Relations among audit committee establishment, information transparency and earnings quality: evidence from simultaneous equation models

Either shareholders or related parties typically serve as the directors and supervisors of listed companies in Taiwan. Consequently, the managerial and supervisory functions of certain companies have failed to meet shareholder expectation, and there have been numerous cases where managers have embezzled company assets and inflated company earnings. Therefore, we contend that strong corporate governance should be established, and the supervision system should be improved. First, we discuss the relationship between establishing an audit committee and information transparency and that between audit committee establishment and earnings quality. Subsequently, we describe results obtained by employing simultaneous equation models to examine the interactions among audit committee establishment, information transparency, and earnings quality for companies in the Taiwan electronics industry in 2011. Our empirical results show that establishing an audit committee correlates positively with both information transparency and earnings quality. The simultaneous equation models result show that interactive and positive effects exist among audit committee establishment, information transparency, and earnings quality.