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This chapter reviews relevant literature regarding: the concept and the importance of auditing, auditor responsibilities, concept of going concern, the role of the external auditor towards auditing the public shareholding companies going concern in Jordan, the accountants act in Jordan, compliance to laws and auditing standards, identify the public shareholding company in Jordan, agency and accountability theory. Previous literature on external auditor evaluation on company going concern ability, annual reports analysis, perception of the importance of the auditor's evaluation of the companies going concern. Measure of effectiveness of the external auditor's evaluation of the company's going concern, factors that influences on external auditor evaluating on company going concern ability are also discussed.
2.1 Overview on Auditing in Jordan
Jordan is located in the Arab homeland and surrounded by four Arab countries; Saudi Arabia, Syria, Iraq and Palestine. The Jordanian economy relies on the external subsidy and taxes from the Jordanian Companies. Even though the King Abdullah of Jordan and the government support the issue of companies' going concern in increasing investments in Jordan, the country is still facing problems with the companies' failure. Many previous studies referred clearly to this problem. They stated that the external auditors did not give an early warning about this failure (JACPA, 2003). Consequently, the government issued regulations and laws for accountants and external auditors and how they can get a license to practice this career as follows:
Those that have an accounting degree are to get auditor training as follows: (1) one-year training for PhD graduates. (2) two-year training for MA graduates. (3) three-year training for Bachelor graduates. (4) five-year training for Diploma graduates.
Career-Related to Majoring such as Economics, Management and Finance must have at least twenty four credit hours in accounting and get an auditor training as follows: (1) two-year training for PhD graduates. (2) three-year training for MA graduates. (3) four-year training for Bachelor graduates.
There are currently 51 auditing firms in Jordan classified according by previous studies as big and small firms. The six big auditing firms are the Al-Mohasiboon Al- Motahidoon, Ibrahim Al-Abassi Wa Shorakah, Almihanioon Al-Arab, Talal Abu Ghzaleh Wa Shorakah, Ghosheh Wa Shorakah and Saba Wa Shorakahom (Matter, 1995&Hummedat, 2002).
2.1.1 Auditing Concept
Audit can be defined as an analysis of financial statements and other information to prove their truth and fairness by a qualified person and issue a credible and useful opinion in his report. The opinion can be used by the financial statements users and make their investment decisions (Hermanson & Strawser, 1993;& Gray and Manson, 2000).
Further to that, there are four attitudes of auditing. First, auditing is a normal process based on logic and reasoning. It must be planned and conducted in a regular manner. Second, the auditor obtains and evaluates evidence. Evidence is collected by the auditor to make decisions related to the financial information presented by an entity. Third, the auditors must audit the financial statements that are prepared and presented in accordance with generally accepted accounting principles. Finally, the auditor gives the results of the audit to interested users of financial statements through his report.
2.1.2 The Importance of Auditing
Currently, there are four conditions why the business environment creates a demand for an independent audit. They are:
Disagreement of interest: users are concerned with the possibility of inadequacy in the financial statements; leading to probable disagreement between the user and the provider of the information.
Consequence: when information is used to take decisions of significant consequence, users are concerned with the probability of biased, misguiding, irrelevant, or incomplete information.
Complexity: if the information was difficult and complex, users of information do not obtain direct assurance about the quality of the information received.
Remoteness: when it is caused by a gap between the user of the information and the information source, it interrupts the user from directly assessing the quality of the information received.
The above points are important to explain how to achieve an audit of the financial statements. The company's management is responsible for the contents and equity of the financial statement. While financial statement users desire substantial financial information to assist them in making economic decisions, the auditors provide to users assurances that the financial statement are accurate and fair (Hermanson & Strawser 1993).
The Jordanian government on the other hand focuses on financial statements audit through going-concern assumption to maintain a social and economic stability in Jordan. There were empirical studies, which focus on management representation in Australia made by auditors. In the Carey and Clarke (2001) study, 174 questionnaires were received of which 62% were completed by audit partners, 32% by audit managers, and 6% by other auditors. This study showed that the Australian auditors place an over-reliance on management representation as evidence. In the case of going-concern scenario, 59% of non-big six auditors and 47% of big six auditors agree that they rely on management representation as audit evidence and regard it as important. A similar scenario can be expected to happen in Jordan. ISA 570 paragraph 26 shows that when events or conditions have been identified which may cast significant doubt on the entity's ability to continue as a going-concern, the auditor should:
Review management's plan for future actions based on its going concern assessment.
Gather sufficient appropriate audit evidence to confirm or dispel whether or not a material uncertainty exists through carrying out procedures considered necessary, including considering the effect of any plans of management and other mitigating factors. In conclusion, auditing the financial statements by the external auditor is important to the decisions makers. Therefore, the quality of auditing depends on the information given because the auditors provide the users with assurances that the financial statements are accurate and fair and if the company will continue its activities in the near future or not.
2.1.3 Auditors' Responsibilities
The auditor should evaluate the company's going concern for a period of time not exceeding one year starting from the date of the financial statements issuance (Guy & Carmichael, 2002).
The International Auditing and Assurance Standards Board (IAASB) and the American Institute of Certified Public Accountants (AICPA) have issued specific standards regarding going concern. These standards established, as part of professional standards, basic principles and essential procedures relevant to the auditor's responsibility to identify events and conditions that may be indicative of significant doubt regarding an entity's ability to continue as a going concern, the appropriate procedures to be performed when such events and conditions are identified and the impact of such events and conditions on the auditor's report.
To satisfy this objective, 1974, AICPA established an independent commission on Commission Auditor's Responsibilities (CAR) to consider responsibilities of independent auditors. The commission considered the expectation of the society and the auditor's ability to respond to these expectations. When the auditor depends on other specialists in financial statements audit, he still has to accept. Full responsibility for the audit opinion, he must also rely on the work of the internal auditor. If he does not pay any attention for the audit opinion for the audit opinion, it is to the external auditor to judge the extent to which reliance should be placed upon the work of the internal auditor. This is stated in SAS 500 (3) as follows: "During the course of their planning, the external auditors should perform an assessment of the internal audit function if they consider that it may be possible and desirable to rely on certain internal audit work in specific audit areas for the purpose of the external audit of the financial statements". The internal audit departments should plan their audit work and complete it every financial year and the external auditor should arrange to meet the chief internal auditor to assess the audit. If the external auditor has any doubt about the work of the internal auditor, additional audit procedures should be performed (Gray & Manson, 2000).
2.2 The Accountant's Act in Jordan
The Jordanian Accounting Act No. 73, which launched in 2003, which regulates the accounting profession in Jordan and ensures the adherence of auditors of the accounting standards. The auditors offer confidence and credibility to financial statement users and to accounts of organizations, in order for them to make decisions about their investments in a company. According to an auditor's opinion about the going concern of the company's, if an auditor has given a clean opinion on a set of accounts which turns out subsequently not to be true and Fairview, a user who loses as a result of reliance on those accounts may well feel that the auditor is one of the faulty persons. Therefore, the auditors' liability must be under civil law, thus, the auditor should give an opinion rather than a guarantee. The financial statement users relying upon the accounts may sue the auditor for damages to compensate them for any loss they have suffered because of the negligent work by the auditor.
2.3 Compliance to Law and Auditing Standard in Jordan
The Jordanian companies have to comply with the following law and auditing standards. The Jordanian Law of Career of Accounting No. 73 in 2003. Law of Jordanian Companies No. 22 (1997), Law of Jordanian Banks and Jordan Securities Commission Law No. 76(2002) issued the following: a). Application of the international accounting and auditing standards depending on the Jordanian economy, b). Checking of the accounts and financial statements expressing opinion by auditors. And c). The following shall be regarded as violation of provisions of these laws: (i) Submitting false or misleading data in any document filed with the commission, (ii) Certification by an auditor or accountant regarding false or misleading financial statements or Statements, which are in violation of adopted accounting and auditing standards. In such case, the accountant or auditor, as the case might be, shall be liable for damages to any party suffering financial loss because of such false or misleading financial statements.
2.4 The Legislation Limitations
The different legislations of rules and regulations related to auditing determined the responsibility of the auditor towards the organization and its future. The companies' law was the most comprehensive in determining those responsibilities, but did not determine his rights such as: the auditing fees and their suitability to the responsibilities. The Jordanian legislation gave the auditor full responsibility on the financial statements he audits. The company's law stated that the auditor is the representative of the shareholders according to the ISA No. 570. In relation to that, the role of auditors is very important in evaluating the going concern ability of companies. Thus, Al Basheer (2003) discussed about the Jordanian company's law, Statements No. 192 to 203 about the auditor and his responsibilities and his role in the going concern ability of the company. In Statement No. 193, the legislation determined the duties of the auditors, which are: a). Controlling the performance of the organization, b). Auditing the organization's accounts according to the auditing rules, career requirements, the scientific and technical basis, c. Checking the administrative and financial systems of the company, d). Checking the company's assets and the accuracy of its commitments, e). Reviewing the decisions of the board of directors, f). Any other duties the auditor has to do under this law and the law of auditing and any other related rule or regulation.
Thus, the Statement No. 195 stated that auditor has to get all the necessary information for his job, in addition to the company's original and well-prepared accounts. The procedures of auditing will be the basis for his opinion regarding the financial statements. Those statements have to be consistent with the files and registers in addition to be legal and clear from any violations. Statement No. 197 states the legislation prohibited the auditor from being a partner in a public shareholding company he is auditing or a member of its board of directors or involved in any consultant service. He must not also be a partner with any member of the board of directors or works for him. The Company's Law No. 73 also talk about the duties and rights of the auditor in attending the meetings of the general staff when discussing his report, since the auditor is considered the representative of the shareholders. Those statements also oblige the auditor to inform the chief of the board of directors, customer and the stock market about any violations in the company. Statement No. 201 states that the auditor has to compensate the company for any shortcoming or unsatisfactory job that affects the going concern of that company.
In this matter, Al-Basheer (2003) emphasize that those litigations and prohibitions make the external auditor the strongest and important party in the evaluation of the company's going concern. Consequently, the role of the auditor is great and comprehensive. He is the one who can determine if the company is running well or not. Al-Basheer proved that in reality it is different. The role of the auditor does not include his rights on the auditing fees. AL-Basheer also showed the importance of the ISA No. 570. When the going concern is at risk, the auditor must consider the financial and working indications, which could affect the going concern of the company. Therefore, the auditor must take into consideration the going concern of the company when planning and achieving the procedures of auditing and when evaluating their results according to ISA No. 570.
2.5 The Jordanian Environment
Jordan is a small Arab country with a population of six million. It depends on foreign grants to finance budget deficits. On 25 October 2001, His Majesty King Abdullah II instructed the Government of Jordan to chart an integrated economic program to accelerate the pace of economic reforms and raise the quality and standard of living of Jordanians in an attempt to decrease dependence on foreign grants. The Government launched the economic transformation program on 15 November, 2001. This program aimed to activate the role of private capital in the economy through further institutionalizing the public-private partnership, providing the legal and institutional framework conducive to increased investment in the economy, and accelerating the privatization process through enhancing the legislative and institutional environment to promote and attractive investment (King Abdullah II, 2008).
2.5.1 Revision for the Related Local Legislations in Jordan
ccording to JSC (2007b), the first public company in Jordan was founded in 1929, and later in 1973 the first financial market in Jordan was established and named Amman Financial Market. The capital market in Jordan has made a significant qualitative transition of operation according to the international accounting and auditing standards. The Securities Law No. 22 issued in 1997 was a turning point for the Jordanian capital market. Three institutions emerged out of what had been the Amman Financial Market until 1997. They are:
The Amman Stock Exchange (ASE)
The Jordan Securities Commission (JSC)
The Securities Depository Center (SDC)
126.96.36.199 The Amman Stock Exchange (ASE)
Amman Stock Exchange replaced Amman Financial Market in 1999 with administration and financial independence. The responsibilities of ASE are (1) to provide companies with the means of raising capital, (2) to support the active market in listed stocks based on the effective determination of prices and fair and transparent trading, (3) to provide the facilities and equipment for trading of securities and publication of prices. And (4) to monitor and organize market trading, and coordinating with JSC, if there is a need, to ensure compliance with the law, a fair trading and also to protect the investor from misleading information.
The ASE works closely with the Jordan Securities Commission (JSC) to comply with International Accounting and Auditing Standards and related practices. The ASE also joins some international associations such as the Union of Arab Stock Exchanges, Federation of Euro-Asian Stock Exchanges (FEAS), and World Federation of Exchanges (WFE), and is a member of the International Organization for Securities Commissions (ASE, 2007).
188.8.131.52 The Jordanian Securities Commission (JSC)
The Commission's Monitoring Instructions No. (1) 1998 states in Chapter 6, Article 42 that:
All entities subject to the Commission's monitoring shall apply International Accounting Standards as issued by the International Accounting Standards Board.
If there is any conflict between these standards and securities law, the law shall apply.
In addition, Article No. 14 states that "The International Accounting Standards issued by the Board of International Accounting Standards are hereby adopted whereby all the parties subject to the Commission's monitoring shall prepare their financial statements consistently therewith." (JSC, 2007).
184.108.40.206 The Securities Depository Centre (SDC)
The Securities Depository Centre (SDC) was established under the authority of the Securities Law No (23) of 1997 as a public utility institution (MIT, 2008). The SDC has been recognized by the JSC as the sole numbering agency in Jordan for the assignment of International Security Identification Numbers (ISIN) for the Association of National Numbering Agency (ANNA). The SDC responsibilities are:
Registration of securities
Deposit of securities.
Transfer of ownership and safekeeping of securities.
Clearance and settlement of securities transaction.
The following is a review of related local legislations in Jordan. The Jordanian Association of Certified Public Accountants (JACPA) was established in 1988 and recommended to apply the International Accounting and Auditing Standards. Therefore, it remained an option for companies to apply these standards until the Amman Stock Exchange (ASE) joined the International Organization for Securities Commissions (IOSCO) in 1997, which required applying the IAS as issued by the IAS Board. Then applying IAS became mandatory. The role of JACPA is to supervise the accounting practices and the application of International Accounting and Auditing Standards in Jordan (JACPA, 2006). Companies' law aims to organize the legal situation of the companies and safeguard the rights of the shareholders. The role of this law was limited to this point, until the revised law was issued on 1989 and required companies to organize their accounts and keeping the financial statements as the GAAP or IAS required (Al Akra, et al., 2009). In 1997 the companies' law no. 22 was issued and required the companies to follow IAS (MIT, 1997).
Article 184, titled Observance of Accounting Principles includes a paragraph that states that a public shareholding company shall organize its accounts and keep its registers and books in accordance with the recognized international accounting and auditing standard. In the same article paragraph C/1, the law determines the standards the companies should follow. The paragraph states that "The specialized professional entities shall adopt recognized International Accounting and Auditing Standards and rules". Paragraph C/4 holds that if there is any conflict between the law and the standards, the law shall apply.
The banking law obligates banks in Jordan to follow IAS. The law No. 28 of banking found in Article No. 60 (Accounts and Financial Statements) indicates that, "The company has to organize its accounts in accordance with internationally recognized accounting principles, preparing its financial statements comprehensively to reflect the actual financial position of the bank and its branches and subsidiaries." Also in the same article, the CJB requires banks to comply with any special requirements specified by the Central Bank in this regard (CBJ, 2008).
2.6 The Role of External Auditor in Jordanian Public Shareholding Companies.
In Jordan, independent public accountants act as external auditors to evaluate the fairness of the presentation of financial statements issued by a firm's management. If there are doubts about a company's going concern, he must take proper procedures to correct deviations, and give early warning to the management. However, he or she might take certain condition and events that contradict with the going concern assumption, such as the company inability to meet its payment obligations, selling of assets and inability of restructuring debt. In addition, the auditors should also reviewed management's plans related to company going concern (Venuti, 2004).
2.7 Overview of Corporate Governance
Mitra and Hossain (2011) studied the relationship between corporate governance attributes (i.e. board and ownership characteristics) and remediation of internal control material weaknesses. They applied a logistic regression for a sample of 258 companies between 2004 and 2006 in the USA. They found a positive relationship between board diligence, CEO-independent board, and managerial, institutional and dominant shareholdings with internal control weaknesses' remediation. They remarked that ownership characteristics are more important in the firms' weaknesses remediation than the board characteristics.
In Europe, Song and Windram (2004) studied the effectiveness of audit committee in financial reporting in UK. They found weak evidence on the relationship between the member financial literacy, meeting frequency, and outside directorships, and the effectiveness of audit committee. They argued that increasing directors' shareholders will not necessarily increase the audit committee effectiveness in financial reporting. Bedard, Chtourou, and Courteau. (2004) studied the effect of audit committee characteristics on aggressive earnings management. They found a negative relationship between aggressive earnings management (both types of earnings management, increasing or decreasing income) and financial or governance expertise of audit committee members. Greco (2010) explored the determinants of board characteristic and audit committee meeting frequency in Italian firms. He investigated ownership structure and board characteristics. He found that insider ownership has a negative impact on the board characteristics and audit committee meeting frequency. However, the proportion of independent directors in the board has a positive impact. He also found that audit committee is more active in large firms.
Rainsbury, Bradbury and Cahan (2009) studied the relationship between the quality of audit committee and the financial reporting quality and external audit fees. They used a sample of 87 firms from New Zealand including 29 firms that had adopted high quality audit committee in 2001, where the formation of audit committee was unregulated. They found no significant relationship between the quality of an audit committee and the quality of financial reporting. They remarked that this surprising result suggests that the benefits of high quality audit committee may be less expected by regulator and decision makers, which may impose unnecessary compliance costs. Machuga and Teitel (2007) studied the effect of implementation of corporate governance in Mexico on the quality of earnings. They found that the quality of earnings improves after Mexico issued the code of corporate governance. Similarly, Teitel and Machuga (2010) provided evidence on the relationship between the audit quality and earnings quality. They found that companies that hire a high quality auditor show a high earnings quality.
Davidson, Jiraporn, Kim, and Nemec (2004) hypothesized that the dual position may give an individual more authority to adjust financial reports. Given high expectations for good performance and the strong authority provided by dual leadership, a CEO-chair may engage in earnings management to show better performance. Bauwhede and Willekens (2003) examined the relationship between board size, audit firm size and earnings management. They found that firms with larger boards correlate negatively with income-decreasing earning management.
Also audit firm size was found to have a negative relationship with earnings management. Meca and Ballesta (2009) meta-analyzed the results of 35 studies that examined the effect on earnings management of firms' boards of directors and ownership structure. The results showed a negative relationship between board size and discretionary accruals. They also found no relationship between existences of chairman and CEO duality and increasing probability of earnings management. The meta-analysis indicated no relationship between insider ownership and discretionary accruals. Similarly, there is no relationship between institutional ownership and discretionary accruals. The findings showed that independent audit committee is an effective mechanism in mitigating earnings management. The results of testing the presence CEO duality and earnings management seems not to support agency theory since the result of most previous studies do not find any significant relation.
In Malaysia, Ismail, Iskandar, and Rahmat (2008) investigated the relationship between audit committee and external audit with quality of financial reporting for 45 companies listed on the Bursa Malaysia. They found that only the audit committee with multiple directorship members is positively related to the quality of reporting. They also found no relationship between the audit quality and quality of corporate reporting. Similarly, Ismail, Dunstan, and Zijl. (2010) provided strong evidence on the relationship between corporate governance and earnings quality during the period 2003 to 2007. They revealed that size of the board of directors and size of the audit committee are positively correlated with earnings quality; in other words, the earnings quality become higher when the company has a large board of directors and large audit committee. Yang, Chunand and Ramadili (2009) tested the relationship between outside directors, institutional shareholders and earnings management activities in Malaysia. They found no significant relationship between the proportion of outside directors, institutional shareholders and earnings manipulation. They argued that adding more outside directors in the board and increasing percentage of institutional ownership will not mitigate earnings management in highly concentrated ownership firms.
In the Middle East, Klai and Omri (2011) studied the relationship between corporate governance mechanism and financial reporting quality in Tunisia. They explored characteristics of board of directors and ownership structure of Tunisian companies. They found a negative relationship between foreign and family ownership with financial reporting quality. They revealed that the financial institutional and governmental ownership are associated positively with quality of financial disclosure. They concluded that there is a lack of board independence and there is concentration of ownership in the Tunisian companies. Sarikhani and Ebrahimi (2011) studied the relationship between ownership concentration, management ownership, institutional ownership, corporate ownership, board composition, leadership structure, and board size with earnings informativeness in Iran. They found that ownership concentration and institutional ownership correlate significantly and positively with earnings informativeness, while there is no significant relationship between management ownership, corporate ownership, board composition, leadership structure, and board size with earnings informativeness. Roodposhti and Chashmi (2011) aimed to test the relationship between ownership concentration, board independence, CEO dominance, institutional shareholders and earnings management in Iran. They concluded that companies with higher ownership concentration and independent boards are associated negatively with earnings management, while higher institutional ownership correlates positively with earnings management. Finally, they found a positive association between the existence of CEO-Chairman duality and earnings management.
In Asia, Fan and Wong (2002) explored the relationship between corporate ownership structure and the informativeness of accounting earnings. They extracted data from 977 companies' annual reports. They concluded that concentrated ownership is associated with low earnings informativeness. They argued that the concentrated ownership, associated pyramidal and cross-holding structures create agency conflicts between controlling owners and outside investors. Goodwin and Seow (2002) explored the auditors and directors perceptions on the relationship between corporate governance practices and the quality of financial reporting and auditing in Singapore. They found that the presence of a strong audit committee decreases errors in financial statements and increases the possibility of management fraud detection. Furthermore, the strength of the internal audit is perceived to decrease the errors and fraud in the financial statements. Yuemei and Yanxi (2007) found a negative relationship between earnings management and proportion of the independent directors. Also, there is a negative relationship found between board size and ownership of the board and earnings management. They found slight evidence that companies with large total assets practice earnings management. Firth, Fung and Rui (2007) studied the role of foreign ownership in mitigating earnings management in China. They found that companies with foreign shareholders have higher earnings informativeness and less earnings management. They argued that the foreign shareholders put pressures on companies to improve the quality of financial reporting. Wenyao and Qin (2008) investigated the relationship between board composition and earnings management in Manufacturing Chinese listed firms. They found that small boards are more effective in constraining income-increasing earnings management than a large board. They also found that inclusion of independent directors and separation of CEO/ chairman did not enhance monitoring of earnings management. They also found that presence of audit committee did not reduce income-increasing earnings management.
Xia and Zhao (2009) studied the relationship between characteristics of supervisory board and earnings quality. They analyzed 160 annual reports for 160 public companies in 2006. They found no significant relationship between characteristics of board and earnings management. They further revealed that the supervisory board size, shareholding proportion of supervisors, and the board meeting frequency have no correlation with earnings management. In Addition, Jiaguo, Qian, Mi and Yun (2010) studied the independence of supervisory board of Chinese listed company and found a high positive relationship between management status and independence of supervisory board. On the other hand, board of directors has a negative relationship with independence of supervisory board and management status, while management status positively related with independence of supervisory board. Jaggi, Leung, and Gul (2009) examined the association between corporate board independence and earnings management and the influence of the family control on the relationship between independent non-executive directors and earnings quality. They found that a higher proportion of independent non-executive directors are positively associated with earnings quality. They concluded that increasing the proportion of outside directors to strengthen board monitoring is unlikely to be effective in family-controlled firms.
Shah, Zafar, and Durrani (2009) found that institutional ownership can play an important role in improving corporate governance in Pakistan. They demonstrated that the presence of institutional investors reduce the management ability to perform earnings management. Additionally, there is a negative relationship between role of the independence of non-executive directors and earnings management. They ascribed this result to the Pakistani context as there are no specific measures to judge the independence of non-executive directors. Kung, Cheng and James (2010) studied the effect of corporate ownership structure on earnings conservatism in China. They provided evidence on how companies' ownership structure affects the properties of earnings in emerging markets. They found that earnings conservatism decreases with the presence of higher levels of non-tradable share. In other words, the companies with concentrated ownership structure are more likely to depend on their private resources to resolve agency problems internally. Lin and Hwang (2010) studied the relationship between audit quality, corporate governance, and earnings management. They found that the independence and expertise of board of directors related negatively to earnings management. Additionally, earnings management has a negative relationship with independence, expertise, and number of meetings of audit committee, while the audit committee's share ownership has a positive relationship with earnings management. They concluded that earnings management is related negatively with audit quality, auditor tenure, and auditor size and auditor specialization. They remarked that, in general, the results are almost the same across the countries under study, but the effect of variables differ from country to another one. Gulzar and Wang (2011) found a positive relationship between CEO duality, board meetings, females' directors and concentrated ownership with earnings management. They found no significant relationship between board size, director's shareholdings, proportion of independent directors, presence of audit committee, and earnings management.
In the United States, Katz (2008) examined the relationship between earnings quality and ownership structure. She used a sample of private companies before and after initial public offering. She concluded that companies that have private equity sponsorship have higher earnings quality, and engage less in earnings management than those do not have private equity sponsorship. She ascribed the superiority of companies that have private equity sponsorship to professional ownership, tighter monitoring, and reputational considerations exhibited by private equity sponsors. Ghosh, Marra, and Moon (2010) found that the separation of CEO and chairman positions and the presence of separate subcommittees are mostly unrelated to earnings management. They further revealed that firms with larger boards and audit committees have fewer tendencies to manage earnings, which indicates that larger boards and audit committees are more effective in monitoring financial accounting process. Dhaliwal, Naiker, and Navissi (2010) studied the relationship between audit committee and accrual quality. They found that audit committee comprising accounting experts, who are independent, hold fewer directorships, and have a lower tenure in their firms, correlate positively with accruals quality. They recommended companies to focus on accounting expertise when they form the audit committee.