Evaluation of Corporate Governance on Earnings Management - CIA 11217

This report examines earnings management and corporate governance by analyzing the 2017 annual report of Wesfarmers. The report begins with a definition of earnings management and its various techniques, including accounting policy choices and real activities management. It then reviews Wesfarmers' corporate governance statement, focusing on the board's structure, including the number of non-executive and independent directors, and the roles of the nomination, remuneration, and audit committees. The report evaluates the effectiveness of the board structure in minimizing earnings manipulations, considering the independence of directors and the presence of committees. The analysis concludes that Wesfarmers has a strong corporate governance mechanism, which reduces the scope for earnings manipulation, and the presence of the audit committee helps in eliminating accounting policy manipulation. The report fulfills the assignment brief's requirements by evaluating corporate governance and its impact on earnings management within a selected company.

Running head: CONTEMPORARY ISSUES IN ACCOUNTING
Contemporary Issues in Accounting
Name of the Student
Name of the University
Author’s Note

1CONTEMPORARY ISSUES IN ACCOUNTING
Table of Contents
Review of the Corporate Governance Statement of Wesfarmers..............................................2
References..................................................................................................................................4

2CONTEMPORARY ISSUES IN ACCOUNTING
Review of the Corporate Governance Statement of Wesfarmers
Earnings management is considered as the creative utilization of accounting methods
for producing financial reports for presenting excessively positive view of the firm’s business
activities and financial position (Fang, Huang and Karpoff 2016). The main intentions of
earnings management are share price maximization, meeting the shareholders’ expectations,
avoiding violation of debt covenant and company’s value maximization. Certain techniques
of earnings management are Accounting policy choice and accrual accounting, Income
smoothing, Big bath write offs and Real activities management (Fang, Huang and Karpoff
2016).
As per the 2017 Annual Report of Wesfarmers, the Board has strong commitment
towards providing strong commitment towards their corporate governance responsibilities
(wesfarmers.com.au 2019). The Corporate Governance part in the 2017 Annual Report of
Wesfarmers shows that the company has none directors that includes eight non-executive
directors. The main responsibility of these non-executive directors is to evaluate the
performance of the executive directors so that they cannot involve in the illegal processes like
earnings management (wesfarmers.com.au 2019). In addition, Wesfarmers consider the
independence of their directors as a crucial aspect for corporate governance. As per
Wesfarmers, independent directors are free from any kind of material interest from the
companies. Wesfarmers follows the ASX Corporate Governance Principles and
Recommendations for the determination of independence of their directors
(wesfarmers.com.au 2019). Wesfarmers has ensured the presence of seven independent
directors among their eight non-executive directors. The absence of majority portion of
independent directors eliminates the scope of earnings management by the directors. In
addition, Wesfarmers has formed three committees for ensuring the presence of robust
corporate governance; they are Nomination Committee responsible for succession planning

3CONTEMPORARY ISSUES IN ACCOUNTING
and director consideration, Remuneration Committee responsible for reviewing and making
remuneration for the directors and Audit and Risk Committee responsible for reviewing the
processes in order to ensure the integrity of the financial statements and compliance with the
financial regulations (wesfarmers.com.au 2019).
It can be seen from the above discussion that Wesfarmers has a strong and effective
corporate governance mechanism where they thoroughly follow the ASX corporate
governance principles and standards (wesfarmers.com.au 2019). At the same time, the
presence of majority portion of non-executive and independent directors makes it difficult for
the executive directors to create the scope for earnings manipulation. At the same time, the
presence of committees like Audit and Risk Committee eliminates the accounting policy
manipulation for the purpose of earnings management (wesfarmers.com.au 2019).

4CONTEMPORARY ISSUES IN ACCOUNTING
References
Fang, V.W., Huang, A.H. and Karpoff, J.M., 2016. Short selling and earnings management:
A controlled experiment. The Journal of Finance, 71(3), pp.1251-1294.
Wesfarmers.com.au. 2019. 2017 Annual Report. [online] Available at:
https://www.wesfarmers.com.au/docs/default-source/default-document-library/2017-annual-
report.pdf?sfvrsn=0 [Accessed 6 Apr. 2019].