The Efficacy of Corporate Governance in Reducing Opportunistic Accounting Earnings Manipulations

Abstract

This paper presents a review of evidence pertaining to whether effective corporate governance mitigates agency conflict and thus reduces opportunistic accounting earnings management. This study pursues the theoretical arguments, (agency theory), that the principal agent relationship provides an insight that effective corporate governance plays a significant role in reducing agency conflict and information asymmetry. This is on the premise that, it may not be possible to directly observe the managers opportunistic accounting choices, but investors (shareholders) have to take action to protect their interests; as a result firms may have to incur higher agency costs to mitigate managers’ discretionary accounting choices.  The findings in this study indicate that corporate governance monitoring is effective in mitigating managers’ opportunistic discretionary accounting choices and reducing agency costs and thus improving the quality of reported accounting earnings.

Keywords: Corporate Governance, Earnings management