Corporate Governance and Earnings Management in Saudi Arabia

  • Ahmed Abdulrahman Alrashed

Student thesis: Doctoral ThesisDoctor of Philosophy


Generally, earnings management is found to lead to adverse outcomes in corporations all over the world. Prior studies explicitly conducted in the Saudi Arabian market reveal that earnings management is one factor that can lead to the failure of corporations in the country. However, the specific details of how corporate governance can contribute to earnings management have not yet been focused on in the research. For that reason, this thesis investigates two research questions: Research Question 1: To what extent do current corporate governance practices allow earnings management to take place in Saudi Arabia? and Research Question 2: In what ways could corporate governance be improved to reduce earnings management in Saudi Arabia. In meeting the aims of this research, a mixed-methods approach was used in this study. Qualitative data were collected through a semi-structured interview involving a total of 37 participants. Quantitative data, on the other hand, was collected through a questionnaire and involved 141 respondents.

The main findings from the qualitative data analysis are as follows. First, most stakeholders who participated in the study had a good understanding of corporate governance regulations and participated in developing corporate codes at the their companies. Second, various stakeholders agreed on the significance of corporate governance policies and regulations on earnings management in Saudi Arabia. Third, the factors making it difficult for firms to adopt corporate governance policies and practices to reduce the risk of earnings management in Saudi Arabian firms were identified. These factors are corruption, nepotism, low literacy of stakeholders on corporate governance policies, inactive boards, fear of bringing about conflict of interest, the perceived increase in the cost of governance, and finally, the concentration of powers to few individuals. Fourth, on examination of the role of audit committees in companies in Saudi Arabia, it was found that audit committees play a significant role in ensuring good corporate performance. Fifth, recommendations by the study sample on ways in which corporate governance could be used to reduce earnings management are: exercising control of board nominations, retaining auditors, using service of internal and external audit functions, exercising strong internal control, separation of functions within a company, evaluation of results, transparency in the flow of information, and finally, holding training programs on corporate governance and earnings management.

This thesis contributes to the literature on corporate governance and its role in reducing earnings management in developing countries. The thesis also provides a timely update to policymakers, potential local and foreign investors with information vital to their decisions. The minority shareholders are also provided with awareness, and therefore, a need to advocate for strong corporate governance to protect their wealth is evoked. The timely update to policymakers is specifically vital for assessing Saudi Arabia’s progress to realise its Vision 2030. Beyond the local context, the findings of this research should form the basis of conducting similar research in other markets in the Middle East. The results presented herein, together with those of future studies that will be conducted in other countries in the region, will provide a good foundation for the development of corporate governance policies in the region.

This thesis’s limitations mainly lie in its small sample size, the qualitative research methodology used, and that this research was done pre-COVID-19 era and may not be the accurate indicator of the prevailing situation.
Date of Award2022
Original languageEnglish
SponsorsSaudi Arabian Cultural Bureau
SupervisorBruce Burton (Supervisor) & Gizella Marton (Supervisor)

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