Reputation of external directors, auditors and earnings management

Abstract

Copyright © 2020 Inderscience Enterprises Ltd. External directors and auditors are crucial elements in determining corporate governance. The efficiency of monitoring and controlling mechanisms depends upon the effectiveness of external directors and auditors. However, the efficiency of each external director and auditor is varies. In this research, the key question is whether the reputation of external directors and auditors reflects upon the potentiality and the perceptions of monitoring and controlling in a consistent manner or not. If the reputation of external directors and auditors reflects the potentiality of monitoring, this may mitigate earnings management. Nonetheless, if reputation represents the busyness of external directors and, auditors, the results occurring would be inconsistent with the aforementioned hypothesis. In this respect, reputation was measured by the number of companies in which each external director and auditor had been appointed. According to the results, it was disclosed that the more the reputation of an external director or auditor leads to increasing of burden on external directors and auditors. As a result, this affects efficiency in controlling and monitoring the operating processes of the management.