Company Characteristics, Corporate Governance, Audit Quality Impact on Earnings Management

Abstract

Objective -The purpose of this research is to empirically examine how company characteristics, corporate governance and audit quality affect earnings management. Methodology/Technique -The population used for this research is manufacturing companies listed on the Indonesian Stock Exchange between 2013 and 2015. The sampling method used in this research is purposive sampling. 64 companies are examined, with 192 items of data being obtained. Findings -This research also uses statistical testing through a multiple regression. The results show that return on assets, financial leverage, free cash flow, and sales growth all have an influence on earnings management. Meanwhile, other variables such as managerial ownership, institutional ownership, board size, the presence of an audit committee, firm size, and audit quality have no significant effect on earnings management. Novelty -In this research, company characteristics are proxied with the return on assets, financial leverage, firm size, free cash flow, and sales growth, while corporate governance is proxied with managerial ownership, institutional ownership, board size, and the presence of an audit committee.

Institutional Ownership, External Auditor Reputation, Financial Leverage, and Earnings Management

“…Additionally, high leverage can cut the firm's tendency to manage its profits as long as it applies transparency. This propensity stands confirmed by the study of Kao & Chen (2004), Emamgholipour, Bagheri, Mansourinia, & Arabi (2013), Firnanti, Pirzada, & Budiman (2019), showing a negative effect of financial leverage on profits management.…”

“…Besides, hiring the auditors affiliated with the big-4 is another way to reduce profits management. This situation stays affirmed by Kao & Chen (2004), Yang, Chun, & Ramadili (2009), Herlambang & Darsono (2015), Shirzad & Haghighi (2015), Sastrawati & Hatane (2016), Lopes (2018), and Firnanti et al (2019) revealing a negative effect of this reputable auditor on profit management.…”

“…Because of the unsatisfactory situation, the technical competence and independence possessed by the auditors affiliated with the big four can only shrink the tendency of earnings management (Lopes, 2018). This statement also obtains confirmation from Kao & Chen (2004) Firnanti et al (2019). They reveal that the existence of the big four affiliated with public accounting firms can reduce the potency of managing profits.…”

“…Unlike this company, a company implementing transparency will disclose its real condition to the public (Tjager, Alijoyo, Djemat, & Soembodo, 2003). As a consequence, the managers do not tend to manipulate profit even though the firm has a significant portion of the debt, as Kao & Chen (2004), Emamgholipour et al (2013), Firnanti et al (2019) express. By mentioning this explanation, planned hypothesis three is as follows.…”

Corporate Governance and Accounting Earnings Management: The Case of Tunisia

“…Likewise, using a sample of non -financial listed firms in Pakistan over the period of 2009-2016, Zandi et al (2019) show that firms audited by big four auditors are more engaged in costly real earnings management activities. Firnanti et al (2019) show that free cash flow, return on assets, sales growth and financial leverage have an impact on earnings management. However, there is no significant link between other variables like firm size, managerial ownership, institutional ownership, the presence of an audit committee, board size and audit quality, and earnings management.…”