Audit Quality and Earnings Management: Empirical Evidence from Indonesia
Authors
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Annisa Yasmin
K. Rembang D3 Management, Department of Business and Finance, Vocational School, Universitas Diponegoro, Semarang, Indonesia
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Aji Yudha
Management, Faculty of Economics and Business, Diponegoro University, Semarang, Indonesia
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Gehad Mohammed Sultan Saif
Master in Accounting, MBA Finance, University of Aden, Faculty of Administrative Sciences, Aden,Yaman
DOI:
https://doi.org/10.69725/ami.v1i1.96
Keywords:
Impact of Audit Quality, Discretionary Accruals, Earnings Management, Audit Firm Size, Big 4Abstract
Purpose: This study investigates the impact of audit quality, company size, leverage, sales growth, and return on assets (ROA) on discretionary accruals, a key measure of earnings management, among Indonesian firms.
Methods: Using a sample of 4,723 firms from Indonesia over the period 2020-2023, we applied multiple regression analysis
Findings: The results indicate that audit quality, as represented by Big4, is significantly associated with a reduction in discretionary accruals, suggesting that higher audit quality constrains earnings manipulation. Larger firms exhibit lower discretionary accruals, consistent with the notion that bigger firms are subject to more scrutiny. Sales growth is positively associated with discretionary accruals, indicating that firms under growth pressure are more likely to engage in earnings manipulation. Leverage and ROA did not show significant effects on discretionary accruals in this sample, indicating that these factors may have less influence on earnings management practices compared to audit quality and firm size.
Novelty: This study contributes to the literature by providing empirical evidence from an emerging market context, specifically Indonesia, highlighting how audit quality and firm characteristics influence earnings management practices. It extends previous research by focusing on the specific dynamics of Indonesian firms during a recent period
Implications: The findings suggest that improving audit quality and enhancing transparency for larger firms can mitigate earnings management. Policymakers and regulators in Indonesia should consider strengthening audit regulations and oversight to ensure higher audit quality, which could improve financial reporting integrity.
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