Impact of the Audit Committee and External Audit Service Provider on Earnings Management: Evidence from Public Listed Companies in Sri Lanka

This study aims to identify the impact of the audit committee and external audit service provider on the level of earnings management among listed companies on the Colombo Stock Exchange (CSE) of Sri Lanka. Using the stratified random sampling method, fifty companies with financial years ending on 31st March were selected for this study, representing various industry groups as of 26th April 2021, covering the period from 2018 to 2020. Companies within the banking, diversified financials, and insurance industry groups were excluded due to inherent limitations. Descriptive analysis, along with Ordinary Least Squares (OLS) linear and panel regression analyses were performed in this study. The descriptive analysis revealed that the chosen listed companies comply with the principles of the code of best practices of Corporate Governance in Sri Lanka, with 81% of these companies being audited by one of the Big 4 firms operating in Sri Lanka. Both OLS and panel regression analyses demonstrated that larger audit committees and the engagement of Big 4 audit firms are negatively associated with earnings management practices. The findings of this study provide useful insights for companies, policymakers and regulators in setting policy guidelines on audit committee characteristics. This study extends previous literature on earnings management by examining the impact of the audit committee and external audit service provider on earnings management in listed companies in Sri Lanka.