The Information Effect of Audit Quality and Credit Grading on Real Earnings Management

Purpose – Many researchers, in several contexts, have investigated the influence of audit committee effectiveness and audit quality variables on reducing the extent of earnings management, and empirical evidence is rather inconsistent. Design/methodology/approach – The aim of this paper is to meta-analyze the results of 58 prior studies that examined whether differences in results are related to moderating effects associated with corporate governance mechanisms or measures of earnings management. Findings – The findings show that the meta-analysis identifies many significant relationships. The independence of the audit committee, its size, expertise and the number of meetings have a negative relationship with earnings management. Similar negative relationships exist between auditor size, specialization and earnings management. Research limitations/implications – This study contributes to the corporate governance literature. Further, recognizing the function of an audit committee and audit quality shows the value of considering an institutional setting in governance research. This study is significant to academic and practitioner literatures, policy makers and professional accounting bodies as it shows that governance reforms promote companies to adopt good governance practices. The results also give useful information to investors in examining the effect of audit committee characteristics and audit quality on earnings quality. Originality/value – This study extends existing research on audit committee and audit quality to oversee both accrual and real earnings management using meta-analysis. Thus, this study has the potential to help stakeholders, board of directors, regulators and auditors, who are related with enhancing the supervision of firms and reducing the opportunities given to managers, to engage in earnings management.

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Audit quality and real earnings management: evidence from the UK manufacturing sector

International Journal of Managerial Finance ◽

10.1108/ijmf-03-2018-0095 ◽

2019 ◽

Vol 16 (2) ◽

pp. 165-181

Author(s):

R.P. Sitanggang ◽

Yusuf Karbhari ◽

Bolaji Tunde Matemilola ◽

M. Ariff

Keyword(s):

Earnings Management ◽

Significant Relationship ◽

Firm Value ◽

Management Practices ◽

Audit Quality ◽

Audit Fees ◽

Production Costs ◽

Real Earnings Management ◽

Content Type ◽

The Uk

Purpose The purpose of this paper is to investigate whether audit quality is associated with real earnings management in the UK. Design/methodology/approach The authors apply the panel fixed effects method that controls for heterogeneity across firms to investigate whether audit quality is related to real earnings management for a large sample of UK manufacturing companies for the period 2010–2013. The authors utilized three proxies to measure real earnings management and two proxies to measure audit quality. Findings The results provide evidence that audit fees are negatively related to abnormal operating cash flows. Conversely, audit fees are positively related to abnormal discretionary expenses. Besides, audit quality proxies show insignificant relationship with abnormal production costs and real earnings management index. Overall, the study finds partial evidence of significant relationship between audit quality and real earnings management. Research limitations/implications These results are important subject to the adequacy of the indicators of real earnings management and audit quality. Like previous research works that mostly focus on upward earnings management, the authors do not address the question of whether and how firms take real actions to manage earnings downwards in certain contexts. Practical implications The findings inform monitoring bodies that the imposition of higher levels of audit quality may result in unintended consequences. Therefore, monitoring bodies, such as audit committees, should consider the implication of imposing higher quality auditing, which may drive firms to potentially value-decreasing real earnings management practices. Managers should curtail real earnings management practices, especially abnormal operating cash flow, because attempt to use higher-quality auditors to mitigate such practice may destroy firm value. Also, managers’ employment may be threatened due to the potential deterioration of firm value caused by using higher-quality auditors to mitigate managers’ real earnings management practices. Moreover, shareholders are informed of the potential detrimental effects of imposing higher levels of audit quality which may lower the value of their investments. Originality/value The paper extends previous research on earnings management in several ways. First, while earlier studies usually use accruals methods to measure earnings management, the authors use the real earnings management approach as managers can switch from accruals to real earnings management when facing more scrutiny from auditors and/or more constrained regulations or standards that may limit their capability to use discretionary accruals. Second, this study reports new findings, as the authors find partial evidence of a significant relationship between audit quality and real earnings management. Third, it is one of the few studies to use a real earnings management index to measure earnings management and its link to audit quality.

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Audit Quality and the Trade-Off between Accretive Stock Repurchases and Accrual-Based Earnings Management

The Accounting Review ◽

10.2308/accr-50230 ◽

2012 ◽

Vol 87 (6) ◽

pp. 1861-1884 ◽

Cited By ~ 44

Author(s):

Brian M. Burnett ◽

Bradrick M. Cripe ◽

Gregory W. Martin ◽

Brian P. McAllister

Keyword(s):

Earnings Management ◽

Audit Quality ◽

Real Earnings Management ◽

Stock Repurchases ◽

Trade Off ◽

Earnings Per Share ◽

Consensus Analysts

ABSTRACT We examine whether audit quality affects the trade-off between accrual-based and real earnings management. We hypothesize that firms motivated to manage earnings per share (EPS) to meet or beat consensus analysts' forecasts are more likely to engage in accretive stock repurchases (a form of real earnings management) when their ability to manage earnings through accruals is constrained by high audit quality. We find that firms with high audit quality are more likely to use accretive stock repurchases and less likely to use accrual-based earnings management to meet or beat consensus analysts' forecasts. Our results are robust to various controls for endogeneity concerns.

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Faktor – Faktor Yang Mempengaruhi Real Earnings Management Pada Perusahaan Manufaktur di BEI

Jurnal Ekonomi ◽

10.24912/je.v25i2.650 ◽

2020 ◽

Vol 25 (2) ◽

pp. 163

Author(s):

Linda Santioso, Emily Janice, Andreas Bambang Daryatno

Keyword(s):

Earnings Management ◽

Firm Size ◽

Audit Committee ◽

Audit Quality ◽

T Test ◽

Real Earnings Management ◽

External Audit ◽

Audit Firm ◽

Financial Expertise ◽

The Impact

This research aims to find out and analyze the impact of audit committee financial expertise, audit quality that is proxied by external audit firm size, and profitability on real earnings management. The method used in this research was purposive sampling with a total sample of 59 manufacturing companies listed in Indonesian Stock Exchange (IDX). The type of data used was secondary data acquired through financial statements extracted from www.idx.co.id. Data analysis methods used in this research were classical assumption analysis, descriptive statistical test, f test, t test, and the test of determination coefficient. T test was used to test this study’s hypothesis. Final result of the study showed that audit committee financial expertise and audit quality proxied by external audit firm size do not have any significant effect on real earnings management, while profitability has been shown to have a positive effect on real earnings management.

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Determinan Praktik Manajemen Laba Riil

Jurnal Ekonomi MODERNISASI ◽

10.21067/jem.v14i1.2510 ◽

2018 ◽

Vol 14 (2) ◽

pp. 110-120

Author(s):

Koerniawan Dwi Wibawa ◽

Bambang Subroto ◽

Wuryan Andyani

Keyword(s):

Earnings Management ◽

Cash Flow ◽

Management Practices ◽

Audit Quality ◽

Cash Flows ◽

Negative Influence ◽

Positive Influence ◽

Production Costs ◽

Real Earnings Management ◽

Financial Disclosure

The aim of this study was to examine the effect of the level financial statement disclosure on earnings management and audit quality in moderating this study. The sample of this study was from LQ45 companies, especially in manufacturing as many as 9 companies with an observation period of 5 years (2012-2016). This study provided empirical evidence that a negative influence between the level of disclosure of financial statements and real earnings management used production costs. But with the proxies of operational cash flow and discretionary costs produce provided a positive relationship. The results of the moderation regression test with production costs as proxy of earnings management provided that audit quality can strengthen the negative effect of the financial disclosure level on earnings management. Other results indicate that audit quality can strengthen the positive influence of the financial disclosure level on earnings management with a proxy for operational cash flows and discretionary costs. The Managerial implications of research was that auditors can examine other factors besides operational cash flow and discretionary costs in carrying out judgment on earnings management practices in the company.

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PENGARUH KUALITAS AUDIT TERHADAP KECENDERUNGAN PERUBAHAN PERILAKU MANAJEMEN LABA: STUDI EMPIRIS PADA PERUSAHAAN MANUFAKTUR YANG TERDAFTAR DI BURSA EFEK INDONESIA PERIODE 2012-2015

Jurnal Akuntansi Bisnis ◽

10.30813/jab.v10i1.984 ◽

2018 ◽

Vol 10 (1) ◽

Author(s):

Kurniawati Kurniawati

Keyword(s):

Earnings Management ◽

Significant Influence ◽

Audit Quality ◽

Real Earnings Management ◽

Quadratic Model ◽

Manufacturing Companies ◽

Font Size ◽

Reporting Standard ◽

Audit Firm ◽

The Real

The improvement of International Financial Reporting Standard (IFRS) may narrow the chance of discretionary accrual earnings management. As a result, there will be changes in the behavior of earnings management from accrual to real earnings management. The aims of this research are to investigate the influence of audit quality on the changes of earnings management behavior from accrual to real earnings management. This research emphasizes audit quality in competency and independency through audit firm tenure and audit firm rotation The sample used in this research were manufacturing companies listed at Indonesia Stock Exchange 2012-2015. Samples are collected by purposive sampling and resulted in 58 firms as the final sample. This research used quadratic model to investigate the relationship between audit firm tenure with real earnings management. The statistic method used was multiplied analysis multiple linear regression, with hypotheses testing of statistic t using a significance level (α) = 5%. The statistical tool used is Eviews 8. The results of this research showed that audit firm tenure has a significant influence to the real earnings management, while audit firm rotation, firm size, and leverage has no significant influence to the real earnings management. The results also showed that audit firm tenure has concave relationship with real earnings management (convex relationship with audit quality). This indicates that audit quality measured by audit firm tenure can decrease real earnings management in the fifth year and afterwards because the increase of audit quality through audit competence is greater than the decrease of audit independence Keywords : real earnings management, audit firm tenure, audit firm rotation, concave, convex, quadratic model

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The effect of audit committee characteristics on financial reporting quality: The moderating role of audit quality in the Netherlands

Corporate Ownership and Control ◽

10.22495/cocv18i3art2 ◽

2021 ◽

Vol 18 (3) ◽

pp. 19-30 ◽

Cited By ~ 1

Author(s):

Sana Mardessi Masmoudi

Keyword(s):

Earnings Management ◽

Financial Reporting ◽

Audit Committee ◽

Audit Quality ◽

Reporting Quality ◽

Ordinary Least Squares ◽

Real Earnings Management ◽

Financial Reporting Quality ◽

Moderating Role

The purposes of this study are to shed light, on the one hand, on the effect of audit committee characteristics, namely independent members in audit committee, a financial expert in audit committee, frequency of meetings and audit committee size on financial reporting quality proxied by real earnings management. On the other hand, it aims to investigate the moderating role of audit quality in the relationship between audit committee characteristics and financial reporting quality. The objective is to contribute to the new evidence on the role of audit committee characteristics towards the financial reporting quality with audit quality as a moderator, particularly the appointment of Big 4 company. This study uses the ordinary least squares (OLS) regression to achieve the research purpose by evaluating the data collected from 90 public listed companies from 2010 to 2019 in the Dutch context. The results state that audit committee characteristics have a statistically significant relationship with real earnings management. However, the effect of audit committee meetings on abnormal operating cash flow and discretionary expenses is not significant. There is also evidence that audit quality positively moderates the audit committee and real earnings management links. Lastly, the findings of this study will help professional accountancy bodies and governments to highlight the relevance of earnings management in safeguarding trustworthy financial information, owners’ wealth and to enhance audit committee characteristics in improving audit quality, especially after the enforcement of the Dutch Corporate Governance Code in 2016.

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Audit committee and financial reporting quality: the moderating effect of audit quality

Journal of Financial Crime ◽

10.1108/jfc-01-2021-0010 ◽

2021 ◽

Vol ahead-of-print (ahead-of-print) ◽

Author(s):

Sana Mardessi

Keyword(s):

Earnings Management ◽

Financial Reporting ◽

Audit Committee ◽

Audit Quality ◽

Reporting Quality ◽

Moderating Effect ◽

Real Earnings Management ◽

Financial Reporting Quality ◽

Content Type ◽

The Relationship

Purpose The purpose of this study is to address the impact of audit quality on financial reporting quality proxied by real earnings management. To further clarify the mentioned links, this study empirically assesses the moderating effect of audit quality. Design/methodology/approach The study is based on a sample consisting of 90 non-financial companies that are listed in the Amsterdam stock exchange in AEX all share index over the 2010–2017 period. This study applies a quantitative approach and secondary data as the main source of information for analysis. This paper performs an ordinary least squares regression to examine the moderating effect of audit quality on the relationship between financial reporting quality. Findings Empirical findings demonstrate that corporate governance mechanism, mainly independence members, financial expert and audit committee size has a statistically significant relationship with real earnings management. However, the effect of audit committee meetings on real earnings management is not significant. There is also evidence that audit quality moderates the audit committee – real earnings management links. Originality/value This study extends the existing literature by examining the moderating effect of audit quality on the relationship between financial reporting quality proxied by real earnings management in the Dutch context.

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