کمیته حسابرسی و مدیریت سود – شواهد از سیستم هیئت مدیره دو جانبه آلمان Audit Committees and Earnings Management – Evidence from the German Two-Tier Board System

1 Introduction The aim of this paper is to investigate the association between audit committees and their characteristics and earnings management in the German two-tier board system with voluntary audit committee establishment. Audit committees are charged with monitoring the financial reporting process and constraining opportunistic earnings management has been widely mentioned as one of the major benefits of firms that have established effective audit committees (e. g., Klein 2002a; Xie et al. 2003). In contrast to two-tier board systems, audit committees already have a long tradition in one-tier board systems and play a crucial role by separating the management and monitoring duties of the board of directors. In two-tier board systems, responsibilities are already split between management board and supervisory board, and audit committees act as a subgroup of the supervisory board. Their justification stems from national legislator concerns about the supervisory boards’ monitoring strength, an issue which arose after the accountings scandals around the year 2000. Therefore, improving the supervisory board’s monitoring process with regard to financial reporting quality (which includes the reduction of opportunistic earnings management), is considered as major responsibility of audit committees in two-tier board systems, which is also expressed by the German legislator (Bundestag-Drucksache 14/7515; paragraph 107 (3) 2 AktG). A survey study by Köhler (2005) of supervisory board chairpersons indicates that audit committees are indeed able to increase the monitoring effectiveness of supervisory boards of German firms. In the U.S., as a predominant representative of the one-tier board system, audit committees are mandatory for all listed firms (Securities and Exchange Commission, Exchange Act Rule 10A-3). In contrast, in two-tier board systems and especially in Germany, legislators adopt an approach with a voluntary establishment of audit committees. The voluntary approach for EU member states is offered by Directive 2006/43/EG, Art. 41 (1), requiring audit committees of public interest entities with the option to usurp audit committee tasks to a supervisory board. Accordingly, the decision to establish audit committees is intentionally made by firms. In Germany, the voluntary approach is flanked by a “comply or explain” (why they did not form a committee) approach for listed firms (German Corporate Governance Code, GCGC Sec. 5.3.2; paragraph 107 (3) 2 and, 161 (1) AktG). There are both arguments for and against a voluntary approach. A mandatory approach yields better compliance and produces consistent standards among firms. The choice of establishing an audit committee under the voluntary approach is based on rational decisions made by firms, which might be better able individually to evaluate the benefits and costs arising (Anand 2005). Hence, differences in audit committee effectiveness might be observed, depending on whether audit committees are only established for legitimacy reasons in a mandatory setting or whether firms voluntarily establish effective audit committees.