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Recent high profile failures in corporate financial reporting, such as the collapse of Enron, WorldCom (USA), and BATAM (Tunisia), have eroded people’s confidence in disclosed information. Certain accounting research has begun to turn to corporate governance aspects to explain the existence and determinants of earnings management practices. These scandals were often caused by the conflict of interests inherent in the relationship between owners and managers. In this context, it is necessary to establish the formulas for the government to regulate the activities of all actors involved in the companies. Furthermore, to enhance the reliability of financial information and improve manager’s control, different codes and laws of corporate governance were issued1.
The board of directors (henceforth board) is one of a number of internal governance mechanisms intended to ensure that the interests of shareholders and managers are closely aligned, and to discipline or remove ineffective management teams (Xie et al., 2003). Thus, the board is important to ensure that investors are not led into suboptimal resource allocation decisions based on a view of the accounting numbers as information (Schipper, 1989). Since Real Earnings Management (REM) activities represent deviations from normal business practices (Taylor and Xu, 2008) and are motivated by a desire to mislead at least some stakeholders (Roychowdhury, 2006), the reported earnings of firms that engage in REM may represent an undesirable state of the firm driven by a strategy to maximize short-term profits at the expense of long-term performance. While board independence, size, meetings and CEO/chair duality have been a growing area of research in recent years, the board is expected to have a special role in assuring that the company’s decisions respect the law and regulations.
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