thereof. Similarly, the UK Code of CG in the year 2003
acclaims for the establishment of AC with at least three IDs (Habbash, 2010).

7.3.2 Role Audit Committee in Corporate Governance mechanism under CA, 2013
The AC acts as a linkage between the management, the statutory auditor, internal auditor,
the board of directors and oversees the financial reporting process. The AC monitors and
supervises the company's financial reporting process intending to provide accurate, timely
and proper disclosure to maintain the integrity and FRQ. The AC also reviews the internal
audit and internal control procedures from time to time, accounting policies of the
company, oversight of company's financial reporting process to ensure that the financial
statements are correct, sufficient and credible. Research shows that the firm with weak
internal control mechanism is more prone to fraudulent financial reporting practice
(Bloomfield, 2002). Therefore, precisely the CA, 2013 has assigned the following
responsibilities to the AC-
 Oversee the company’s financial reporting process and the disclosure of its financial
information to ensure that the financial statements are correct, sufficient and
credible.
 Reviewing the annual financial statements and auditor’s report thereon before
submission to the board for approval, with particular reference to:
o Changes, if any, in accounting policies and practices and reasons for the same;
o Primary accounting entries involving estimates based on the exercise of
judgment by management;
o Compliance with listing and other legal requirements relating to financial
statements;
o Qualifications in the draft audit report;
 Reviewing the quarterly financial statements before submission to the board for
approval.
 Review and monitor the auditor's independence and performance and effectiveness
of the audit process.
From the foregoing discussion, it appears that almost all the studies are associated with US,
UK and other European countries except few in the context of developing countries like

Hamdan et al., (2013) in Jordan, Ayemere & Elijah, (2015) and Dakata et al., (2017)
studied in Nigeria, Iqbal et al., (2015) addressed for Pakistani firms then Alzoubi, (2016) in
Jordan who have documented mixed result about impact of AC attributes on FRQ.
However, none of the studies was found to focus on Indian context to assess the effect of
AC attributes to curb the EM propensity in financial reporting practices. This may be for
the reason that whether AC plays any significant role in FRQ has lately received the
attention of stakeholders after contemporary corporate collapse surfaced in recent years.
Whereas India is different from developed countries and to some extent from other
developing countries where users depend upon the external financial reporting by the firms
for investment, lending and other decisions, it is thus essential to study the influence of AC
attributes on EM. Therefore, the present chapter attempted to bridge the gap in the existing
body of literature and contributed valuable input to the investors, market regulators in India
in the process of their decision making.
Thus, the principal objective of the present chapter is to examine the impact of AC
attributes on EM in ET-500 listed NFCs in India during the year 2011-12 to 2015-16. More
specifically, the present study endeavoured:
 To explore the pattern of AC across the ET-500 listed NFCs in India over the period
under review.
 To assess the impact of AC attributes on EM practices in ET-500 listed NFCs in India.
Some widely discussed variables have been considered under AC attributes as independent
variables to realise the set objectives,.
7.5 Description of Independent Variables

In the present chapter, three important audit attributes have been recognised as independent
variables to find out the impact of audit quality on the incidence of EM. The variables are
as follows-
7.5.1 Audit Committee Size: The size of AC is measured as the total number of directors
nominated for the AC.
7.5.2 Audit Committee Independence: ACI refers to the share of IDs in the AC and it is

calculated as a proportion of the total number of directors in the committee.
7.5.3 Audit Committee Diligence: Here, ACD is measured through how frequently the
meetings are being held. Therefore, it is quantified as the total number of AC meeting held
during a particular financial year.
7.6 Description of Control Variables
The EM decisions of a firm may be influenced by several firm-specific factors other than
independent variables considered in this chapter. Therefore, to nullify the influence of such
factors on the EM behaviour of managers, some firm-specific attributes were considered as
control variables, namely, FRMS, FRMG and FLEV.
7.6.1 Firm Size: Natural logarithm of total assets is taken as a proxy for the size of the
firm.
7.6.2 Growth: Growth of the firm is measured as the percentage increase in capital
employed in the current year from the previous year.
7.6.3 Financial Leverage: Financial ratio, namely, long term debt to equity capital is taken
as a proxy to represent the degree of leverage.
7.7 Model Formulation
Regression Model: regression model of the study is as follows.
DAit = β0 + β1(ACSit) + β2(ACIit) + β3(ACDit) + β4(FRMSit) + β5(FRMGit) + β6(FLEVit) +

eit……… (iv)
Where; DA = discretionary accruals of the firm; ACS = audit committee size; ACI = audit
committee independence; ACD = audit committee diligence; FRMS = firm size; FRMG =
firm growth; FLEV= financial leverage; e = error term; β0= intercept of the equation; β1 to
β6 = coefficients; ‘i’ and‘t’ = subscripts for entity and time period respectively.

This section presented the result of the analysis of data concerning the set objectives.
7.8.1 Descriptive Statistics
The descriptive statistics for the variables under consideration are shown in Table 7.1.
Table 7.1 presented that the mean value of AC size is 4, which indicates that on an average
AC is formed with four directors across the firms under consideration during the study
period which is in due compliance with the CA, 2013. However, a small variation in the
distribution of AC size was observed which is evident from the maximum of 10 directors to
the minimum two directors along with the moderate amount of standard deviation and
coefficient of variance at 1.001 and 0.254 respectively. Which implies that despite the
specific number of members in AC is dictated in the legal framework; committee size still
varies across the sample firms to a certain extent. Minimum size 2 implies there were some
companies under consideration which could not appoint or retain the minimum number of
directors in the AC during the period under consideration.
Table7.1 also depicted that the average value of ACI is 83.55, which implies that on an
average, 83.55 percent of the members are independent in the AC. In other words, most of
the AC of companies under consideration are consists of 83.55 percent of IDs. Similar with
the higher average ratio of IDs in AC, a higher range of variations in AC composition was
observed which is evident from the difference between the maximum (100 percent) and
minimum (33.33 percent) statistics. Despite the higher average value of ACI (because
average values represent the group results), there have been violations about the formation
of AC by at least some companies under consideration during the study period which is
clear from the minimum values less than the fifty-percent proportion prescribed by the CA,
2013.
Similarly, so far ACD (measured by the total number of AC meetings held) is concerned; it
was found that on an average firm under consideration hold five times AC meeting in a
particular financial year. Though the arithmetical mean shows the group results, most of the
companies under consideration during the study period hold four meetings during a

financial year as depicted by the value of mode statistics. In fact, the minimum number of
meeting that a company had to hold as per CA, 2013 as well as Clause 49 of SEBI's listing
agreement requirement is at least four meetings during the financial year and not more than
120 days shall elapse between two meetings. However, lots of variations were observed
regarding holding of AC meeting across the firms over the period under consideration
which is clear from the massive gap between two extreme values of maximum (21) and
minimum (2) statistics accompanied by the higher value of SD and CV. Therefore, there
has been a violation of holding the AC meetings by some of the companies under
consideration during the study period, which is evident from the lowest number of meetings
held.
Table 7.1: Descriptive Statistics of Variables

Variables ACS ACI ACD FRMS FRMG FLEV
Mean 4 83.551 5 3.573 11.214 1.700
Median 4 80 4 3.513 8.34 0.32
Mode 4 100 4 3.584 14.05 0
Maximum 10 100 21 5.129 580.62 767.18
Minimum 2 33.333 2 2.255 -129.59 0
Skewness 0.0849 -0.009 8.076 0.321 9.318 28.723
Kurtosis 0.759 -0.7407 103.37 -0.127 158.94 838.87
SD 1.001 14.864 2.554 0.520 29.961 26.183
CV 0.254 0.178 0.491 0.146 2.672 15.403
Source: Author’s compilation and calculation.
Note: SD stands for Standard Deviation, CV for Coefficient of Variance.
Further, firm size, which is measured as the natural logarithm total assets, is taken as a
proxy of size in the present study. Least variations have been observed about the size of
the firms under consideration during the year of study as it is evident from the values of
descriptive statistics. Increase in capital employed has been taken as a proxy of FRMG in
the present study. It was found that the firm grows 11.21 percent as it is evident from the
mean value. The substantial variation in the distribution of growth across the firms under
consideration during the study period was observed which is evident from the maximum
and minimum value statistics accompanied by the higher value of SD and CV along with
other variables measure for dispersion. The degree of leverage, which is a measure of risk

in financing the firm, has been quantified through financial ratio that is long term debt to
equity capital.
Table 7.2: Year-wise presentation of independent variables

Year 2012 2013 2014 2015 2016
ACI (%) 84.56 83.21 82.77 82.39 82.21
Total ACD 945 883 882 940 902
Average ACD 5 5 5 5 5
Median and Mode of ACS 4 4 4 4 4
Median and Mode of ACI 3 3 3 3 3
Source: Author’s compilation from relevant Annual Reports.
From Table 7.1, it was observed that the average leverage ratio is 1.69, which implies that
the firm's proportion of long term debt capital is 1.69 times higher of its equity capital. It is
also evident from the Table 7.1 that, there is a massive disparity of leverage ratio among
the sample firms which is evident from the more significant gap between smallest and
largest value statistics accompanied by higher values of SD.
Figure 7.1 presented the total statistics of AC of firms under consideration during the study
period. From the Figure 7.1, it was seen that the total number of directors in the AC from
all the 175 companies under consideration were 680 in the year 2012, which has increased
in the year 2013 up to 697 followed by little fall in the year 2014 to 685 directors. Again,
from the year 2015, the total number of directors in AC started increasing slowly up to 687,
followed by a further increase in the year 2016 up to 697. Similarly, small fluctuations
about the total number of IDs in the AC across the year under consideration have been
observed, where, the total number of IDs in the AC varies from 566 to 580. Therefore, it is
concluded that the composition of AC was similar across the firms during the study period
without having any substantial variance among the firms under consideration.
Table 7.2 reported the year-wise descriptive statistics of other independent variables under
consideration. Further, Table 7.2 depicted the size and composition of ACS of the firm
under consideration. From Table 7.2, it can be seen that on an average AC of the firms
under consideration is formed with five directors. However, the majority of the companies
under consideration formed their AC with four directors as apparent from the mode value.
Above all, AC was found very similar across the years under consideration because

irrespective of the years under consideration normal strength (measured through median
and mode) of the AC was found to be constituted with four directors in all the cases.
So far independence of AC is concerned, it is clear that in all the year under consideration
independence of AC varies from around 82 percent to 84 percent across the year, which is
well above the minimum threshold limit prescribed by CA, 2013 where it has been
mandated that majority of the AC members including Chairman should be an IDs.
Therefore, the composition of AC in Indian companies under consideration is fairly in
x
compliance with Regulations 18 of SEBI (Listing Obligations and Disclosure
Requirements) Regulations, 2015 and Section 177 of the CA, 2013 requirements.
Table 7.3: Multicollinearity Tests

ACS ACI ACD FRMS FRMG FLEV
ACS 1
ACI -0.13957 1
ACD 0.017464 0.100024 1
FRMS 0.056079 0.170086 0.253771 1
FRMG 0.057654 0.130532 -0.0036 0.02217 1
FLEV 0.0028 -0.0289 -0.00804 0.03334 -0.0242 1
Finally, from the discussion above, it appeared that the constitution and composition of AC
of ET-500 listed NFCs under consideration over the five years remained the same.
This scenario implied that the implementation of CA, 2013 does not have any significant
impact over the AC formation. The analysis further exposed that ACM frequency had huge
variations from minimum 2 to maximum 22 numbers of meetings with an average of 5
meetings in a year.
Table 7.3 revealed the correlation between independent variables used in the multiple
regressions. From Table 7.3, it is observed that there is no strong pair-wise correlation
among the independent variables (ACS, ACD, ACI, FRMS, FRMG, and LEV). As per
econometrics theory, the pairwise correlation among the independent variables above 0.80
signals for problems of multicollinearity (Gujarati, 2010), therefore, this state of affairs
confirmed the nonappearance of multicollinearity problem among the explanatory variables

in the present study.
7.8.2 Multicollinearity Tests

The VIF measures the severity of multicollinearity among the independent variables in a
regression model. In Table 7.4, VIF statistics of all variables are reported along with
Tolerance statistics. VIF of all the independent variables are less than 10 and the value of
Tolerance statistics were consistently higher than the typical threshold level (0.10) for all
the variables under consideration. Therefore, this situation further established about the
absence of multicollinearity among the explanatory variables under consideration.
Figure 7.1: Audit Committee Strength and Independence

800 680 697 685 687 697
575 580 567 566 573
600
400 ACS
ACI
200
0
2012 2013 2014 2015 2016
Source: Author’s compilation from relevant Annual Reports.
Note: ACS stands for Audit Committee Size; ACI for Audit Committee Independence.
In Table 7.5, the result of the Pearson Product-Moment correlation is presented to examine
the nature and extent of the association between DA and audit attributes under
consideration in the present study. Table 7.5 reported that ACS and ACI both are
negatively linked with DA. But, ACD measured through the number of AC meeting held
during a particular financial year is positively correlated with DA though it is not
statistically significant. Among the control variables under consideration, it was found that
FRMS is negatively associated with DA, although the correlation was not statistically
significant. However, on the contrary, FRMG and FLEV were found to be positively
associated with DA.
7.8.3 Regression Results
Table 7.6 shows the regression result examining the impact of AC attributes on DA (a
proxy of EM in the present study). In the Table 7.6 regression analysis has been piloted

with six variables, of which first three variables are the independent variable and rest three
have been considered as control variables. Firstly, the study examined all companies in the
sample, which is the standard estimation for the study.
Table 7.4: Test of VIF across the Variables

Variables VIF Tolerance
ACS 1.04 0.966162
ACI 1.08 0.927143
ACD 1.04 0.961963
FRMS 1.07 0.934712
FRMG 1.02 0.97662
FLEV 1.00 0.99797
The Table 7.6 depicted that F-statistic value at 8.838818 accompanied by the
corresponding p-value is equal to 0.00000; this is significant at 1 percent level and
indicates that the hypothesis of a significant linear relationship between the dependent and
independent variables cannot be rejected. It is also indicative of the joint statistical
significance of the model is well accepted. The value of adjusted R-square is 0.2336497
which point out that all the explanatory variables (AC attributes) in the model jointly
explain about 23.36 percent variation in the dependent variable (DA) and there are other
variables not considered in the study is responsible for the rest of the change (known as
stochastic error of variance) in the DA.
The Durbin Watson statistics value 2.11 indicates the absence of serial correlation in the
data set considered for the test.
The regression analysis provides a significant negative association between ACS and level
of DA (t-statistic=2.2758; p-value=0.000000). These findings implied that an increase in
ACS discourages EM propensity. This result is in line with the philosophy of CG, various
legislative measures and many previous empirical studies (Yang & Krishnan, 2005; Salleh
& Haat, 2014; Ayemere & Elijah, 2015; Iqbal et al., 2015; Mishra & Malhotra, 2016) who
have found an inverse association between AC quality and financial reporting frauds and
thus accept the alternative hypothesis (H17) which presumed that ACS is negatively linked

with EM. Therefore, it is affirmed that in Indian ET-500 listed NFCs, the role of ACS is
effective in controlling the deceitful financial reporting by the managers and making a
difference or influencing the company's strategic decision making choices in the financial
reporting process.
Table 7.5: Pearson Product-Moment Correlation Matrix

DA ACS ACI (%) ACD FRMS FRMG FLEV
DA 1
ACS -0.02257 1
ACI (%) -0.02646 -0.1396 1
ACD 0.024879 0.0175 0.100024 1
FRMS -0.1696 0.0561 0.170086 0.25377 1
FRMG 0.153376 0.0577 0.130532 -0.0036 0.022174 1
FLEV 0.020594 0.0028 -0.0289 -0.0084 0.03334 -0.024 1
Source: Author’s calculation. Note: *significant at 5 percent level.
Likewise, the regression analysis indicates a significant negative link between ACI and DA
(t-statistic=-2.41305; p-value<0.05), which signifies that firms with a higher proportion of
IDs in AC are less engaged in EM. Therefore, it concluded that the ACI is crucial in
monitoring the FRQ. This outcome is wholly consistent with the philosophy of CG and
supports the existing studies (Hutchinson & Percy, 2008; Madawaki & Amran, 2013;
Omoye & Eriki, 2014; Latif & Abdullah, 2015; Iqbal et al., 2015; Alzoubi, 2016; Kapoor
& Goel, 2017) who have observed that ACI is adversely allied with EM in many developed
and developing countries and therefore, accepted the alternative hypothesis (H18) which
contended that ACI influence EM negatively. Consequently, it can be concluded that AC
ability to perform as an effective controlling mechanism relies on the independent status of
its members.
However, concerning the ACD (measured by frequency of AC meetings), the analysis

revealed that the rate of ACD has a statistically significant positive effect on DA (t-
statistic=3.334389; p-value=0.000000). This result confronted the theory of CG, which
holds that highly diligent AC members are instrumental in monitoring EM and rejected the
present alternative hypothesis (H19). This positive association between ACD and EM is
contrary to the expectation of agency theory, where it is expected that AC holding frequent
meetings improves the transparency of reported earnings and therefore, enhance earning

quality (a proxy for FRQ). This result contradicts with the conclusion of previous findings
(Chandrasegaram et al., 2013; Salleh & Haat, 2014; Ayemere & Elijah, 2015; Alzoubi,
2016; Dakata et al., 2017) who observed that AC meeting is negatively linked with EM and
viewed that when companies are holding additional meetings, AC further oversee the
annual accounts preparation process and would generally diminish the DA. However, the
positive association between ACD and EM may be explained by the fact that directors of
the AC are attending the meeting without adequate preparation and least conversant about
the company affairs.
Apart from the impact of CG attributes, an estimate of the control variables in the regression
analysis exposed that FRMS has a negative effect on EM practices in financial reporting,
which is evident from the P>|t| (Prob.) value 0.0000 for FRMS leading to accept the
alternative hypothesis (H010). Also, the coefficient is equal to -0.7749, which prove to have a
negative relationship between variables. This result implies that smaller firms are more
inclined to EM than the larger one. Therefore, this study result substantiates the findings of
previous studies (Ajit et al., 2013; Ahmad et al., 2014; Ali et al., 2015; Roy & Debnath,
2015; Bassiouny et al., 2016). But the study denies the observation of others studies at the
same time (Naz et al., 2011; Mahdi et al., 2012; Rahmani & Akbari, 2013; Uwuigbe et al.,
2014) who found the positive association between FRMS and EM. The previous studies
argued that the bigger firms face problem to meet or beat the analyst’s expectation and
market anticipation for which they are more inclined to managing the earnings figures.
From the analysis, it is found that FRMG found to be a significant variable in predicting the
EM as depicted in the P>|t| (Prob.) value (0.000) which is statistically significant at 5
percent level. This finding supported the observation of previous studies (Kasznik &
McNichols, 2002; Brown & Caylor, 2005; Goel, 2012) and acknowledged the presumption
of the alternative hypothesis (H114) which stated that the firm’s growth is expected to be
positively associated with the DA.
On the contrary to the prior expectations, findings for the hypothesis, which presumed that
there is a negative association between FLEV and DA, the study observed that DA was not
significantly associated with the FLEV. Hence the alternative hypothesis (H113) of a negative
relationship between FLEV and DA of the sampled firms in India is overruled and concluded

that FLEV does not have any significant impact on EM.
However, to check the impact of the application of CA, 2013, the present study split up the
full sample into two sub-groups based on time period. Since the financial year 2014-15 was
the first year under CA, 2013, the total time period under consideration from 2011-12 to
2015-16 was bifurcated into pre-application and post application of CA, 2013. Hence, the
financial year 2011-12, 2012-13 and 2013-14 were taken as pre-application period and 2014-
15 to 2015-16 were considered as post-application period.
Table 7.6: Multivariate Regression Output

Multiple R 0.488785
R-square 0.238911
Adjusted R-square 0.23365
Observations 875
Durbin Watson 2.11
Coefficients Standard Error t-statistic F-statistics p-value
Regression 6 2.59631 0.432718 8.8388 0.00000
Residual 868 42.4943 0.048957
Total 874 45.0906
Intercept 0.41913 0.070043 5.98309 0.000000
ACS -0.62818 0.276026 -2.27558 0.00000*
ACI -0.36749 0.152293 -2.41305 0.00000*
ACD 0.43306 0.129877 3.33438 0.00000*
FRMS -0.77490 0.014875 -5.20972 0.00000*
FRMG 0.12317 0.025343 4.86036 0.00000*
LEV 0.00026 0.000286 0.91346 0.361253
The regression result of dependent and independent variables for the pre-application and
post-application period of CA, 2013 is summarised in Table 7.7. For the pre-application
period, Table 7.7 shows the adjusted R-square value 0.1018, which indicates that the model
explains about 10.18 percent of the systematic variations in FRQ over the study period.
From Table 7.7, it is clear that the F-statistic value of 10.90 accompanied by corresponding
p-value (0.000) which is statistically significant at 1 percent level. This scenario indicates
that the hypothesis of a significant linear relationship between the dependent and
independent variables cannot be rejected. It is also indicative of the joint statistical
significance of the model is well accepted.
The Durbin Watson statistics value 1.88 (as reported in Table 7.7) indicates the absence of

serial correlation in the residuals.
So far the effectiveness of the AC variables are concerned, it has been observed that ACS
and ACI are positively associated with DA (a proxy for EM) for the period before
application of CA, 2013, although the association was not statistically significant which is
evident from the corresponding p-value greater than 0.05 of respective variables.
Therefore, it may be justified to assert that, ACS and ACI had no statistically significant
influence on EM behaviour of management before application of CA, 2013 in Indian
corporate scenario. The frequency of AC meetings has been used as a proxy for ACD in the
present study, which has a statistically significant positive impact on DA, implying the fact
that more frequent AC meetings promote EM. This result, clearly denies the logic of CG
theory and previous research finding (Ayemere & Elijah, 2015; Dakata et al., 2017) which
believes to be minimisation of EM on the ground that frequently holding AC meeting put
pressure on the management’s discretion leaving less scope in the hands of management for
biased interpretation of accounting results and therefore, less EM. Apart from the impact of
independent variables, an approximation of the control variables in Table 7.7, analysis
revealed a significant (at 1 percent) relationship between FRMS and DA. This outcome is
evident in the P>|t| (Prob) value (0.0000) for firm size. Also, the coefficient is equal to -
0.40249, which prove to have a negative relationship between FRMS and DA. This result
implies that smaller firms are more inclined to EM than the large one substantiating the
findings of contemporary literature (Ajit et al., 2013; Ahmad et al., 2014; Ali et al., 2015;
Roy & Debnath, 2015; Bassiouny et al., 2016). But at the same time, the present result
denies the observation of many studies (Naz et al., 2011; Mahdi et al., 2012; Rahmani &
Akbari, 2013; Uwuigbe et al., 2014) who have documented positive association between
FRMS and DA and explained the reason that large firms face high investors expectation
even when the firm is facing the difficulties in running the business.
Therefore, the management of larger firm resorts to manage the reported earnings figure to
meet the investors' expectation.
Similarly, it was also found that the FRMG was positively associated with DA, which is
statistically significant at 5 percent level. Thus, it is concluded that the firm which has more

growth opportunity to indulge in more EM practices in financial reporting. This finding is

in line with contemporary studies (Kasznik & McNichols, 2002; Brown & Caylor, 2005;
Goel, 2012) who observed that FRMG is positively correlated with the EM.
However, at the same time, Sun & Rath, (2009) failed to find any significant relation
between EM and FRMG in the Australian context.
More so, inconsistent with the prior expectation of the hypothesis, which suggested a
significant negative relationship between FLEV and DA, the analysis revealed that there is
no significant association between them which is confirmed from the P>|t| (Prob.) value
0.361253 for FLEV in the regression output Table 7.7.
Thus, it can be concluded that EM is independent of the degree of financing risk

undertaken by the firms under consideration during the study period.
For the post-application period, Table 7.7 presented that F-statistic value at 10.64562
accompanied by the corresponding p-value (0.0000). This value is significant at 5 percent
level and indicates that the hypothesis of a significant linear relationship between the
dependent and independent variables cannot be rejected. It is also indicative of the joint
statistical significance of the model. The value of adjusted R-square is 0.215918 which
pointed out that all the explanatory variables in the model jointly explain about 21.59
percent variation in the DA (dependent variable) and there are other variables responsible
for the rest of the change in the DA which was not considered in the study.
The Durbin Watson statistics value 2.23 indicates the absence of serial correlation in the data
set considered for the model. The regression analysis of the independent variables for the
post-application period provides similar evidence of a significant negative association
between ACS and level of DA showing that increase in ACS demotivates EM practices in
financial reporting.
This result is in line with many previous findings (Iqbal et al., 2015; Mishra & Malhotra,
2016) who found an inverse association between AC quality and financial reporting frauds.
This negative association between ACS and DA (a proxy of EM) in the present study is
consistent with the expectation of CG philosophy which believes that higher number of
directors carry more excellent knowledge of accounting and finance and in turn helps the

committee to monitor the management decision. Therefore, it is affirmed that in Indian ET-
500 listed NFCs, the role of ACS is effective in controlling the deceitful reporting by
managers and making a difference or influencing the company's strategic decision making
choices after application of CA, 2013.
Table 7.7: Multivariate Regression Analysis (before and after application of CA, 2013)
Pre-Application of CA, 2013 Post-Application of CA, 2013
Multiple R 0.334818 Multiple R 0.478956
R-square 0.112103 R-square 0.229398
Adjusted R-square 0.101819 Adjusted R-square 0.215918
Observations 525 Observations 350
Durbin Watson 1.88 Durbin Watson 2.23
Pre-Application of CA, 2013
DF SS MS F P>F
Regression 6 4.2705 0.71175 10.9002 0.00000
Residual 518 33.824 0.06529
Total 524 38.095
Post-Application of CA, 2013
DF SS MS F P>F
Regression 6 1.098 0.18300 10.6456 0.00000
Residual 343 5.8963 0.01719
Total 349 6.9943
Pre-Application of CA, 2013 Post-Application of CA, 2013
Coef. t-statistic p-value Coef. t-statistic p-value
Intercept 0.35821 3.397671 0.0007 0.33849 5.04625 0.0000
ACS 0.00177 0.015606 0.9848 -0.1251 -2.9916 0.000*
ACI 0.00275 0.35713 0.7210 -0.8661 -4.09462 0.003*
ACD 0.14649 2.328489 0.0203* 0.47251 2.43209 0.000*
FRMS -0.40249 -4.49638 0.0000* -0.2928 -2.05451 0.000*
FRMG 0.42138 6.424059 0.0000* -0.0020 -6.1397 0.000*
LEV 0.005764 0.558855 0.57650 0.00016 0.92085 0.3578
Likewise, the regression analysis also provides an indication of a significant negative

linkage between ACI and DA, which signifies that firms with a more substantial proportion
of the IDs in AC are less engaged in EM which is consistent with the findings of Klein,
(2002); Kapoor & Goel, (2017) who observed ACI is useful in monitoring EM. This
outcome also supports the spirit of CG which assumed that accumulation of IDs enables the
AC to give independent monitoring over the management decision to ensure that the
information is accurate, timely and proper disclosure and maintain the integrity and FRQ.
The audit team also ensures fair treatment to all stakeholders in line with the philosophy of

responsible and accountable business management. Concerning the ACD (proxy by the
number of AC meetings), the analysis revealed that the frequency of the AC meeting is
positively associated with DA. This situation indicates that the increase in AC meeting
promotes EM practices in financial reporting. This result challenged the theory of CG
which holds that highly diligent AC members are instrumental in monitoring EM because
frequently sitting committee members get more opportunity to evaluate the management
activities which leaves less room in the hands of managers for manipulating accounting
result to accomplish their own business.
An estimate of the control variables in the regression analysis it was exposed that FRMS
and FRMG have a statistically significant negative association with DA which signifies that
bigger firm with higher growth opportunity demotivate EM in the financial reporting
because they are well concerned about the reputation and loss of future opportunity. On the
contrary, the financial leverage of the firm was found to have exercised no impact on EM.
Now, when it comes to the point of comparison of two periods under consideration, it
appeared that AC attributes become more stringent towards monitoring the discretionary
behaviour of management in financial reporting. It is evident from higher adjusted R-square
value (0.215918) of the post-application period compared to pre-application period adjusted
R-square (0.10181) as the adjusted R-square is the statistics which represents the joint
effect of all the independent variables over the dependent variable. Again, when we
consider about the impact of CA, 2013 on audit effectiveness in monitoring EM behaviours
of managers, it revealed that, before application of the CA, 2013, ACD influenced the DA
among the other variables. However, after application of the CA, 2013, ACS, ACD and
ACI emerged as active variables to control the DA across the firms under consideration.
These findings led us to affirm that CA, 2013 certainly has impacted the quality of
monitoring mechanism imposed through AC for ensuring the FRQ.
The present chapter stressed upon exploring the impact of AC attributes as CG mechanism
on EM in financial reporting in the context of Indian ET-500 listed NFCs over five years
from the year 2011-12 to 2015-16. The multivariate regression analysis has been applied in

three alternative stages. The study examined all companies in the sample for the whole
period under consideration as the standard estimation and the entire period under
consideration is further divided into two groups namely, pre-application period (2011-12 to
2013-14) and post-application period (2014-15 to 2015-16) to exercises check on the
impact of the application of CA, 2013.
In the full sample test, the empirical results provide an indication of a significant adverse
association between ACS and ACI with DA showing the fact that, increasing the ACS and
IDs in the AC force to decline the extent of EM. Similarly, it also holds in the post-
application period sample where it was observed that BDS and BDI were correlated with
DA in a statistically significant manner which implies that after the application of CA, 2013
these variables are effective in controlling the EM practice in financial reporting. Therefore,
it may be concluded that the higher number of directors brings diversified knowledge
which works as a negative catalyst to control the management's opportunistic discretionary
decision and therefore, minimize EM in financial reporting. Similarly, in all three
regressions model result provides evidence of a statistically significant positive association
between ACD and DA signifying that increase in meetings frequency of AC does not put
any effective constraints over the discretionary management behaviour, therefore, increase
in EM practices in financial reporting. This situation might be explained by the fact that AC
members of those companies under consideration are attending the meeting only for the
sake of attending the same without adequate preparations which increase the cost of the
meetings and bringing adverse impact on FRQ. Therefore, this result of a significant
positive association between ACD and EM contradicts with the underlying philosophy of
CG theory which believes that diligent AC members are likely to condense the extent of
EM propensity in financial reporting. Therefore, the present findings recognised that audit
quality exercise check and balance for the effective monitoring of EM among Indian NFCs.
The results of the present study also provided the avenue for awareness among the
investors regarding the impact of AC effectiveness in curtailing EM practices in the
--------

A Study on Contemporary Earnings Management and Corporate Governance Practices in India 2019
CHAPTER 8
Summary and Conclusions
8.1 Introduction
There are two phases in which the present study is presented. In the first phase, the study
focuses on exploring the nature and extent of EM measured through DA using the Modified
Jones (1991) model. In the second phase, the study covers assaying the impact of CG
practices in terms of board attributes including gender diversity and AC characteristics on
EM practices in Indian ET-500 listed NFCs over five years from 2011-12 to 2015-16.
8.2 Summary of Empirical Analysis
The overall findings of data analysis and discussion have been summarised in this section. A
summary of all the formulated hypotheses and their corresponding findings have been
presented in Table 8.1.
In the first phase, the study evaluated the nature and extent of EM across different industries
during the years under consideration. The study mainly used descriptive statistics along with
relevant tables and figures for presenting the distribution pattern of DA, which is a proxy of
EM across the industries and over the period under consideration. In line with previous
studies, the present study too exposed the widespread incidence of income-declining EM
across the firms under consideration. The study also witnessed a massive disparity in EM
(proxy by DA) across the firms under consideration. Again, sector-specific investigation
depicted that Electric Equipment Industry experiences the highest level of EM, whereas the
lowest level of EM was found in Pharmaceutical Industry. An analysis of the degree of EM
across the study period revealed that the companies were involved in income-increasing EM
in financial reporting in the first three years (2011-12 to 2013-14), whereas, income-
declining EM practice was followed in last two years (2014-15 and 2015-16).
In the second phase, the study attempted to examine the impact of board attributes on the
nature and extent of EM practices in financial reporting. To investigate the influence of
board attributes on EM practices in financial reporting, many CG attributes viz. BDS, BDI,

BDD, MLD, CEOD and gender diversification were considered as independent variables,
which have been hand-picked from the Report on CG presented as a part of annual reports of
respective companies. Further, firm-specific characteristics such as profitability, age and
financial leverage were considered as control variables and explored from the Capitalineplus
Corporate database over five years from the financial year 2011-12 to 2015-16. Results have
been derived by analysing the data by way of multiple regression method.
Thus obtained results showed evidence of a significant negative relationship between BDS
and DA which signifies that the more the number of directors on the board leads to a decline
in the degree of EM propensity in financial reporting. From this result, it may be affirmed
that a higher number of directors accumulates the diversified knowledge and experience in
the real sense and are useful in controlling the discretionary judgement of the management.
Similarly, the study also found that BDD measured by the frequency of board meetings is
negatively linked with DA. This result suggested that diligent board members are
instrumental in controlling EM propensity because the increased number of board meetings
signifies higher devotion towards the company, thus more access to company affairs leading
less room for managers to manipulate in the financial reporting process.
Furthermore, the results provided evidence of a significant positive association between

CEOD and DA, indicating that possession of CEO and Chairman positions by one person
simultaneously increase the level of EM. Therefore, to control the EM practices, the CEO
and Chairman of the board should not be the one and same person, two separate persons
should hold these two positions. Similarly, significant positive connection between MLD
and DA was found, which suggests that the level of EM increases when the board of
directors occupy directorship in multiple others companies simultaneously and make
themselves busy by such outside directorship. Thus, the exercise of several outside
directorships can reduce the effort and time devoted by the directors to their monitoring tasks
(Jiraporn et al., 2009), which weakens their oversight capacities, and hence, reduce their
ability to deter EM practices, leaving room for greater freedom and opportunities to manage
reported earnings for realizing the personal gain of managers.

This finding further suggested that the level of EM propensity is more influenced by time
devoted by the board directors in monitoring tasks, than by knowledge and expertise
gathered from various outside directorships they hold.
On the other hand, varying with the expectations of the existing literature, the present study
disclosed that BDI has no significant impact on EM propensity in financial reporting. This
result may have stemmed from the reason that the IDs come from outside of the company
who have no direct contact with the business activities of the organisation but lack
knowledge about the particular company. Hence, they fail to monitor the executive directors
to deter the propensity of EM. Further, due to the nature and complexity of running the
business in the present competitive market, independent directors may not have played any
crucial role to deter the EM practices in financial reporting.
Further, consistent with the theoretical expectations and previous empirical findings, the
study of the relationship between gender diversity in the boardroom and degree of EM also
revealed that presence of women directors in the board plays a crucial role in constraining
the EM practice in the financial reporting process. On the other hand, the sector-specific
analysis revealed that service-sector industries under consideration retained the higher
representation of women directors compared to the manufacturing sector industries. Still
further, the study witnessed that, after application of the provision of Section 149(1) read
with Rule 3 of the Companies (Appointment and Qualification of Directors) Rules, 2014 of
the CA, 2013 women representation in the boardroom has increased at twofold as compared
to the era of Companies Act, 1956.
Finally, the study also uncovered an existing nexus between AC attributes and EM proxy by
way of DA estimation. Along with the board attributes, under the caption of AC attributes,
the present study considered ACS, ACD and ACI as explanatory variables and some firm-
specific variables, namely, FRMS, FRMG and FLEV as control variables to nullify their
effects while estimating the influence of AC attributes to control the EM propensity in the
The analysis of the final chapter revealed that ACS is adversely linked with DA, which
implies that increasing the number of directors in the AC leads to a decline in the EM

propensity in financial reporting. Furthermore, a higher number of directors in the AC

accumulate the diversified knowledge and experience in the true sense, which is effective in
monitoring the FRQ. Likewise, in line with the expectation of agency theory, ACI was found
to be negatively associated with DA. These phenomena clarified that increases in the
number of IDs in AC raise the monitoring quality of the committee, which ultimately leads
to a drop in EM propensity, and advances the FRQ.
On the other hand, ACD measured by the frequency of holding the AC in a particular
financial year was found to be positively linked with EM which is contrary to the
expectation of CG philosophy, where it is expected that an increase in ACD reduces the
reporting malpractice and increases the FRQ. However, the positive relation between ACD
and DA may be explained by the fact that members attend the AC meeting without
adequate preparation and are least conversant about the company affairs. One reason
behind this could be that AC members lack sufficient knowledge in accounting and
financial reporting, which makes them unable to deter the accounting game played by the
management in the financial reporting process and deceive the investors by way of
suppressing the actual underlying financial position.
Further, analysis of the control variables, namely FRMS and FRMG, were found to have a
statistically significant connection with DA (a proxy for EM). Where, FRMS has a negative
linkage with the EM, which implies that larger firms are less involved in EM compared to
smaller firms. But, FRMG and EM are positively associated with each other. This positive
association suggested that a firm which has high growth opportunity indulge more in EM
than that of the firm having lesser growth. Conversely, FLEV, FRMA, FRMP were found to
have no significant relationship with the degree of DA, which is a proxy of EM.
8.3 Contributions of the Study
This study is an attempt to contribute to the existing body of literature by examining the
effectiveness of CG attributes to mitigate the extent of EM in financial reporting in the
context of developing country like India. The study considered Indian companies as the
country has a pyramidal, concentrated and founders dominated corporate structure where
the small number of individual persons or organisation hold significant voting share leaving

minimal voting share to minority shareholders scattered over the different parts of the globe
(Kumar, 2018). This scenario provides stronger inducements to the major shareholders to
bias the corporate decision process at the cost of the minority shareholder‟s wealth
compared to their counterparts in developed nations (Saleh et al., 2007). Moreover, the
majority of the businesses are under dominant control of family ownership, leaving a small
part of ownership to the minority shareholders. In such corporate ownership structure, the
CG mechanism acts as legal protection for minority interests so that they may be
safeguarded from the expropriation of their wealth (Mitton, 2002). Therefore, this study
tries to bridge this space in the literature by investigating whether in a developing country
like India the CG attributes play any significant role to curb the EM that satisfies the
expectation of minority shareholders, and where protection to minority shareholders largely
depends upon good governance. Thus, Kumar (2018) rightly points out in an annual event
at the Harvard Business School that the information asymmetry exists to a great extent in
family dominant business "I have realised that what looks great from the outside, is not
quite the same when you are inside. So, a lot of things are hidden between what is disclosed
publicly and what is going on and it is a little bit of a cultural mind-set”. Therefore, the
conclusions of this study warrant further investigation of the nature of the role played by
CG attributes of the companies constraining the EM practices in the financial reporting
process and to establish the link between the CG and EM in the context of quickly
developing country like India.
8.4 Potential Limitations of the Study
Although due care has been taken while carrying out the research and writing the report,
the present study has some potentials limitations. This study is limited by the finite number
of a sample where data has been collected from 175 ET-500 listed NFCs from the
published annual reports of the respective companies under consideration vis-a-vis
Capitalineplus corporate database spread across fourteen industries for five years.
Moreover, the selection of sample firms was based on several predetermined criteria, as
was mentioned in Chapter 3. Likewise, the limited number of CG variables, namely, BDS,
BDI, BDD, gender diversity, MLD, CEOD, ACS, ACI and ACD, were considered
following the presently available and accessible literature. But, there are many other CG

variables like ownership structure, audit fees, big four audit firms, AC financial expertise
which are likely to have a considerable impact over the degree of EM in the Indian context
which has been dropped out given the time constraint and limited access to resources for
data collection.
Further, the data related to the CG variables were manually collected from the report on CG
published as a part of the Annual Reports of the respective company as per the code of
corporate disclosure practice. Given the limited resources, in terms of manpower and costs,
the final sample picked for this study was limited to 175 non-financial Indian firms
belonging to ET-500 list published in the year 2012 based on the volume of yearly turnover
to make the research work achievable and complete within the given time frame.
8.5 Summary of Hypotheses and Findings
Table 8.1 summarises all the hypotheses framed in Chapter 2 (Review of Literature) and
their corresponding findings across the study.
8.6 Further Scope of Research
The present study provides evidence that while a number of CG attributes are significantly
associated with the incidence of EM, some others are not. However, there are numbers of
areas which have not been covered in this study, which could have significant importance
in the CG mechanism and controlling the incidence of EM in financial reporting. Therefore,
future research may consider other CG variables that were not considered in this study.
Again, out of the various existing models, in the present study, the researcher used
Modified Jones Model developed by Dechow et al., (1995) for estimation of DA a proxy of
EM which is an adverse measure of FRQ. Use of different model for estimation of DA may
produce a different result(s). Thus, future research may examine the other models relating
to EM and CG. In the present study, the use of data set is limited up to five years from
2011-12 to 2015-16, which comprises of ET-500 listed 175 non-financial Indian
companies. Future study may consider a larger sample size with a longer time period from
across different countries, which would present a comparative picture among the countries
of research interest.

Table 8.1: Summary of Hypotheses and Findings

N Hypothesis Expected Outcome Observed Outcome
H11 There is a negative relationship between BDS and EM. Negative (-) Negative (-)**
H12 The BDI is negatively associated with EM. Negative (-) Not supported
H13 BDD adversely influences the EM. Negative (-) Negative (-)**
H14 CEOD is positively linked with EM. Positive (+) Positive (+)**
H15 There is a negative relationship between Gender Diversity and EM. Negative (-) Negative (-)*
6
H1 MLD is positively associated with EM. Positive (+) Positive (+)***
H17 ACS negatively influences EM. Negative (-) Negative (-)*
H18 ACI is negatively associated with EM. Negative (-) Negative (-)*
H19 ACD adversely influences the EM. Negative (-) Positive (+)*
H110 FRMS is negatively linked with EM. Negative (-) Negative (-)*
H111 FRMA is negatively related to EM. Negative (-) Not supported
12
H1 FRMP and EM are negatively linked with each other. Negative (-) Not supported
H113 There exist a negative link between FLEV and EM. Negative (-) Not supported
H114 FRMG has a positive impact on EM. Positive (+) Negative (-)*
Source: Author’s work; Note: * significant at 1 percent level, ** significant at 5 percent level, *** significant at 10 percent level.

8.7 Suggestions
From the results of the study, it may be suggested that despite the presence of CG laws and
regulations in the country for the greater interest of stakeholders, there remain the EM
practices in the financial reporting process in the context of Indian economy. The reason
may be explained by the fact that, considering the regulatory framework, India is
considered as over-regulated but under enforced nation where we need to give teeth to the
regulators to implement them with speed and determination.
Therefore, from the present study, it may be advocated that CG regulations need to be
followed both in letter and spirit to achieve the desired output of the CG mechanism. This
move will not only enhance the accountability and transparency of the CG mechanism but
also ensure fair financial reporting, and indeed, it will ensure the protection to the investors
form CG malpractice, falsified financial reporting and ultimately, of course, give safeguard
from Satyam like saga in future.
8.8 Summary
The result of the present study has been summarised and implication has been discussed in
this chapter. The potential limitations of the research were then presented before the scope
of future research. The present study proposed and observed that CG is instrumental in
curtailing the extent of EM practice by the managers in the financial reporting process.
Therefore, the current finding tries to contribute to the existing body of literature by
empirically examining the association between the CG mechanism and EM in the context
of quickly developing economy like India. Overall, the analysis of the study exposed that
the CG mechanism has important implications for mitigating EM and other deceitful
financial reporting practices. Therefore, results from this study would have a definite
impact on the regulatory bodies, investors to understand the firm's EM practices and in the
allocation of their resources in the capital markets, researchers, practitioners and the
managers to aware of the aggressiveness of the different activities and their consequences.
Nevertheless, the present study is based on the limited number of sample firms across
fourteen industries working in the Indian economy for a finite period of five years.

Hence, generalization or applicability of the present findings over other countries and
industries with different incentives for pampering into EM in financial reporting, other
industry-specific and country-specific factors are expected to be explored in the future
course of research in this field considering the cross-country sample firms for the more
extended period.
--------

ENDNOTES
i
As per Article Published in Business Line on January 22, 2018
ii
Waste Management Scandal in the US (1998), HIH Insurance of Australia in 2001, Enron
Scandal in the US (2001), WorldCom Scandal (2002, USA) Lehman Brothers Scandal of US
in 2008, Satyam Scandal in the year 2009 confessed in India, and Olympus Scandal (2011,
Japan).
iii
See the definition given by Healy, (1985); and Schipper, (1989)
iv
The amount of managed earnings is the difference between reported earnings and actual
earnings. Accounting adjustments are known as accrual, which is the difference between
reported earnings and cash flow generated from operating activities. Accruals consist of a
discretionary portion which is often manipulated by managers and a non-discretionary part
which is dictated by business conditions. Researchers use empirical models to decompose total
accruals into non-discretionary and DA are then used as a proxy for EM.
v
Accruals represent accounting adjustment and does not involve any immediate cash flow.
These accruals are generated due to the use of mercantile treatment in accounting transactions.
vi
CEO-duality occurs when the same person holds both the CEO and board chairperson
positions in a corporation (Rechner & Dalton, 1991).
vii
DA represents the accounting adjustment that arises due to management choice and there
appeared to be no legitimate business reasons. Therefore, it is used as a proxy of demonstrating
FRQ or existence of EM.
viii
Akers, Michael D.; Giacomino, Don E.; Bellovary, Jodi L. " EM and Its Implications:
Educating the Accounting Profession". The CPA Journal. The New York State Society of
CPAs. Retrieved 28 November, 2018
ix
According to the US Department of Labour, Glass Ceiling refers to an artificial barrier based
on attitudinal or organizational that prevents qualified and deserving women from progressing
to the senior managerial position. The situation is referred to as a ceiling as there is a constraint
blocking upward advancement and glass indicates transparent because the limitation is not
immediately apparent and is usually an unwritten and informal policy.
x
SEBI was established in the year 1992 by the Government of India.
--------

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DECLARATION

I, Mr. Pranesh Debnath, Research Scholar, Department of Commerce, Tripura University (A

Dated: Suryamaninagar Mr. Pranesh Debnath

Ref: No.F.TU/COE/Ph.D/10/COM/05/16 Date: 19.06.2019

I wish to express my warm gratification and indebtedness to my Supervisor, Prof. Chinmoy

Mr. Pranesh Debnath

Declaration .................................................................................................. Page No.

Chapter 1: Introduction ..................................................................................... 1-17

Chapter 2: Review of Literature ...................................................................... 18-47

Chapter 3: Data and Methodology .................................................................. 48-66

Chapter 4: State of Earnings Management Practices in India ................... 67-79

Chapter 5: Association between Corporate Governance Attributes and

Chapter 6: Relationship between Women Participation in Board and

Chapter 7: Nexus between Audit Committee Attributes and Earnings

Chapter 8: Summary and Conclusions ...................................................... 143-151

Sl. No. Table No. Title of the Tables Page No.

1 Table 3.1 Sample Selection 49

Keywords: Earnings Management, Corporate Governance, Total Accruals, Discretionary

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Because of the fastest economic growth, increasing prospects of foreign institutional

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course of accounting. Secondly, EM is executed through the accounting system or business

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1.2 Statement of the Problem

Thus, trying to mitigate this contradictory situation of accounting information, Generally

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the information asymmetry by enhancing the relevance and timeliness of financial

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1.3 Earnings Management Concepts and Definition

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1.4 Execution of Earnings Management

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1.5 Types of Accruals

1.6 Root Cause of Earnings Management

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1.7 Significance of the Study

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1.8 Organisation of the Thesis

The remainder of this thesis is organized as follows-

Chapter 2 provides a comprehensive review of the literature on the association between EM

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Chapter 7 outlines the influence of AC characteristics on EM practices. Further, the present

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2.2 Corporate Governance in India

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2.3 Survey of Literature

2.3.1 Pakistani context

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study found no significant association between firm size and EM.

Naveed et al., (2012) studied the impact of EM on the profitability of 98 non-financial

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2.3.2 Nigerian Context

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2.3.3 Malaysian Context

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