FINANCIAL EXPERTISE IN AUDIT COMMITTEES: A GOVERNANCE APPROACH TO LIMITING EARNINGS MANIPULATION

Abstract

This study explores how audit committee financial expertise and corporate governance mechanisms influence earnings management practices. Earnings management occurs when company management deliberately manipulates financial reporting to present a favorable image of performance, often misleading stakeholders. Using discretionary accruals as the primary measure, the research applies established models such as Jones (1991), Dechow et al. (1995), Kasznik (1999), and Kothari et al. (2005) to assess earnings manipulation among firms listed on the Karachi Stock Exchange. The findings reveal that audit committee independence and financial expertise are negatively associated with earnings management, indicating that qualified and independent committees enhance reporting credibility. Conversely, excessive workload and frequent meetings may reduce effectiveness, suggesting that governance quality depends on both structure and functionality. Corporate governance factors, including board size, independence, and audit quality, also play a significant role in shaping transparency and accountability. Overall, the study demonstrates that strong governance frameworks and financially skilled audit committees act as safeguards against opportunistic earnings manipulation. By reinforcing independence, expertise, and accountability, organizations can improve the reliability of financial reporting and protect stakeholder interests.