An accounting educated CEO’s relationship with earnings management and accounting conservatism, and the moderating role of executive compensation / Yvonne Joseph Ason

This study focuses on the area of corporate governance, particularly looking at the relationship between CEO with accounting background towards earnings management and accounting conservatism. Motivated by the unexplained trend of companies in the developed countries to hire individuals with accounting background to hold a post as Chief Executive Officer (CEO) after the introduction of the Sarbanes Oxley Act in 2002, this study attempts to examine empirically the effectiveness of the CEOs with accounting backgrounds in curbing the earnings management activities. This study also examines the accounting conservatism of CEOs with accounting backgrounds based on the findings from prior studies which suggested that CEOs with accounting backgrounds possess a higher level of accounting conservatism. Furthermore, this study examines the moderating role of the executive compensation towards; firstly, the relationship between CEO’s accounting background and earnings management; secondly, the relationship between CEO’s accounting background and accounting conservatism. Using the data from 71 companies from the Malaysian FTSE top 100 companies that fulfilled the requirement to become the sample, this study provides evidence from the perspective of developing countries. Earnings management is represented by discretionary accruals estimated using Modified Jones (1991) model and Performance – Matching model by Kothari (2005). For the proxy of accounting conservatism, this study uses the estimation of C-Score following Basu (1997). All financial data were downloaded through the DataStream Software by Thompson One Banker, while the data for CEOs’ education backgrounds, CEOs’ demographic backgrounds, and other corporate governance variables were collected manually from the companies’ annual reports. The regression results of this study suggest that CEOs with accounting backgrounds are indeed conservative as compared to their non-accounting educated counterparts. Unfortunately, there is no evidence found on the effectiveness of CEOs with accounting background in curbing the earnings management activity, neither the role of executive compensation in influencing the relationship between CEO’s accounting background towards earnings management and accounting conservatism. The finding of this study is meaningful in a way that it highlighted the successful learning outcome at the tertiary level in producing accounting graduates that are hopeful to practice conservative accounting in an effort to provide more reliable accounting information to the wide range of users of financial information.