The role of the audit committee in accounting and finance expertise on earnings quality

Abstract

This study aims at examining the effect of the audit committee with accounting and finance expertise on the earnings quality of manufacturing companies in Indonesia. The earnings quality measurement uses the absolute value of discretionary accrual. This study uses three measurements of discretionary accruals, the Jones model (Jones, 1991), the modified Jones (Dechow, Sloan, & Sweeney, 1995), and the Kasznik models (Kasznik, 1999). Further, the current study refers to Badolato, Donelson, and Ege (2014) to identify the audit committee expertise. The data were collected from the Indonesia Stock Exchange (IDX) between 2015 and 2017 with 331 observations. The results showed that audit committees’ characteristics with both accounting and finance expertise have a negative effect on discretionary accrual. Thus, audit committees’ members with both accounting and finance expertise have reduced the level of discretionary accruals. The result is consistent using three measurements of discretionary accruals. Therefore, the audit committee members with both accounting and finance expertise have a positive effect on improving the quality of firms’ earnings. Our result is robust to different methods of discretionary accrual measurement. This study may be very helpful for those audit committees seeking to improve their composition and way of working. In other words, the findings of this study are potentially relevant to both audit committees and policy-makers