Surplus Free Cash Flow, Earnings Management and Audit Committee

The objective of this study is to examine whether high surplus free cash flow is related to earnings management. This study hypothesizes managers of high surplus free cash flow companies have incentive to engage in earnings management. However, earnings management occurs less frequently when the audit committee is more independent. Independent audit committees provide an effective monitoring over earnings management practices. This study expects that the positive relationship between surplus free cash flow and earnings management is moderated by independent audit committee. Using a sample of 155 companies listed on the main board of Bursa Malaysia in 2001, this study obtains empirical evidence consistent with the prediction in all hypotheses. This study shows that independent audit committee help companies with high surplus free cash flow to reduce income increasing earnings management practices.