Financially Qualified Members in an Upper Echelon and Their Relationship with Corporate Sustainability: Evidence from an Emerging Economy

Abstract

Non-observable board diversity is an important organizational strategy for improving the long-term growth and survivability of firms. The involvement of corporate sustainability (CS) in top management teams has led to effective boards. By using agency theory, we stress how financially qualified directors (FQD) in audit committees (ACs) may positively or negatively affect the practice of earnings management (EM). We also use various theories to explain how a powerful chief executive officer (CEO) complicates the effectiveness of AC and reduces their ability to detect EM practices. Using a sample of 1020 firm-year observations representing 204 non-financial listed Pakistani firms during 2013–2017, we find that the presence of FQD on the AC is associated with lower levels of EM. Our analysis shows that this effect is driven by the level of FQDs’ accounting knowledge.