Journal of Accounting, Management, and Economics
Vol. 19, No. 1, 2017, pp.1-10
Published by Faculty of Economics and Business
Universitas Jenderal Soedirman
Published online on January 9, 2017 in http://jos.unsoed.ac.id/index.php/jame
Correspondence to :
1Hebei University, China. E-mail: fatimazakiya@yahoo.com
2Hebei University, China. E-mail: liu.xia@126.com
Received: November 4, 2016
Revised: November 25, 2016
Accepted: December 16, 2016
INTRODUCTION
In doing a business a company needs capital
to keep the business operating. One of the
method to get this capital is investing by
listed their stock in capital market. After being
listed in capital market and raise their capital
in there, Company’s management has a
responsibility to the capital providers to
provide a financial report. Financial statement
as primary source of independent verified
information to capital providers about the
performance of management, firm’s operation
and financial position, has an important role
for capital providers in making investment
decision. Since shareholders, creditors, and
other financial statements users rely on the
information reported in the financial
statement to make a decision, therefore the
credibility and the reliability of information
reported is crucial.
To evaluate their investment, capital
providers focus on earnings information
reported by management. Earnings must
have a good quality as one of important
indicator of company’s financial health and
the financial information that mostly use by
investor. However the practice of earnings
management can reduce the quality of
earnings reported. Earnings management
practice resulting in the earnings information
which does not portrays the true underlying
performance of business. Since they made a
decision based on the information reported in
financial statement which does not truly
reflected the real financial condition of
company, this kind of practice can mislead
capital providers and other financial
statement users in making decision.
To maintain the quality of earnings reported
in financial statement and protect
shareholders from managerial opportunistic
and reporting behavior, assurance from
independent parties and public accountant
are needed. The assurance from auditor can
improve the quality of financial reported by
management (Arens and Elder, 2010). The
The Influence of Audit Tenure and Audit Committee
on Earnings Quality
(Empirical Study on Chinese A-Shares Manufacture
Companies Listed in Shenzhen Stock Exchange)
FATIMA ZAKIYA RAZANI, LIU XIA
Hebei University, China
Abstract
One of the Auditor and Audit committee role is to ensure the quality of corporate financial
reporting process. This study aims to test the effect of the length of auditor tenure and audit
committee on earning quality measured by the absolute value of discretionary accruals. A
sample of 465 companies has been selected and data covering the period 2009-2014 has
been collected from these firms, where 2325 observation were used in this analysis. The
data collected form CSMAR and analyzed using GLS regression analysis.
This study found that the short audit tenure on Chinese listed company in Shenzhen Stock
Exchange has a significance negative influence on earning quality, meanwhile this study
found that audit committee which is measure by the size of the committee does not has a
significance influence on earning quality. This study suggests that auditor should have a
longer tenure to gain adequate knowledge of client’s business. Moreover companies should
strengthen the role of their audit committee in monitoring financial reporting process by
improved their activity and financial knowledge of the member.
Keywords Auditor tenure; Audit Committee; Earning Quality; Discretionary Accruals; China
mailto:fatimazakiya@yahoo.com
Journal of Accounting, Management, and Economics, Vol. 19, No. 1, 2017, pp.1-10
2
audit process doing by independent auditors
designed to detemine whether the figures
reported in financial statement present the
firm’s operating results and financial postion
in fair manner.
In giving a good assurance to the capital
providers, auditor must have a good
qualification. One of the qualification is the
knowledge of client bussiness industry and
accounting system. This kind of qualification
can be obtain from the time auditor working
with the same client to have a better
understanding about the client bussiness.
However, if auditor has been audit the same
client for a long time, it can impairs the
independece and objectivity of auditor and
lead to the development of economic and
social bonds between the auditor and client
due to the continuous involvement. One of
the effect of long tenure is the auditors more
likely to compromise on their client
accounting and reporting choice in order to
retain the client. Meanwhile short time of
audit tenure also resulting in higher risk of
audit failures. New auditor with insufficient
client-specific knowledge will have to rely
more heavily on the estimation and
representation made by client firm (Gul et al.,
2009). Gul et al. (2009) also suggest that
auditors with short tenure maybe more lax in
the early years of auditor-client relationship
so that they can retain their job long enough
to recoup the initial losses, resulting in lower
quality of earnings reported. Until now, there
have been some argue about the effect of
auditor tenure on earnings quality whether it
will enhance the quality of earnings reported
or vice versa.
Another way to enhance the quality of
earnings reported is by the establishment of
audit committe. Audit committe is one of
corporate governance tools emphasis on
audit quality and oversight financial reporting.
audit committee make recommendations to
the board on the selection of external
auditors, liaison between senior financial
managaers and external auditor on issues
such as the financial statements, audit
process and internal control as well as
oversee internal auditors and the external
auditors to ensure that they act on the best
interest of shareholders.
The External auditors and audit committee
perform to ascertain the validity and reliability
of corporate financial statements. However,
regulators have questioned the effectiveness
of audit committees and auditors in ensuring
financial statement that are fairly stated and
minus earnings management practice.
Dechow et al. (2010) mention there are six
categories of determinants of earning quality:
firm charcateristic, financial reporting
practices, governance and controls, auditors,
equity market incentives and external factors
(e.g political process, tax regulation or capital
requirements. This study will examine the
effect from auditor factor and governance
factor on the earning quality.
As an emerging market, Chinese stock
market is in a high growth stage.
Consequently investor in Chinese stock
market must rely on reliable and consistent
financial information to identify good
companies and their investment evaluation in
the market. The majority of investor in
Chinese stock market are individual investor
who must use the publicly available
information disclosed in financial report to
evaluate their investment (Sutthisit et al.,
2012), Therefore to protect this minority
shareholders against managerial
opportunistic from reported unreal condition
in financial statement, independent and
objective assurance from auditor and
monitoring from audit committee is important.
After the formation of audit committee, it
won’t gives a guarantee that the audit
committee will be effective in doing their roles
especially for monitoring the financial
reporting process and gives assurance that
information reported in financial statement is
free from earning management practice. This
study will examine the effect of audit
committe measure by the number of audit
committee member. The unclear statement
about the appropriate length of time of auditor
to acquire an acceptable and reasonable
level of client knowledge and gain the
necessary acquintance with the client’s
business and industry which improved the
earning quality reported, encourage another
research to be done.
Based on the description aboved, thereby
the main research problems are as follows:
1. Does the length of Auditor-Client
relationship has a significant
influence on earnings quality in
chinese listed company?
2. Does the audit committe has a
significant influence on earnings
quality in chinese listed company?
Journal of Accounting, Management, and Economics, Vol. 19, No. 1, 2017, pp.1-10
3
LITERATURE REVIEW AND
HYPOTHESES
Audit Tenure and Earnings Quality
Some studies argue about the effect of
audit tenure on earnings quality. Previous
audit tenure studies have predicted that audit
tenure affect the financial reporting quality
(Chung and Kallapur,2003; Gates el al.,
2007) These studies shows that early audit
tenure decrease earnings quality. These
results due to the lack of client-specific
knowledge and/or lack of independence due
to the external auditor’s incentive to maintain
new client relationships (Meyers et al.,.2003;
Fairchild, 2008 and Davis et al., 2009). In
addition other studies provide evidence of a
positive link between audit tenure and
earnings quality (Carcello and Nagy 2004;
Ghosh and Moon, 2005), These findings are
consistent with the theory that length of
auditor-client relationship has a positive
relation on earning quality since the length of
tenure is used to achieve a specific
knowledge of characteristic of the company
resulting in higher quality audits.
After specific number of years, excessive
familiarity can result and serve as a deterrent
to the quality of financial reports. Long tenure
is assumed lead to less objectivity in the
auditor’s behavior, where a “learned
confidence” in the client is developed (Hoyle,
1987 on Johnson et al., 2002). According to
Johnson et al., (2002) who divided tenure into
three categories said the learning effect will
diminish when the engagement exceeds
eight years. They document higher
unexpected accruals when auditor tenure is
short than when its medium. Moreover, they
find no evidence that a longer audit tenure is
associated with lower unexpected accruals
compared to the medium auditor-client
relationship. Upon approaching the medium
tenure category and extending beyond
towards the long tenure, the independence of
the auditor is jeopardized as a result of the
auditor’s excessive familiarity with client and
its industry. The auditor is no longer
motivated to innovate or diversify in the audit
procedures at this stage of engagement.
Davis et al., (2009) inferred that
management gains additional reporting
flexibility with the progress in auditor tenure.
This was evident in the direct positive effect
the auditor tenure had on discretionary
accruals. in example, Discretionary accruals
increase with the progress in the audit tenure.
Similiarly Chung and Kallapur (2003) found
that the audit tenure was inversely related to
abnormal accruals.
Research have also used estimated
discretionary accruals as proxy for audit
quality (Dechow and Dicheve, 2002; and
Krishman, 2003) on (Adeniyi and Mieseigha,
2013). Their studies assume that higher
estimated discretionary accruals reflect lower
earnings quality and thus lower audit quality.
Absolute discretionary accruals were found to
decrease significantly through the passage of
the audit firm tenure (Chen et al., 2008). The
researchers findings are consistent with the
argument that audit firm rotation might have
adverse effect on the quality of earnings, and
accordingly the accruals reported (Al
Thuneibat et al., 2011).
From the effect of how investor perceived
earning quality. Wiemann (2015) using
earning response coefficient in proxy earning
quality, found that investor perceived the
lower earning quality in the early years and
later years of audit tenure, they found that the
highest perceived of earnings quality is on
the 8.5 year. This study is not far from
Johnson et al. (2002) who found that the
optimal earning quality is reach on medium
tenure of auditor.
Myers et al., (2003) examine the relation
between auditor and earnings quality using
both the signed and absolute value of
discretionary accruals as proxies for earnings
quality. Their results suggest that higher
earnings quality is associated with longer
auditor tenure, which they interpret as
evidence that longer auditor tenure enables
auditors to constraints management
opportunistic behavior.
From several researches above this study
draw a hypotheses that a short auditor tenure
will reduce the chance of auditor to obtain
better knowledge of client’s business and
make them lack of capability to detect
earnings misstatement and earning
management practice in the client’s company
resulting in lower earning quality reported by
the company.
H1: Short audit tenure has a significant
negative influence on earnings quality.
Audit Committee and Earnings Quality
Baxter and Cotter (2009) found that the
formation of audit committee is associated
with an increase in earnings quality. They
found that the discretionary accruals
decrease significantly in the following years
of audit committee formation. The decreasing
in the discretionary accruals indiciate that the
Journal of Accounting, Management, and Economics, Vol. 19, No. 1, 2017, pp.1-10
4
formation of audit committee is the effective
way to reduce earnings management, since
earnings management has an inverse
measure with earnings quality, therefore the
lower number of earnings management
indicate the higher earnings quality reported.
Lin et al., (2009) study the effect of audit
characteristic such as independent directors,
financial expertise and size on abnormal
accruals in Hongkong listed chinese
company. They found that ownership
concentration and present of government
officials in independent directors is important
determinants of negative association
between audit committee characteristic and
earnings management. Bala and Gugong
(2015) found that Audit committee size and
financial expertise has an inverse relationship
on earnings management.
Berdard et al. (2004) and Jaggi et al.
(2009) found a significantly negative
relationship between earnings management
and the existence of audit committee. Lin and
Hwang (2010) using meta analysis shows
that there is no significant relationship
between the existence of an audit committee
and earnings management based on either
unweighted or weigthed Stouffer combined
tests.
From several research above the study
draw a hypotheses that the size of audit
committee has a positive influence on
earning quality, because the more member
consist in the committee the more knowledge
has by the committee to detect earning
management practice by the management
and it can make the monitoring activities over
financial reporting process effective.
Thereby the hypothesis as a following :
H2: Audit committee size has a significant
positive influence on Earnings Quality
Earnings Management and Earnings
Quality
Earnings quality and earnings management
are two related concepts. Earning quality is
equivalent to financial reporting quality and is
a function of both the management and
auditors. The management is responsible for
the (non) financial information that they
provide to the auditors, but both management
and auditor are responsible for the (non)
financial information provided to outsiders.
Dechow et al.,(2010) define high quality
earnings provide more information about the
features of a firm’s financial performance that
are relevant to a specific decision made by
decision-maker. Because this definition alone
is meaningless can not gives a clear
understanding of high earning quality,
therefore they add three features. these
feature are (1) earning quality is defined only
in the context of a specific decision model, (2)
the quality of earnings depends on wheter it
is informative about firm’s financial
performance, (3) earnings quality is jointly
determined by the relevance of the
underlying financial performance to the
decision and by the ability of the accounting
system to measure performance.
Healy and Wahlen (1999) defined
earnings management as the practice that
occurs when managers use judgment in
financial reporting and in structuring
transaction to alter finanial reports to either
mislead some stakeholders about the
underlying economic performance of the
company or to influence contractual
outcomes that depend on reported numbers.
Ball and Shivakumar (2008) conclude that
low quality earnings are earnings which are
managed upwardly. However, low quality
earnings could also be earnings that are
managed downwardly to postpone earnings
to the next year to receive bonuses (Healy,
1985). Regardless the direction of earning
management, once firms engage in earnings
managemenr practice their earning quality
will be lower than when they do not engage in
earnings management. Earning management
and Earning quality concept can be related
and generalized each other concept.
METHODS
The Study’s Variables
Independent Variables
The independent variables in this study are
audit tenure and audit committee. The main
research is to see the effect of the length of
auditor-client relationship on earnings quality
(Johnson et al., 2002). Audit tenure is
measured by the number of years auditor
audit the client, because auditor who audits
the client usually in a partner form and
sometimes one of the partner changes in a
certain year, therefore this study only use one
partner who has longer experience with the
firm client. If the firm switch to a new auditors
without any partner from the last partner then
the counting start from the beginning.
Audit committee is measure by the size of
audit committee member. The bigger size of
the audit committee expected results in better
monitoring practice and higher earning quality
because the committee will have much more
knowledge and more ability to detect and
Journal of Accounting, Management, and Economics, Vol. 19, No. 1, 2017, pp.1-10
5
monitoring the financial reporting process,
results in less earning management practice
and higher earning quality.
Dependent Variable
The dependent variable in this study is
earnings quality. Because earnings quality is
unobservable, proxy is used to determined
the earning quality. Discretionary accrual
model is adopted to proxy earnings quality.
Because discretionary accruals are accruals
that arise through the discretion of
management, thus makes discretionary
accruals a good indirect measure of earning
quality.
The Jones (1991) and modified Jones
(Dechow et al., 1995) is most widely used
model to measure earnings management
through discretionary accruals. However,
Kothari et al., (2005) argue that measure
earnings management without controlling for
firm performance will produce
misspecification in the earnings management
model.
This study will used the modified jones
model and controlled firms performance by
lagged return on asset (Aerts, 2012). The
controlled has been put a place because
performance-matched discretionary accruals
measure enhance the reliability of the
inferences from earnings management
research. (Kothari et al., 2005).
Follows are the equation to obtain the
discretionary accruals :
))(
)
1
(
14
1
3
1
2
1
1
(
ROAa
ASSET
PPE
a
ASSET
RECSALE
a
ASSET
aTADA
t
t
t
t
tt
t
tt
Where,
Tat : Total accruals in the year t
(Income before extraordinary
income – cash flow
operation)
Asset t-1 : Total asset at end in the
year t-1
∆SALEt : Change in sales in the year
t from year t-1
∆RECt : Change in Accounts
Receivable year t from year
t-1
PPE : Gross property, plant and
equipment at the end in the
year
ROAt-1 : Return on Asset at end of
the year t-1
The coefficient a1, a2, a3, and a4 will be
estimated per year and obtain from OLS
regression.
The absolute value of discretionary
accruals |DA| represent earnings
management because earnings management
can be income-increasing or income-
decreasing accruals. Bedard and
Johnstone(2004); Klein (2002); and Abdul
Rahman and Ali (2006) suggest that absolute
value of abnormal accruals is a good proxy
for the combined effect of be income-
increasing or income-decreasing earnings
management. Thus the high absolute value
of the discretionary accruals indicate low
earnings quality and vice versa.
Control Variables
1) Firm Size
Lobo and Zhou (2006) found that a large
firm has a bigger chance to manage their
earnings because of the business
complexity and larger operation. The
larger the firm the more complex system
information in a company. Thus makes a
difficulty in detect earning manipulation
resulting in a lower earning quality
reported.
2) Leverage
Defond and Jiambalvo (1994) fund that a
company with a high leverage of debt has
an incentive to manage earning upwards
to satisfy the debt covenant.
3) ROE
ROE used as a proxy of profitability.
Listed firms with lower profitability tend to
have a higher chance to manage
earnings, thus increase in ROE expected
to have a negative influence on
discretionary accruals and increase the
earning quality.
4) Loss
Loss reflected losses on firm’s financial
condition which is one of the factor that
encourage management to manage their
earnings. A company experience loss in
their net income has a much bigger
incentive to manager their earnings by
doing a big bath (Kallapur, 2008).
Therefore resulting in higher level of
Journal of Accounting, Management, and Economics, Vol. 19, No. 1, 2017, pp.1-10
6
earning management and lower earning
quality.
Population and Sample
The population in this research is Chinese A
shared manufacture companies listed in
Shenzhen Stock Exchange during the period
2010-2014 and the annual report of the
companies can be accessed in China
Securities Market and Accounting Research
Database (GTA/CSMAR).
For the sample, this study use purposive
sampling method. Criteria for selecting
samples as follows:
a. The company should be listed on the
Shenzhen stock exchange on the period
2009-2014
b. The company that used in this study are
specified into A share types, and a
manufacture company.
c. The company used in this study must
have complete of information required
over period 2009 -2014.
Research Model
Regression Model
The study attempt to find the relationship of
audit tenure and audit committee on earnings
quality. In addition following previous
research client firm size, leverage, ROE and
loss included as control variable.
LossROELevFSize
ACommitteATenureDA
6543
21
||
Where :
|DA| : Absolute Value of
Discretionary Accruals
ATenure : Audit tenure measure by the
number of years auditor audit the client
Acommitte : Audit Committee, measured
based on the total number of audit committee
members presented at the end of fiscal year
Fsize : Firm size, measure by
natural log of total assets
Lev : Leverage measure by the
ratio of total liablities to total assets
ROE : Measured by Net profit
divided average shareholder’s equity
Loss : Measured by dummy
variable, 1 if a company experience a loss,
and 0 otherwise.
Data analysis methodology
This study used panel data therefore three
tested will be used in analyzing the data. The
first one is descriptive statistic to explain the
variable of this study. The second is
estimation method test, and the last is
regression analysis. Eviews 9 is used to
analyze the data.
RESULTS AND DISCUSSION
Description of Research Object
The population of this research manufacture
company of A shares listed in shenzhen
stock exchange, the number of population is
1236 companies. In accordance with the
purposive sampling method used in this
study, 465 companies selected as a sample
with 5 years observation within the time
period from 2010 until 2014. Bringing the
total observation of this study as many as
2325 observations.
Data Analysis
Descriptive Statistic
Descriptive statistic anlysis described the
variable used in this study by the mean,
median maximum, minimum and standard
deviation number. Results obtain in this study
showed in table 4.1. In this study earning
quality is proxied by the absolute value of
discretionary accruals. The minimum value of
Discretionary accruals in this study is
0.0000293 and the maximum value is
4.199672. The average discretionary
accruals value is 0.09362 and standard
deviation is 0.167022. The audit tenure
variable minimum value is 1 while the
maximum value is 5. The mean of auditor
tenure is 2.1 and the standard deviation is
Audit
Tenure
(X1)
Audit
Committe
(X2)
Earnings
Quality
(Y)
Control
Variables :
FirmSize
(X3)
Leverage
(X4)
ROE (X5)
Loss (X6)
Journal of Accounting, Management, and Economics, Vol. 19, No. 1, 2017, pp.1-10
7
1.0566095, this result indicate the average
auditor audit client in Chinese listed company
are around 2.1 years within 5 years
observation. The audit committee minimum
value is 0 and maximum is 7, the number
zero hows because not all the sample
company use in this study already
established audit committee since 2010, so
some of them still have zero audit committee
size within 2010 until 2014. The average size
of audit committee established by the
Chinese listed company in this study is
2.749677. The standard deviation for audit
committee is 1.520133.
Table 4.1 Descriptive statistic
N Mean Maximum Minimum Std.Dev
DA 2325 0.09362 4.199672 2.93E-05 0.167022
Auditor Tenure 2325 2.101505 5 1 1.0566095
Audit Committee 2325 2.749677 7 0 1.520133
Firm Size 2325 21.67621 25.86123 17.75689 1.167631
Leverage 2325 0.706904 118.291 0.002865 3.058119
ROE 2325 0.091791 25.1686 -5.286353 0.778529
Loss 2325 0.110968 1 0 0.314160
Regression Analysis Model
The estimation method test aims to
determine which model will be use in the
regression analysis.
Selected the Estimation Method
Chow Test
Table 4.2 Chow test
Redundant Fixed Effects Tests
Equation : FEWEIGHTED
Test cross-section fixed effects
Effects Test Statistic d.f. Prob.
Cross-section F 2.226974 (464,1854) 0.0000
This test use to determine whether the
regression model will use fixed effect or
common effect method. If the probability of
Cross-section F is more than 0.05 then
common effect (pooled lesast square) will be
used in this regression model, but if it is less
than 0.05 then the fixed effect method will
be used. Based on the result obtain in this
study, the probability of Cross-section F is
less than 0.05, therefore The fixed effect
method use in this study.
Hausman Specifiction Test
Table 4.3 Hausman test
Correlated Random Effects – Hausman test
Equation : RE
Test cross-section random effects
Test Summary Chi-Sq. Statistic Chi-Sq. d.f Prob.
Cross-section random 73.109405 6 0.0000
To assure that fixed model is the right model
to analyze the regression model in this study,
we use Hausman test to choose whether the
model will use fixed effect or random effect. If
the value of cross section random probability
is more than 0.05 then the random effect
method is choose but if otherwise the fixed
effect method will be used. Based on the
result obtains (Table 4.3) it is show that the
probability value of cross section random is
less than 0.05 therefore the fixed effect
method is much suitable to use in this study
rather than random effect.
Journal of Accounting, Management, and Economics, Vol. 19, No. 1, 2017, pp.1-10
8
From the two test above we can coclude
that the panel data regression in this study
used fixed effect method.
Regression Result
Table 4.5 Regression Result
Variable Coefficient Std. Error t-Statistic Prob.
AUDITOR_TENURE 0.004530 0.001084 4.179729 0.0000
AUDIT_COMMITEE -0.000790 0.000896 -0.882210 0.3778
FIRM_SIZE 0.052889 0.004257 12.42401 0.0000
LEVERAGE 0.010198 0.001055 9.669923 0.0000
ROE 0.012446 0.001801 6.911495 0.0000
LOSS 0.015805 0.003753 4.211397 0.0000
C -1.070259 0.091026 -11.75770 0.0000
Influence of Audit Tenure on Earning
Quality
To test whether the auditor tenure significantly
influence the earning quality, its obtain from P-
value-state. The regression result in table 4.5
show that auditor tenure probability value is
0.0000, with the significant level of 95%. The
auditor p-value-stat in this study is less than
0.05, therefore the auditor tenure has a
significant influence in earning quality.
From coefficient results we can see
whether the auditor tenure has a positive or
negative influence towards earning quality.
The results from Table 4.5 shows that auditor
tenure has a positive coefficient, the positive
coefficient indicate that auditor tenure
positively influence the discretionary accruals,
which means decreasing the earning quality.
Based on descriptive statistic, the average
year of auditor tenure use in this study is 2.7
years, it means the tenure is a short tenure
(Johnson et al., 2002) and we found that the
short auditor tenure has a positive influence
on discretionary accruals, in an inverse has a
negative influence earning quality, So the first
hypotheses is accepted. A short auditor tenure
in Chinese listed company reducing the
earning quality reported. The conclusion can
be draw form this result is a short tenure
(under 3 years) is not enough time for auditor
to obtain the knowledge of client
characteristic, resulting in a lack of ability to
detect misstatement or management practice
in client company. This study support Johnson
et al. (2002) whose found that a short auditor
tenure associated with lower financial
reporting quality and Myers et al. (2003) that a
longer auditor tenure may have an ability to
constraint earning management practice in a
company due to better understanding of
client’s business.
Influence of Audit Committee on Earning
Quality
The p-value-stat in table 4.5 shows that Audit
committee p value is 0.3788, with the
significant level of 95%. This result show that
audit committee which is measured by size
does not significantly influence earning quality.
However, the coefficient is – 0.00079, a small
number and negative coefficient indicates that
audit committee negatively influence the
discretionary accruals means has a positive
influence on earning quality but not significant.
Therefore the Second Hypotheses (H2) is
rejected, audit committee size has a positive
influence but not significant on earning quality.
This means the bigger number of audit
committee member doesn’t guarantee the
effectiveness of committee in monitoring
financial reporting process and higher ability to
detect earning management practice. Maybe
this can be explained by the lack of financial
expertise in the committee or the lack activity
of audit committee, so they only become a
decoration on the company without their
effective roles in prevent earning management
to produce a higher earning quality. This result
support Lin (2011) whose using Chinese listed
company sample found that audit committee
size is not significantly related to earning
management. Lin suggest Chinese regulator
should strengthen the audit committee
function. Xie et al. (2003) using 282 firm
observation in S&P 500 report that audit
committee size is also not significantly related
to discretionary accruals.
CONCLUSION
Conclusion of study
First, this study found that the length of audit
tenure influenced earning quality in Chinese
listed company. The average years of tenure
in Chinese listed company is around 2-3 years
and this study found the engagement of audit
tenure within 1-3 years has a negative
Journal of Accounting, Management, and Economics, Vol. 19, No. 1, 2017, pp.1-10
9
influence on earning quality. This length of
time is not enough for auditor to obtain
adequate knowledge and better understanding
of client’s business thus makes it difficult for
auditor to detect earning misstatement and
earning management in Chinese listed
company, resulting in lower earning quality
reported. Second, this study found that the
size of audit committee does not have a
significant influence on earning quality in
Chinese listed company. This study suggests
strengthening the role of audit committee in
monitoring financial reporting process
especially in the activity and financial
knowledge of audit member. Even if there is
lot of audit committee member does not
guarantee they provide better monitoring to
prevent earning management, if the size is big
but they have a less meeting and does not
have an adequate member with financial
knowledge it might be difficult to detect the
earning management and resulting in lower
quality of earning reported.
Recommendation for further research
a. Further research can use the bigger data
than this study, such as use all industry
or add another company from other
china’s stock exchange to draw a more
larger conclusion of the effect of audit
tenure and audit committe in china.
b. Further research can extend the time of
auditor tenure, to see the effect of long
tenure in Chinese listed company.
Further research can use another
characteristic of audit committe, such as the
financial expertise and audit committe meeting
number to see if the audit committe practice in
china is effective and have a significant
influence in reducing earnings management
practice and has a significance influence in
enhancing earnings quality.
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