An Assessment of the Efficacy of Corporate Governance in Regulating Earnings Manipulation

Abstract

The primary objective of annual reports is to provide an accurate evaluation of a company's financial condition; yet, managers may experience pressure to manipulate data in order to achieve or surpass projections. Diverse incentives can manifest in several forms, including as bond covenants, stock prices, and incentives specifically designed for management. This study examines three specific elements of corporate governance and their ability to reduce the use of profit manipulation strategies. This group encompasses the characteristics of the board of directors, audit committee, and ownership structure. The researchers examined data from 120 non-banking companies registered on the Karachi Stock Exchange between 2003 and 2012. The study found a negative association between the autonomy of the audit committee and the manipulation of earnings. Nevertheless, the presence of a dual CEO who simultaneously holds shares in the company on behalf of institutional investors is strongly correlated with the act of artificially inflating outcomes. Organizations experiencing rapid growth and those with moderate growth have distinct requirements regarding the effectiveness of governance structures in regulating profit management strategies.