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Audit committee gender differences and earnings management

Sheela Thiruvadi
Morgan State University, Baltimore, Maryland, USA, and

Audit committee gender differences 483

Hua-Wei Huang
State University of New York College at Old Westbury, Old Westbury, New York, USA
Abstract
Purpose The purpose of this paper is to investigate whether gender diversity of audit committees has a signicant impact on the rms earnings management. Design/methodology/approach This paper uses a performance-adjusted discretionary accrual model to examine the association between gender variables and the rms earnings management. Regression analysis is applied using 320 rms from the S&P Small Cap 600. Findings The authors nd consistent evidence to show that the presence of a female director on the audit committee constrains earnings management by increasing negative (income-decreasing) discretionary accruals. Research limitations/implications Future research can explore the behavior of female managers by applying the gender theory. Furthermore, the papers evidence has implications for regulators and policy makers, since the presence of a female director in the audit committee may affect management decisions and audit quality in a positive way. Therefore, gender diversity on the board should be more strongly emphasized. Moreover, the presence of female members on the board may further enhance public condence. Originality/value This research contributes to the existing literature on gender in four aspects. First, this research provides new evidence to reinforce the existing gender literature that women are more risk averse, cautious and ethical than men. Second, the ndings showcase that gender theory can be applied into the research of management behavior. Third, the ndings are signicantly important in contemporary corporate governance discussions over the SOX enactment and audit committee characteristics Fourth, this study sheds further light on the importance of having women on corporate boards and the positive outcomes that are associated with it, thereby serving as an encouraging force against the existence of the glass ceiling effect. Keywords United States of America, Women, Audit committees, Gender, Earnings management, Corporate governance, Female member Paper type Research paper

1. Introduction The purpose of this study is to investigate whether gender diversity of audit committees has a signicant impact on the rms earnings management. The motivation for this study comes from public concerns about deterring aggressive earnings management (Levitt, 1998) due to various management decisions related nancial scandals. Concerns related to earnings management have resulted in calls for effective audit committees from regulators, shareholders and others (Blue Ribbon Committee, 1999a, b; US Securities and Exchange Commission, 2000). Section 301 of Sarbanes-Oxley Act

Gender in Management: An International Journal Vol. 26 No. 7, 2011 pp. 483-498 q Emerald Group Publishing Limited 1754-2413 DOI 10.1108/17542411111175469

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(SOX 301) states that [. . .] the audit committee shall be directly responsible for the appointment, compensation, and oversight of the auditor. The monitoring function of the audit committee was further emphasized after many investors lost their condence in managers and external audits after the Enron debacle followed by a series of other nancial frauds. Currently, the managers decision on external nancial reporting is more likely to be affected by audit committee characteristics. In the post-SOX era, many studies have examined the association between earnings management and some audit committee composition variables (Klein, 2002; Xie et al., 2003; Bedard et al., 2004; Yang and Krishnan, 2005). Although these studies provide evidence to show that audit committee characteristics were signicantly associated with the rms earnings management, yet, most of the previous studies were focused more on independence, meeting frequency, size and nancial expertise rather than the facet of gender. Moreover, there is a recent growing stream of research on the effects of gender differences that state that the presence of women on audit committees or board of directors could bring about positive outcomes in corporate monitoring and oversight (Stewart and Munro, 2007; Ittonen et al., 2009), thereby leading to better nancial reporting quality. Good nancial reporting quality can lead to better clarity and consistency in nancial disclosures thereby discouraging manipulation and fraud Moreover, this study also serves as an important medium in overcoming the effect of glass ceiling that serves as a deterring factor in preventing women from occupying top executive and management positions The term the glass ceiling refers to invisible or articial barriers that prevent women (and people of color) from advancing past a certain level (Federal Glass Ceiling Commission, 1997; Morrison and Von Glinow, 1990; Bell et al., 2002). Because of the increasing concern of gender diversity on audit committees, we examine if there is an association between earnings management and the presence of female in the audit committee. Based on prior gender studies, we expect to nd, that the presence of female audit committee members may have a positive inuence on the managers decision in the rms earnings reporting. This study contributes to the recent growing literature regarding gender diversity of audit committees in four aspects. First, this research provides new evidence to reinforce the existing gender literature that women are more risk averse, cautious and ethical than men (Powell and Ansic, 1997; Gold et al., 2009). Second, these ndings showcase that gender theory can be applied into the research of exploring management behavior. Third, our ndings are highly important in todays corporate governance discussions over the SOX enactment and audit committee characteristics. Fourth, this study further throws light on the importance of having women on corporate boards and the positive outcomes that are associated with it thus serving as an encouraging force against the existence of the glass ceiling effect. Our evidence also has implications for regulators and policy makers; that the presence of female director in the audit committee will affect management decision and audit quality, therefore gender diversity on audit committees should be further emphasized. One implication of this nding is to recommend the appointment of more female members on the board since the presence of female member/s have shown positive outcomes, help in constraining earnings management. Another implication is that the appointment of female members on the audit committee will enhance the condence of the public regarding accounting information.

2. Earnings management, related literature and hypothesis development 2.1 Earnings management Managers may actively engage in earnings management because the reported accounting earnings usually affect their compensation. According to agency theory, managers (agent) are more likely to look out for their self-interest instead of the shareholders (principal) interest. Thus, in order to reduce the agency conict, shareholders provide incentive plans such as, linking the accounting earnings with the managers compensations. However, managers may manipulate the accounting earnings by using discretionary accruals. Especially, aggressive managers may use positive discretionary accruals to increase their accounting earnings. However, external governance mechanisms such as, the audit committee can help reduce aggressive earnings management. The audit committee members are responsible for overseeing the work of the auditors, and also liaison with the managers and auditors in order to improve the nancial reporting quality of the rm. If the audit committee is very effective, not only will the management will be less aggressive, but also the auditor will be more conservative and use negative discretionary accruals to decrease the accounting earnings of the client. Based on the accounting conservatism principle[1], conservative earnings reporting is viewed as good nancial reporting since it provides higher earnings quality and also reduces the probability of potential shareholder litigation at the same time. 2.2 Gender theory and related literature The gender theory demonstrates that women have made signicant contributions to the economic success that includes valuable unpaid work (such as housework) and human well-being cross-countries (Waring, 1988). Additionally, feminist economics theory claims masculine biases and argues that female tends to be more neutral in moral judgment (Nelson, 1996). This study extends this research stream and explores how female audit committee directors impact rm-level nancial reporting process and reliability. With respect to corporate governance, audit committees have come to play a very signicant role especially in the wake of the corporate scandals. They have to take responsibility on the part of the external auditor and the management to ensure the quality of the nancial statements and the companys internal controls. Klein (2002) examines the association between audit committee/board of directors characteristics and earnings management after controlling for other determinants. Results show that there is a negative relationship between abnormal accruals and the board or audit committee independence. Similarly, rms show that there is an increase in the abnormal accruals when there is a decrease in the number of independent directors on the board of directors or audit committee. Bedard et al. (2004) examines if there a relationship between a rms audit committee expertise (nancial, governance, and rm-specic) and a managers earnings management. Likewise, the empirical results show that reduced earnings management is associated with the audit committee composed of fully independent directors. Further, results show that aggressive earnings management is negatively associated with certain audit committee activity (overseeing rms nancial reporting process). In addition, there is a negative association between a nancial expert on the audit committee and aggressive earnings management. Yang and Krishnan (2005) nds that the tenure and the experience

Audit committee gender differences 485

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of audit committee members as outside directors on other boards are related to decreasing earnings management. Hence, the results of prior studies consistently support the assertion of SOX, that both independence and nancial expertise are important characteristics of an audit committee to oversee the managers activity of nancial reporting process. 2.3 Hypothesis development Most of the previous studies of audit committee characteristics were focused on independence and nancial expertise rather than the facet of gender. However, there is a growing stream of research interest into the issue of directors gender and earnings management. Prior research on gender differences in sociology and psychology studies show that women are more risk averse, cautious and ethical than men (Powell and Ansic, 1997; Gold et al., 2009). Wood et al. (1985) indicate that women demonstrate more effective communication ability and perform better than men in group problem-solving requiring consensus. Bernardi and Arnold (1997) examine levels of moral development in Big 6 CPA rms and nd that female managers are signicantly well developed than male managers. Bilic and Sustic (2011) show that female respondents are more ethical then men especially women respondents without work experience are more ethical than those in employment. Additionally, Elias (2004) suggests that males and younger CPAs perceive higher ethical values differently compared to females and older colleagues. According to these gender studies, researchers investigate the impact of gender diversity on the corporate boards or audit committee. Halpern (2000) suggests that gender-mixed groups show a better performance than single gender groups. Burgess and Tharenou (2002) indicate that it is likely to reduce corporate failure by increasing the presence of female directors on corporate boards. Shawver et al. (2006) indicate that female IPO accountants are less likely than their male counterparts to engage in earnings management actions. Grosvold et al. (2007) suggest that increasing female directors on the boards greatly benets all the companies, stockholders and customers. Stewart and Munro (2007) indicate that female audit committee members exhibit better communication abilities and meeting preparations. Ittonen et al. (2009) suggest that if female representation reduces the inherent risk of misstatements, gender diversity in audit committees may lead to lower audit fees. Bernardi et al. (2009) indicate that the presence of female on the boards of directors is positively associated with the company being listed on Ethisphere Magazines Worlds Most Ethical Companies list. Recent studies document that rm with female CFOs show better quality of discretionary accruals (Barua et al., 2010; Peni and Vahamaa, 2010). Further:
The most signicant obstacle to the recruitment of women with business experience is the failure of corporate board leadership to recognise the competitive advantage represented in the systematic recruitment of women from the corporate sector (Mattis, 1993, p. 154; Shilton et al., 2010).

486

In summary, these studies provide evidence to show that gender differences affect conservatism, managerial opportunism and risk preference of the management. Based on the consistent ndings of prior studies, we hypothesize that the presence of female director in the audit committee strengthens the external governance of the rm and its auditor, thereby leading to reduced earnings management (measured by reporting more negative discretionary accruals). Our hypothesis is stated as follows:

H1. There is a signicant association between negative discretionary accruals and the presence of female director in the audit committee. 3. Method and data 3.1 Method Discretionary accrual model. Ashbaugh, LaFond, and Mayhew (ALM) (2003) examine the association between audit fees and measures of biased nancial reporting using discretionary accruals model as a proxy. Two measures of discretionary accruals are calculated for controlling for rm performance impact. One is the performance adjusted current discretionary accrual using an industry and performance matched portfolio (PADCA) and the other measure of discretionary current accrual includes a control for rm performance in the regression model used to estimate discretionary accrual (REDCA). As in ALM (2003), we control for the association between rm performance and discretionary accruals by calculating ROA in Estimation Discretionary Accruals (REDCA). REDCA includes a control variable for rm performance (lagged ROA) in the model used to estimate discretionary accruals. As in ALM (2003), REDCA is calculated as follows; we include lagged ROA as a control variable and estimate the following regression: CA g1 1=LAG1ASSET g2 DREV g3 LAG1ROA 1 1

Audit committee gender differences 487

where current accruals (CA) is net income before extraordinary items plus depreciation and amortization minus operating cash ows scaled by beginning of year total assets. LAG1ASSET is total assets at the beginning of the year, and DREV equals change in net sales from the prior year scaled by beginning total assets. The parameter estimates are then used to calculate expected current accruals with a performance control (ECAPC), and REDCA equals CA minus ECAPC. Thus, REDCA controls for rm-specic performance. We then test the association between gender variables and performance-adjusted discretionary accruals, REDCA, using the following OLS regression model[2]: DCA_PA b0 b1 BIG4 b2 L1ACCRUAL b3 LogMV b4 MRGR b5 FINCG b6 MB b7 LVRG b8 LTGN b9 LOSS b10 CFO b11 GENDER 2 VARS 1

DCA_PA BIG4

discretionary accruals, measured by PADCA or REDCA. 1 if the sample rm is audited by Big 4 rms, and 0 otherwise.

L1ACCRUAL last years total current accruals (net income before extraordinary items plus depreciation and amortization minus operating cash ows) scaled by beginning of year total assets. LogMV MRGR natural log of market value of rms as of December 31, 2003. 1 if the sample rm has engaged in a merger or acquisition, and 0 otherwise.

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FINCG MB LVRG

1 if the number of common shares outstanding or the long-term debt increased by at least 10 percent, otherwise 0. ratio of market value to book value as of year-end. total assets less book value divided by total assets. 1 if a rm is in any of the following sectors: pharmaceuticals (SIC codes 2833-2836), computers (3570-3577), electronics (3600-3674), retail (5200-5961), software (7370), otherwise 0. 1 if a rm had a loss for 2003, otherwise 0. cash ow from operations scaled by beginning of year total assets.

488

LTGN

LOSS CFO GENDER-VARS:

FPCT percentage of female members to total number of members, 0 otherwise. FEMD 1 if audit committee has a female director, 0 otherwise. FSIZE number of female audit committee members. MSIZE number of male audit committee members. In order to be robust, we employ three different proxies to measure the gender diversity on audit committees; FPCT (percentage of female members), FEMD (presence of female members), and FSIZE (number of female members). As in ALM (2003), we control the size, LogMV and MB, for rms complexity. L1ACCRUAL is controlled to capture the reversal effect of prior accruals. In addition, we use LVRG, LTGN, LOSS, and CFO to proxy for the effect of the rms risk and performance on earnings management. We also control MRGR and FINCG for additional risk of business merger and obtaining new capitals. BIG4 controls for the effects of auditors quality on discretionary accruals. 3.2 Data Our sample includes 320 rms from the S&P Small Cap 600 with a December 31, 2003 scal year. The reason for the sample selection was due to the following criteria. First, we wanted to keep the data size manageable since data on audit committee had to be hand collected from proxy statements. Second, there was a strong focus on the effectiveness of audit committees immediately after the enactment of SOX due to the various management decisions related nancial scandals. Third, we wanted to see whether the enactment of SOX had any immediate effect on the sample, hence we choose and examine 2003 audit committee female presence because it is the rst year subsequent to the enactment of SOX 2002. Lastly, the reason for choosing year 2003 data than the subsequent years data is to avoid the SEC 404 internal control provisions relating to SOX. Under SOX 404, management is required to le an internal control assessment report including the effectiveness of the internal control system and procedures of the rm for nancial reporting. Hence, the data close to SOX enactment was the year 2003 data. The available proxy and nancial data was from the Compustat database and the audit committee data was hand collected from proxy statements.

We delete 21 rms from industries (based on two digit SIC code) where less than 20 rms are present, as in ALM (2003). Finally, the available observations for the adjusted discretionary accruals tests are 299. We separate this sample into rms reporting negative discretionary accruals (more conservative) and rms reporting positive discretionary accruals (more aggressive) in order to observe managers decision in earnings management. Table I provides descriptive data[3] about the sample. The mean (median) values of PADCA and REDCA values are 22.91 percent (20.50 percent) and 23.33 percent (2 0.44 percent). In general, managers tend to be conservative and report income-decreasing (negative) discretionary accruals in the post-SOX period. The result is reasonable because the enactment of SOX in 2002 increased potential litigation risk for the US public companies. The Big 4 serve as auditors for 96 percent of the sample. The mean values for LVRG, MB, and FINCG in our sample are 0.51, 2.58, and 0.30, respectively. 4. Results 4.1 Main results Table II presents the DCA analysis for both male and female groups. In this uni-variate test, we nd weak evidence to show that rms tend to report less negative PADCA (2 26.70 percent) when there is no female director in the audit committee ( p , 0.10, one-tailed). Firms tend to report more negative PADCA (2 44.31 percent) when there is a female director in the audit committee. However, we nd no signicant difference for positive PADCA, and positive/negative REDCA between male and female groups. Table III presents the results of OLS regression model (2), with negative DCA_PA as the dependent variables. Control variables L1ACCRUAL, MB, LVRG, and LGTN are signicant ( p , 0.10, two-tailed). Considering the gender variables, the coefcients of FPCT (2 0.64) and FSIZE (2 0.20) are negative and signicant ( p , 0.10, two-tailed) in the PADCA 2 regression. In addition, the coefcient of FEMD (2 0.17) is negative and marginally signicant ( p , 0.10, one-tailed) in the PADCA 2 regression. For the REDCA 2 regression, the coefcients for of FPCT (2 0.58) and FSIZE (2 0.17) are negative and marginally signicant ( p , 0.10, one-tailed). All MSIZE are insignicant in negative DCA_PA regressions. Thus, we nd consistent evidence to show that the presence of female director on the audit committee constrains managers earnings management by increasing negative (income-decreasing) discretionary accruals. Table IV presents the results of OLS regression model (2), with positive DCA_PA as the dependent variables. Control variables BIG4, MB, and LGTN are signicant ( p , 0.10, two-tailed). The coefcients for all gender variables are insignicant at conventional levels. There is no evidence to support that male or female director on the audit committee increases or decreases positive discretionary accruals. 4.2 Sensitivity tests To examine if our main regression results are robust, we conducted the following sensitivity analyses. First, we exclude clients of Non-Big 4 CPA rms since Big 4 auditors are expected to have better audit quality, which in turns affects the rms earnings management. The empirical results are similar to our main results. Second, we exclude nancial rms (SIC 6000-6999) because of their distinct industrial characteristics. However, we nd that the empirical result remains consistent with our main results.

Audit committee gender differences 489

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n 299 23.33% 20.44% 0.75 28.48% 20.44% 7.78% 0.96 1.00 0.19 1.00 1.00 1.00 21.93% 22.00% 0.07 25.00% 22.00% 1.00% 20.23 20.30 0.63 19.80 20.30 20.70 0.21 0.00 0.41 0.00 0.00 0.00 0.30 0.00 0.46 0.00 0.00 1.00 2.58 2.05 1.84 1.58 2.05 2.94 0.51 0.51 0.25 0.32 0.51 0.70 0.14 0.00 0.35 0.00 0.00 0.00 0.16 0.00 0.36 0.00 0.00 0.00

Mean Median SD Percentiles 25 50 75

Notes: Where: DCA_PA discretionary accruals, measured by PADCA or REDCA; BIG4 1 if the sample rm is audited by Big 4 rms, and 0 otherwise; L1ACCRUAL last years total current accruals (net income before extraordinary items plus depreciation and amortization minus operating cash ows) scaled by beginning of year total assets; LogMV natural log of market value of rms as of December 31, 2003; MRGR 1 if the sample rm has engaged in a merger or acquisition, and 0 otherwise; FINCG 1 if the number of common shares outstanding or the long-term debt increased by at least 10 percent, otherwise 0; MB ratio of market value to book value as of year-end; LVRG total assets less book value divided by total assets; LTGN 1 if a rm is in any of the following sectors: pharmaceuticals (SIC codes 2833-2836), computers (3570-3577), electronics (3600-3674), retail; (5200-5961), software (7370), otherwise 0; LOSS 1 if a rm had a loss for 2003, otherwise 0; CFO cash ow from operations scaled by beginning of year total assets; GENDER-VARS: FPCT percentage of female members to total number of members, 0 otherwise; FEMD 1 if audit committee has a female director, 0 otherwise; FSIZE number of female audit committee members; MSIZE number of male audit committee members

Table I. Descriptive statistics

REDCA BIG4 L1ACCRUAL LogMV MRGR FINCG MB LVRG LTGN LOSS CFO FEMD FPCT FSIZE MSIZE 0.09 0.08 0.08 0.04 0.08 0.13 0.20 0.00 0.40 0.00 0.00 0.00 0.06 0.00 0.12 0.00 0.00 0.00 0.22 0.00 0.47 0.00 0.00 0.00 3.39 3.00 0.85 3.00 3.00 4.00

PADCA

22.91% 20.50% 0.65 28.82% 20.50% 6.93%

FEMD PADCA 2 REDCA 2 PADCA REDCA 0 1 Total 0 1 Total 0 1 Total 0 1 Total

n 132 28 160 130 27 157 108 31 139 110 32 142

Mean (%) 2 26.70 2 44.31 2 33.25 2 43.71 28.84 25.23 32.96 27.56

t-test 2 1.48 * 2 0.74

Audit committee gender differences 491

2 0.30 2 0.40 Table II. Variable analysis female vs male

Notes: Signicant at: *p , 0.10 (one-tailed); the variables are the same as dened in Table I

4.3 Additional tests As discussed earlier, gender studies suggest that women are more conservative and risk averse than men. When the female director perceives that the risk of earnings management is increasing, she may call for meetings in order to reduce such information risk. As discussed earlier in this paper, female audit committee members exhibit better communication abilities and meeting preparations (Stewart and Munro, 2007). Hence, we further investigate the association between gender variables and audit committee meeting frequency, by using the following model: Meeting frequency model. ACMEET n0 n1 BIG4 n2 MB n3 LVRG n4 LTGN n5 LOSS n6 PADCA n7 GENDER 2 VARS 1 where: ACMEET number of audit committee meetings. The other variables are the same as dened in model (2). Table V presents the number of female, male audit committee members and meeting frequency by one way ANOVA analysis. As expected, we nd that audit committee meeting frequency increases while the number of female members increases ( p , 0.01, two-tailed). Further, Table VI presents the OLS regression analysis for gender variables and meeting frequency. The coefcients for FPCT (3.49), FEMD (1.18) and FSIZE (1.22) are all positive and signicant ( p , 0.01, two-tailed) in model (3). MSIZE is insignicant. The evidence supports that the presence of female director on the audit committee is positively associated with audit committee meeting frequency. 5. Conclusion Regulators, Shareholders, Securities and Exchange Commission (SEC) and Blue Ribbon Commission have emphasized the need for an efcient audit committee on many occasions due to growing concerns related to earnings management. Moreover, previous research has used various characteristics of audit committee to show good 3

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Dependent variables Variable PADCA 2 Coeff. t-stat. 21.93 20.46 21.48 0.11 20.03 20.02 20.09 0.16 20.43 0.00 0.35 20.17 9 2.48 * * * 160 20.20 21.9 * 20.05 20.9 10 *** 2.40 160 21.4 * * * * 21.2 21.5 22.3 * * 1.3 20.2 20.2 23.2 * * * 0.8 22.9 * * * 0.0 0.6 21.70 20.45 21.46 0.11 20.04 20.03 20.10 0.22 20.43 20.01 0.39 21.0 21.5 22.3 * * 1.2 20.3 20.3 23.3 * * * 1.0 22.9 * * * 20.1 0.6 21.37 20.27 21.58 0.07 0.02 20.02 20.15 0.42 20.09 0.09 0.22 20.58 20.8 20.8 22.0 * * 0.8 0.1 20.2 24.6 * * * 1.7 * 20.6 0.6 0.3 21.4 * * * * 21.57 20.29 21.61 0.08 0.02 20.02 20.15 0.42 20.10 0.09 0.19 2 0.15 12 2.96 * * * 157 12 2.90 * * * 157 PADCA 2 Coeff. t-stat. REDCA 2 Coeff. t-stat. 21.0 21.4 22.3 * * 1.1 20.2 20.2 23.2 * * * 0.8 22.9 * * * 20.1 0.6 21.7 *

(Constant) BIG4 L1ACCRUAL LnMVE MERGER FINCG MB LVRG LGTN LOSS CFO FPCT FEMD FSIZE MSIZE Adj. R 2 (%) F n

Notes: Signicant at: *p , 0.10, * *p , 0.05, * * *p , 0.01 (two-tailed) and * * * *p , 0.10 (one-tailed), respectively; the variables are the same as dened in Table I

Table III. OLS regression analysis female variables and negative discretionary accruals
REDCA 2 Coeff. t-stat. 20.9 20.8 22.1 * * 0.9 0.2 20.1 24.6 * * * 1.7 * 20.6 0.6 0.3 21.1 REDCA 2 Coeff. t-stat. 21.34 20.28 21.59 0.07 0.02 20.02 20.15 0.44 20.09 0.08 0.21 20.7 20.8 22.0 * * 0.8 0.1 20.2 24.6 * * * 1.7 * 20.6 0.5 0.3 20.17 21.3 * * * * 20.02 20.2 12 *** 2.71 157

PADCA 2 Coeff. t-stat.

21.67 20.44 21.46 0.10 20.02 20.02 20.09 0.17 20.42 20.01 0.37 20.64

10 2.58 * * * 160

Dependent variables Variable PADCA Coeff. t-stat. 2.89 20.70 0.17 20.10 20.02 0.11 0.09 20.27 0.28 0.07 20.59 0.08 20 4.07 * * * 139 0.03 0.3 20.02 20.3 19 3.67 * * * 139 26 5.61 * * * 142 0.7 0.04 26 5.60 * * * 142 0.3 1.9 * * 23.1 * * * 0.2 21.3 20.2 1.0 3.6 * * * 21.2 2.1 * * 0.4 20.7 2.87 20.70 0.17 20.10 20.03 0.11 0.09 20.24 0.28 0.07 20.56 2.91 20.71 1.08 20.11 20.11 0.13 0.11 20.18 0.58 20.05 20.84 0.04 1.7 22.9 * * * 1.5 21.2 20.8 1.1 4.1 * * * 20.8 3.7 * * * 20.3 20.9 0.1 2.92 2 0.71 1.07 2 0.11 2 0.11 0.13 0.11 2 0.18 0.58 2 0.05 2 0.85 1.7 22.9 * * * 1.5 21.2 20.7 1.1 4.1 * * * 20.8 3.7 * * * 20.3 20.9 1.8 * * 23.1 * * * 0.2 21.3 20.2 0.9 3.6 * * * 21.0 2.1 * * 0.4 20.7 2.83 2 0.71 1.07 2 0.10 2 0.11 0.13 0.11 2 0.20 0.58 2 0.04 2 0.86 PADCA Coeff. t-stat. REDCA Coeff. t-stat. REDCA Coeff. t-stat. 1.8 * * 23.1 * * * 0.2 21.3 20.2 0.9 3.6 * * * 21.1 2.1 * * 0.5 20.7 0.4

PADCA Coeff. t-stat.

REDCA Coeff. t-stat. 1.6 22.9 * * * 1.5 21.2 20.8 1.1 4.1 * * * 20.8 3.7 * * * 20.2 20.9 0.1 0.2

(Constant) BIG4 L1ACCRUAL LnMVE MERGER FINCG MB LVRG LGTN LOSS CFO FPCT FEMD FSIZE MSIZE Adj. R 2 (%) F n

2.81 20.70 0.18 20.10 20.03 0.11 0.09 20.27 0.28 0.07 20.58 0.14

19 4.03 * * * 139

0.01 0.01 26 5.09 * * * 142

Notes: Signicant at: *p , 0.10, * *p , 0.05, * * *p , 0.01 (two-tailed) and * * * *p , 0.10 (one-tailed), respectively; the variables are the same as dened in Table I

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Table IV. OLS regression analysis female variables and positive discretionary accruals

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FSIZE 0 1 2 Total MSIZE 1 2 3 4 5 6 Total

n 240 52 7 299 2 22 168 81 17 9 299

Mean 7.03 8.21 8.71 7.27 6.50 7.77 7.14 7.05 8.18 9.00 7.27

F 4.72 *

494

1.35

Table V. Number of female/male members and meeting frequency: one way ANOVA analysis

Notes: Signicant at: *p , 0.01 (two-tailed); the variables are the same as dened in Table I

Variable (Constant) BIG4 MB LVRG LGTN LOSS PADCA FPCT FEMD FSIZE MSIZE Adj. R 2 (%) F n

Coeff. 5.00 0.97 0.01 2.12 0.66 20.34 0.45 3.49

Dependent variable: ACMEET t-stat. Coeff. t-stat. 5.1 * * * 1.1 0.2 3.1 * * * 1.3 2 0.8 1.8 * 2.7 * * 4.97 0.99 0.02 2.02 0.66 20.35 0.43 1.18 5.0 * * * 1.1 0.3 3.0 * * * 1.3 2 0.8 1.7 * 2.9 * * *

Coeff. 3.94 1.00 0.03 1.70 0.68 20.30 0.47 1.22 0.33 6 3.15 * * 299

t-stat. 3.3 * * * 1.1 0.3 2.4 * * 1.4 2 0.7 1.8 * 3.32 * * * 1.55

Table VI. OLS regression analysis PADCA, female variables and meetings

4 2.97 * * 299

5 3.18 * * * 299

Notes: Signicant at: *p , 0.10, * *p , 0.05, and * * *p , 0.01 (two-tailed), respectively; the other variables are the same as dened in Table I; ACMEET number of audit committee meetings

outcomes related to earnings management. Although many studies have used the audit committee characteristics yet, most of the previous studies were focused more on independence, meeting frequency, size and nancial expertise rather than the facet of gender. Moreover, there is also a growing stream of research on the positive outcomes of having a female director on the board. In this study, we investigate whether the gender diversity of audit committees has a signicant impact on the rms earnings management using rm data from the S&P Small Cap 600. Our results provide evidence to show that the gender diversity increases the external governance function of audit committee, thereby leading to reduced earnings management. We nd consistent evidence to show that the presence of female director on

the audit committee constrains earnings management by increasing negative (income-decreasing) discretionary accruals. This nding is consistent with gender theory and prior literature which shows that women are more conservative and unbiased than men in making ethical decisions further, this study also acts as a strong inuencing force against the existence of the glass ceiling concept. In addition, we nd that the presence of female director on the audit committee is positively associated with audit committee meeting frequency. Overall, female directors are found to have a signicant inuence on the quality of nancial reporting and also contribute to the efcacy of corporate governance considerably. Our study is different from the previous studies; prior studies only examine the inuence of audit committee characteristics, not female presence, on earnings management. To our knowledge, there are limited evidence on audit committee female presence other than auditor independence, nancial expertise and meeting frequency. Since regulators, legislators and policy makers are very concerned with the issue of earnings management that needs attention in order to ensure public condence in the reporting of accounting information. One implication of this nding is to recommend the appointment of more female members on the board since the presence of female member/s have shown positive outcomes, help in constraining earnings management and also acts as an inuencing factor in overcoming the glass ceiling effect Another implication is that the appointment of female members on the audit committee will enhance the condence of the public regarding accounting information that can further enhance the corporate governance mechanism of rms. Our study is subject to the following limitations. First, our sample includes only those companies in the S&P Small Cap 600. However, we cannot investigate all US rms because of data availability. The generalization of our results is limited and should be explained with caution. Second, we employ discretionary accruals models that have been used in previous study, and such models are usually restricted to measurement errors. Third, we examine only one year in this paper. It would be an interesting question to evaluate if there is any change in the presence of female director on the audit committee leading to good outcomes on earnings managements, as we move from the strong focus on effective audit committees immediately after the enactment of SOX due to the various management decisions related nancial scandals leading to concerns on earnings management. Our ndings also suggest potential avenues for further gender and management decision research. For example, since managers nancial reporting decision may be affected by the characteristics of audit committee, are female CEO/CFO more likely to be inuenced by the presence of female audit committee members? Future studies can also investigate the impact of audit committee gender diversity on the rms future earnings management. Also, future research can also examine the impact of female on the board of directors and audit committee in different countries since audit committee and board diversity has been gaining attention across the globe and other measures of accounting information risk.
Notes 1. Accounting conservatism principle is that when two reasonable alternative values are indicated, the manager/accountant will choose the lower asset/revenue and the higher liability/expense.

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2. We use the same variables as ALM (2003) except that institutional holdings data are unavailable and hence not considered. We refer interested readers to ALM (2003) for the rationale for including the variables in the model. 3. We winsorize continuous variables at the rst and 99th percentiles to eliminate potential effects of extreme values on the regression results.

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(3) Discretionary (abnormal) accruals. An accounting proxy that measures the degree of a managers earnings management behavior. (4) Positive (negative) discretionary accruals. Income-increasing (income-decreasing) discretionary accruals. Firms are considered to be more aggressive (conservative) if reporting income-increasing (income-decreasing) discretionary accruals. (5) Sarbanes-Oxley Act of 2002 (SOX). Public Company Accounting Reform and Investor Protection Act (SOX Act) was established on July 30, 2002 to restore condence in corporate governance and to prevent fraud. This law required new procedures and requirements for public companies and their independent auditors in order to enhance the quality and accuracy of nancial reporting. (6) SEC 404. SOX SEC 404 mandates that adequate internal controls and procedures for nancial reporting are to be established by the management of all public companies. They also need to provide effective documentation for the effectiveness of those controls. It also requires that the companys independent auditors to attest on the managements assessment of those controls. About the authors Sheela Thiruvadi is an Assistant Professor of Accounting at the Earl G. Graves School of Business and Management in Morgan State University. She holds a PhD in Accounting (Florida International University, USA) and her research interest covers areas in auditing, gender, outsourcing, information systems, earnings management and corporate governance. She has published papers in Accounting Horizons, International Journal of Public Information Systems and Information Technology Journal. Currently, she serves as a reviewer in the Afro-Asian Journal of Finance and Accounting (AAJFA). Sheela Thiruvadi is the corresponding author and can be contacted at: sheela.thiruvadi@morgan.edu Hua-Wei Huang is an Accounting Assistant Professor and Research Coordinator (School of Business) in SUNY College at Old Westbury. I hold a PhD in Accounting (Florida International University, USA). I am also a Certied Public Accountant in Taiwan, Republic of China. My research interests span auditing, earnings management and corporate governance. Currently, I serve as a reviewer in Journal of Finance and Economic Practice. I have published several papers in Auditing: A Journal of Practice and Theory, Managerial Auditing Journal, Journal of Forensic & Investigative Accounting, The Journal of 21st Century Accounting, International Journal of Public Information System, The Business Review and Issues in Information Systems.

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