Anti-corruption disclosure quality and earnings management in the United Kingdom: the role of audit quality

Abstract

Purpose Building upon institutional pressures on firms to deal with corruption, this study aims to investigate the association between a firm's engagement with anti-corruption disclosure quality (ACD_Q) and earnings management (EM). Also, this study examines the moderating role of audit quality in the association between ACD_Q and EM. Design/methodology/approach The authors constructed an ACD_Q index based on the 2010 UK Bribery Act and taking into account a wide range of rules on corruption and bribery, including those of the OECD, World Bank, UNCTAD, UNGC, UNCAC and GRI. Generalized method of moments and panel regression were used to examine the association between ACD_Q and EM. Findings Using a sample of 2,695 firm‐year observations of the UK’s FTSE-350 from 2008 to 2018, this study finds ACD_Q is negatively associated with EM. In addition, this negative relationship is contingent on audit committee independence and audit committee expertise. This finding is supported by additional robustness and sensitivity analysis. Practical implications The empirical evidence reiterates the crucial need for more concerted efforts to ensure corporate engagement in anti-corruption practices with a view to reducing earnings manipulations. Originality/value This study contributes to the limited evidence that investigates how ACD Q influences EM in the UK after the introduction of the UK Bribery Act in 2010. Furthermore, by considering the period from 2008 to 2019, this study investigates the potential moderating role of UK corporate governance reforms in EM reduction. In particular, to the best of the authors’ knowledge, this study assesses for the first time the moderating effect of audit committee mechanisms on the ACD Q and EM nexus.

Assessing the Practice of Earnings Management in COVID-19 Era. Landscape of European Companies: An International Comparison

“…Previous studies have confirmed that a Big 4 audit firm (Deloitte, Ernst & Young, KPMG, and PricewaterhouseCoopers) is representative of high audit quality. The reason for this is that high audit quality status ensures high quality reporting earnings, in other words lower earnings management, see studies by Becker et al (1998), Krishnan (2003), Santos-Jaén, Martín de Almagro and Valls (2023), Sundkvist and Stenheim (2023), Salem et al (2023). In addition, Susak (2020) studied the impact of COVID-19 on earnings management and audit effect.…”

Is earnings management impacted by audit fees and auditor tenure? An analysis of the Big Four audit firms in the US market

“…Previous research has shown that as the quality of audit work increases, the manipulation of financial results by audit firms decreases (Chi et al, 2011;Salem et al, 2023;Zgarni et al, 2016). At the same time, auditor independence is essential to ensure the quality of audits and protect stakeholder interests (Jamal & Sunder, 2011).…”

“…Earnings management (EM) is a strategy used within the limitations allowed by the Generally Accepted Accounting Principles (GAAP) to deliberately manipulate a company's financial reports so that the figures match a pre-determined target (Chang et al, 2022a;Palacios-Manzano et al, 2019;Santos-Jaén et al, 2021). EM is considered a latent threat and an undesirable practice in the economic-financial world (Dechow & Skinner, 2000;Teixeira & Rodrigues, 2022), and many accounting scandals in recent years have involved EM (Al-Absy et al, 2019;Salem et al, 2023). This has prompted widespread interest in reducing these unfair practices as much as possible.…”

Audit quality and classification shifting: evidence from UK and Germany

“…Due to information asymmetry, it could lead to managers' engagement in EM practices as the shareholders have insufficient motives, resources and access to relevant information to monitor the activities of the managers (Warfield et al, 1995). Hence, firms need to have a strong audit committee as they enable firms to restrain managers' opportunistic behaviour to engage in EM (Komal et al, 2022;Salem et al, 2023). Also, it helps firms to reduce the issue of information asymmetry, improving the overall FRQ (Bepari and Mollik, 2015).…”