The Impact of Broad Diversity Characteristics on Earnings Management: The Role of Internal Audit Function as a Moderator

Hira Ahmad

Student thesis: Master thesis

Abstract

This thesis aims at investigating the impact of diversity in board characteristics and earnings management practices in the UK. In addition, the thesis also examines the role of internal audit function as a moderator. Using corporate governance theories including agency, stakeholder and upper echelon theory, three key functions of board were presented including monitoring, mediating and advising roles. Effectively acting on these functions, the board can reduce earnings management practices as monitoring allows for controlling manipulations in financial reporting, mediating role aligns conflicts between shareholders, stakeholder and managers to ensure incentives for seeking opportunities for private gains are lowered and advisory role allows better execution of financial reporting, thus constraining earnings management practices. Prior research noted that the effectiveness of boards in functioning as a monitoring, mediating and advisory role can be impacted by board characteristics. For this thesis, board gender diversity, board director independent, board size, board financial skills were employed. Further, internal audit function was applied as a moderator to assess if the interaction between board characteristics and internal audit function influences this relationship. Pooled OLS, fixed effects and random effects were applied using a sample size of 3190 firmyear observations. Results reveal significant relation between board characteristics except for board size. Including the moderating effect of audit quality only influence board gender diversity and board independence. The primary contribution to prior research in this field is the extension of including internal audit function which to the knowledge of the researcher is the first work in the UK settings. Regulators, governments and corporate councils can overall get an indication of corporate governance structure and its relation with earnings management with the addition of also investigating these relations using internal audit functions.

EducationsMSc in International Business, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2021
Number of pages78
SupervisorsAleksandra Gregoric