Does Effective Audit Committee Oversight Curb Earnings Surprise Games

Audit Committees and Earnings Expectations Management M.H. Carol Liu Department of Accounting and Finance School of Business Administration Oakland University Rochester, MI 48309 Samuel L. Tiras* Department of Accounting E.J. Ourso College of Business Louisiana State University Baton Rouge, LA 70803 Zili Zhuang School of Accountancy Faculty of Business Administration The Chinese University of Hong Kong Shatin, N.T. Hong Kong August 31, 2008 *Corresponding author: Sam Tiras, tiras@lsu.edu (225) 578-6275 We thank Larry Brown, Agnes Cheng, Daniel Cohen, Bill Kross, Joey Legoria, Jackie Moffitt Ken Reichelt, and the workshop participants at Louisiana State University and SUNY-Buffalo for helpful comments. We also thank Drew Green, Min Zhao, Chunquan Zhou, for their assistance with our data collection. ABSTRACT This study examines the association between audit committee oversight and earnings expectations management. We find that audit committees that are independent, include at least one accounting expert, and meet frequently are associated with lower likelihoods of downward expectations management and optimistic bias in analyst forecasts. Consistent with the expectations management results, we also find that analyst forecast revisions and management guidance are less likely to be downward when audit committees are active and have financial or accounting expertise. Further, we ...