Does earnings management mediate the relationship between audit quality and company performance? Evidence from Jordan

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Malik Muneer Abu Afifa ◽  
Isam Hamad Saleh ◽  
Fadi Fouad Haniah
Keyword(s):  
Earnings Management ◽  
Financial Market ◽  
Significant Influence ◽  
Audit Quality ◽  
Company Performance ◽  
Content Type ◽  
Audit Firm ◽  
Service Companies ◽  
Future Work ◽  
The Relationship

Purpose The purpose of this study is to look at the direct relationship between audit quality, earnings management (EM) practices and company performance, as well as the indirect influence (mediation) of EM practices in the relationship between audit quality and company performance. It offers empirical evidence from the Jordanian market, which is considered an emerging market. Design/methodology/approach The population of this study is represented in Jordanian service companies listed on the Amman Stock Exchange (ASE), with a total of 344 company-year observations. Furthermore, panel data analysis was used in this study, and data for the study were acquired from yearly reports as well as the ASE’s database. Findings Based on generalized method of moments model, the present findings demonstrate that the size of the audit firm and the tenure of the audit firm have a positive and negative influence on EM practices, respectively, but that industry-specialist audit firm has a negative and insignificant effect. EM practices have a negative impact on two company performance proxies (ROA and ROE), but have no effect on earnings per share (EPS). Furthermore, the size of the audit firm has a positive and significant influence on the performance proxies of the company [i.e. return on assets (ROA) and return on equity (ROE)]. The presence of an industry-specialist audit firm has a positive and significant influence on two proxies of company performance (ROE and EPS), but a negative and significant impact on ROA. An audit firm’s tenure has a negative and significant impact on two performance proxies (ROA and EPS), but a positive and significant impact on ROE. Then, EM practices either fully or partially mediate the relationship between audit quality proxies and company performance as assessed by ROA, ROE and EPS. Research limitations/implications The current study’s limitation is that it only searched in Jordanian service companies listed on ASE from 2012 to 2019 to meet the study’s objectives; thus, the authors recommend that future work investigate the study model for other sectors, whether in Jordan or other emerging markets such as the Middle East and North Africa. Another limitation of this study is that the study models lack important variables, which may affect EM and company performance, such as corporate governance and ownership structure characteristics; as a result, the authors recommend that future work includes such variables in future research models to have more explanations in this context. Practical implications Analysts, investors and other strategic decision makers may use the findings of this study to improve the efficiency and efficacy of Jordan’s financial market. These findings will enhance policymakers’ willingness to establish appropriate regulations, which might improve Jordan’s financial market performance and efficacy. These findings may help investors make better judgments by using audit quality proxies and EM indicators, which can forecast business success. Originality/value First, this study distinguishes itself from prior studies through establishing a new research model, by investigating the mediating effect of EM in the relationship between audit quality and company performance. It provides empirical evidence from the Jordanian market; hence, it increases the body of the knowledge in this context. Second, to the best of the authors’ knowledge, this is the first study to look into the link between audit quality, EM and company performance together; hence, the model of this study is developed using agency theory and information asymmetry theory. Third, the current study adds new evidence to the role of audit quality and EM in companies, as well as how audit quality and EM practices affect company performance in emerging markets such as Jordan.

The moderating role of audit quality on the relationship between auditor reporting and earnings management: empirical evidence from Tunisia

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Fakhfakh Imen ◽  
Jarboui Anis
Keyword(s):  
Earnings Management ◽  
Audit Quality ◽  
Stock Exchange ◽  
Generalized Least Squares ◽  
Content Type ◽  
Audit Opinion ◽  
Before And After ◽  
Audit Opinions ◽  
Auditor Reporting ◽  
The Relationship

PurposeThe purpose of this study is to examine the interrelationship between modified audit opinions and earnings management as measured by discretionary accruals and develop a thorough understanding regarding the moderating effect of audit quality on this relation.Design/methodology/approachThis study uses a sample of Tunisian listed firms on the Tunis Stock Exchange during 2006–2013. Four models are developed and tested by using panel logistic and Feasible Generalized Least Squares (FGLS) regressions.FindingsThe results show that earnings management increases the likelihood of receiving a modified audit opinions. Then firms receiving modified audit opinions manage earnings more than those receiving clean opinions. It is also discovered that audit quality moderates the relationship between audit opinion and earnings management.Practical implicationsThis paper contributes to the literature of both audit and management studies and represents the first effort to examine the relation between audit opinion and earnings management, with audit quality as a moderating variable.Originality/valueThis study extends existing research on earnings management and audit opinion. 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. It constitutes an addition to previous knowledge about audit opinion in the Tunisian context before and after revolution.

Audit quality and earnings management: evidence from Jordan

2016 ◽  
Vol 17 (2) ◽  
pp. 170-189 ◽  
Author(s):  
Ebraheem Saleem Salem Alzoubi
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Audit Quality ◽  
Reporting Quality ◽  
Least Square ◽  
Cross Sectional ◽  
Content Type ◽  
Audit Firm ◽  
Big 4 ◽  
Jones Model

Purpose – The purpose of this paper is to test the association between audit quality and earnings management (EM). Audit quality studies documented that accruals would reduce when the auditor is independent or the audit firm is large. Design/methodology/approach – This paper uses generalised least square regression to investigate the influence of audit quality on EM. The sample contained 86 companies listed on the Amman Stock Exchange from 2007 to 2010. The cross-sectional modified Jones model was employed to measure discretionary accruals as a proxy for EM. Findings – This paper revealed that there is a significantly negative association between audit quality and EM. The result inferred that EM level is significantly lower among companies using the services of independent auditors. Moreover, this study exposed that the level of EM is significantly less among companies hiring a Big 4 audit firm, as compared to companies utilising the service of a non-Big 4 audit firm. Research limitations/implications – The measurement error, which is a rigorous concern for studies on EM, is one of the limitations in this study. Hence, the current study wholly inherited the limits of the modified Jones model. Practical implications – The findings based on the current study would provide beneficial information for regulators in Jordan and other countries with an institutional environment similar to that of Jordan. Moreover, the results provided valuable information to investors in assessing the influence of audit quality on financial reporting quality (FRQ). Originality/value – The current study contributed to auditing and corporate governance literature and its influence on EM among Jordanian companies. This research will be of value to companies seeking to reduce EM and enhance FRQ.

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

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

<p><em><span style="font-size: small;">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 </span></em></p><p><em><span style="font-size: small;"> </span></em></p><p><span style="font-size: small;"><em>The sample used in this research were manufacturing companies listed at Indonesia Stock Exchange 2012-2015. </em><em>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 </em><em>using a significance level (α) = 5%. The statistical tool used is Eviews 8.</em></span></p><p><em><span style="font-size: small;"> </span></em></p><p><span style="font-size: small;"><em>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). </em><em>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</em></span><em></em></p><p><em><span style="font-size: small;">                                                                                                                      </span></em></p><strong><em>Keywords : </em></strong><em>real earnings management, audit firm tenure, audit firm rotation, concave, convex, quadratic model</em>

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

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.

Earnings management, audit quality, and cost of debt: evidence from a Central Asian economy

2019 ◽  
Vol 34 (6) ◽  
pp. 696-721 ◽  
Author(s):  
Nurlan Orazalin ◽  
Rassul Akhmetzhanov
Keyword(s):  
Earnings Management ◽  
Empirical Evidence ◽  
Audit Quality ◽  
Ordinary Least Squares ◽  
Annual Reports ◽  
Cost Of Debt ◽  
Content Type ◽  
Central Asian ◽  
The Impact ◽  
The Relationship

Purpose This study aims to examine the effects of earnings management and audit quality on cost of debt of listed companies in Kazakhstan. The study also investigates the effects of audit quality on earnings management and whether the relationship between earnings management and cost of debt is affected by audit quality in the context of a given emerging economy. Design/methodology/approach The study sample consists of public companies listed in the Kazakhstan Stock Exchange (KASE) from 2011 to 2016, and all data were obtained from audited financial statements and annual reports downloaded from the webpage of KASE. The study uses the cross-sectional ordinary least squares technique to test the impact of audit quality and earnings management on cost of debt. Findings The collected empirical evidence shows that earnings management is negatively related to cost of debt. The findings also indicate that higher audit quality leads to a lower cost of debt. However, the results suggest that audit quality has no impact on earnings management and that the effect of earnings management on cost of debt is not different for the companies audited by the Big Four and for the companies audited by other audit firms. Practical implications The findings of the study can be of interest to policy-makers, regulators, investors and practitioners in emerging markets with an institutional environment similar to that of Kazakhstan. Originality/value The study throws more light on the impact of earnings management and audit quality on cost of debt in Kazakhstan, representing the Central Asian region. This study also extends the current literature by providing empirical evidence that the relationship between earnings management and cost of debt is not affected by audit quality.

Auditor tenure and accounting conservatism: evidence from Greece

2016 ◽  
Vol 31 (6/7) ◽  
pp. 538-565 ◽  
Author(s):  
Laura K. Rickett ◽  
Anastasia Maggina ◽  
Pervaiz Alam
Keyword(s):  
Earnings Management ◽  
Audit Quality ◽  
Negative Impact ◽  
Accounting Conservatism ◽  
Accounting Quality ◽  
Cross Sectional ◽  
Content Type ◽  
Auditor Rotation ◽  
Auditor Tenure ◽  
The Relationship

Purpose This study aims to examine the relationship between auditor tenure and conservatism for firms in Greece. Greece not only has a high incidence of earnings management but is also required under the new European Commission (EC) regulation to comply with mandatory auditor rotation. Therefore, Greece is an ideal setting in which to study the association between auditor tenure and accounting conservatism. Design/methodology/approach Similar to Jenkins and Velury (2008), this paper uses Basu’s (1997) asymmetrical timeliness of earnings as a measure of conservatism. Following Li (2010), the regression is re-estimated for subsamples based on client importance as measured by the ranking of client sales among all clients audited by the firm. Findings In contrast to Li (2010), the results of this study, which used a sample of firms in Greece, indicate that conservatism decreases as the auditor–client relationship lengthens. Client importance does not appear to affect the relationship between auditor tenure and conservatism, as measured by asymmetric timeliness of earnings. However, when using the accrual–cash flow measure of conservatism (Ball and Shivakumar, 2005), it is found that auditor tenure is positively (negatively) associated with conservatism for less (more) important clients. The results suggest that longer auditor tenure may have a negative impact on audit quality in certain countries where accounting quality has been found to be poor. Therefore, the new EC regulation requiring mandatory auditor rotation may in fact improve audit quality for firms in Greece. Research limitations/implications This study’s sample consists of firms on the Athens Stock Exchange for the period of 1998-2011. This sample was purposely selected because of the unique conditions of rampant earnings management and low incentive in Greece for the auditors to exert effort to detect such practices. Moreover, Greece is subject to the new EC regulations requiring mandatory auditor rotation beginning in 2014. Future studies could examine this issue in alternate settings and over different time periods. Also, other cross-sectional variations among firms which affect the association between auditor–client tenure and audit quality may exist. Practical implications The findings are important to regulators such as the EC and indicate that Greece may be an appropriate setting in which to require mandatory auditor rotation. These results are also useful to auditors who wish to improve the audit quality and the public’s perception of their work. Originality/value Auditor tenure has been the subject of considerable debate, and regulators contend that long auditor tenure reduces audit quality. There may be a valid argument in favor of mandatory auditor rotation in countries particularly susceptible to low accounting quality due to issues such as rampant earnings management. Greece appears to be one such example, and this study provides support in favor of that argument by demonstrating that longer auditor tenure may lead to lower accounting quality in terms of conservatism. Therefore, the recent EC regulation may result in improved audit quality for firms in Greece.

Pengaruh Hubungan Politik Terhadap Manajemen Laba Pada Perusahaan Sektor Jasa Dengan Variabel Kontrol Ukuran Perusahaan Dan Kualitas Audit

2018 ◽  
Vol 16 (2) ◽  
pp. 30
Author(s):  
Dwikky Darmawan ◽  
Weny Putri
Keyword(s):  
Earnings Management ◽  
Firm Size ◽  
Significant Influence ◽  
Service Sector ◽  
Audit Quality ◽  
Stock Exchange ◽  
Secondary Data ◽  
Annual Reports ◽  
Political Connection ◽  
Discretionary Accrual

The purpose of this study is to determine the effects of political connection toward the earnings management of service sector companies with control variables firm size and audit quality. Firm�s political connection measured by using dummy variable. Earnings management is proxied by discretionary accrual which is measured by using Modified Jones Model. The research data applied in this study are the secondary data which are taken from the annual reports of service sector companies that listed in Indonesian Stock Exchange of 2016-2017 periods. There are 330 observations fit as sample, which are taken by using purposive sampling method. Data are processed by applying the multiple linear regression test. The result show that the political connection had positive but not significant influence to earnings management. Firm size had negative but not significant influence to earnings management. Whereas the audit quality had a negative and significant influence to earnings management.

Fee Discounting and Audit Quality Following Audit Firm and Audit Partner Changes: Chinese Evidence

2014 ◽  
Vol 90 (4) ◽  
pp. 1517-1546 ◽  
Author(s):  
Hua-Wei Huang ◽  
K Raghunandan ◽  
Ting-Chiao Huang ◽  
Jeng-Ren Chiou
Keyword(s):  
Earnings Management ◽  
Audit Quality ◽  
Audit Fees ◽  
Audit Firm ◽  
Audit Fee ◽  
Significant Attention

ABSTRACT Issues related to low-balling of initial year audit fees and the resultant impact on audit quality have received significant attention from regulators in many countries. Using 9,684 observations from China during the years 2002–2011, we find that there is a significant initial year audit fee discount following an audit firm change when both of the signing audit partners are different from the prior year. The evidence is mixed if one or both of the signing partners from the prior year also moves with the client to the new audit firm. We find evidence of audit fee discounting in our analysis of fee levels, but not in our analysis of changes in audit fees from the prior year. Sanctions for problem audits and greater earnings management are more likely when there is an audit firm change that involves two new signing partners together with initial year audit fee discounting.

Earnings management and ownership structure in emerging market

2017 ◽  
Vol 43 (10) ◽  
pp. 1117-1136 ◽  
Author(s):  
Naima Lassoued ◽  
Mouna Ben Rejeb Attia ◽  
Houda Sassi
Keyword(s):  
Emerging Markets ◽  
Earnings Management ◽  
Ownership Structure ◽  
Audit Quality ◽  
Emerging Market ◽  
Middle Eastern ◽  
Convincing Evidence ◽  
Loan Loss ◽  
African Countries ◽  
Content Type

Purpose The purpose of this paper is to investigate whether ownership structure affects earnings management in the banking industry of emerging markets. Design/methodology/approach The empirical study is conducted using a sample of 134 banks from 12 Middle Eastern and North African countries. Econometrically speaking, the study used a panel data regression analysis. Findings The authors found convincing evidence that banks with more concentrated ownership use discretionary loan loss provisions to manage their earnings. The authors also found that state and institutional owners encourage earnings management, while family owners reduce this practice. Practical implications The findings would be valuable for investors since they should take into account ownership structure in order to reach a better investment decision. Moreover, regulatory reforms in emerging markets should push for more transparency about ownership structure, high levels of supervision, and external audit quality. Originality/value This study presents international evidence on the prominent role of owners in earnings management in emerging markets with weak shareholder rights protection.

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