Corporate Governance and Accounting Conservatism : Evidence from Board and Audit Committee Characteristics

We examine the role of corporate governance on accounting conservatism. Since corporate governance influences the financial reporting process, it may have a systematic relationship with the level of accounting conservatism. Specifically, we investigate the relationship between three board and audit committee characteristics and accounting conservatism. We posit that firms with a strong board of directors and audit committee are likely to recognize bad news in a more timely manner, thereby reporting a more conservative accounting income. Using board and audit committee composition, independence, and activity, we find that the level of accounting conservatism is positively associated with the strength of the board and audit committee. To the extent that the strength of the board and audit committee proxies the level of corporate governance, our results are broadly consistent with the prediction that corporate governance is positively associated with accounting conservatism.