Internal Factors, External Factors and Earnings Management: Moderating Effects of Auditor Industry Specialization

Abstract

Purpose - Earnings management is one of the agency problems in a company. Furthermore, it illustrates the opportunistic behavior of company managers and can be a bad signal for company stakeholders. This research was conducted with the aim of testing the auditor industry specialization as a moderator in the effect of financial distress, tax planning, ownership structure, and audit quality on earnings management.
 Research Method - This research uses 288 data from 36 manufacturing companies listed on the Indonesia Stock Exchange from 2012 to 2019, using a purposive sampling method. The model used in this research was analyzed using multiple linear regression and moderation test (sub-group analysis and ANOVA test).
 Findings - According to the findings, managerial ownership and audit quality have a negative effect on earnings management. On the other hand, financial distress, tax planning, and institutional ownership are not significant to earnings management. Meanwhile, by taking into account firm size, profitability, and leverage, auditor industry specialization can be found to moderate the relationship between financial distress, tax planning, managerial ownership, and institutional ownership with earnings management. However, specialization in the audit industry has no effect on the on the effect of audit quality on earnings management.
 Implication - The presence of managerial ownership and external auditors can serve as a de-confliction mechanism. Companies can consider giving managers the opportunity to own company shares and use the Big Four KAP auditors in order to create better oversight. In addition, companies can consider using auditors from KAPs who have a lot of experience in certain industries.

Leverage, earnings management and audit industry specialization: the case of Palestinian-listed companies

“…High-quality audit enhances the reliability of financial statements and highlights the investors' assessments of the firm's value (Titman and Trueman, 1986). As cited by Prayogi et al . (2022), auditors can help bridge the gap between the interests of shareholders and executives.…”

“…Managers have access to more information than owners, which creates information asymmetry (Prayogi et al ., 2022). Riahi-Belkaoui (2004) describes earnings management as a strategy used by managers to obtain personal benefits while interfering with the process of external financial reporting.…”

“…High-quality audit enhances the reliability of financial statements and highlights the investors' assessments of the firm's value (Titman and Trueman, 1986). As cited by Prayogi et al (2022), auditors can help bridge the gap between the interests of shareholders and executives. According to Azad et al (2023), substantial audit modifications negatively impact earnings management; thus, earnings management could be reduced by paying more attention to a high-quality audit and, as a result, detecting misstatements and amending or reporting them.…”

Do abnormal accruals influence abnormal tone in the CEO statements of the top 40 JSE-listed companies?

“…Through the use of Azure Machine Learning (AML) technology in Microsoft Excel, the CEO statements were lexically examined to figure out the amount of positive and negative words utilised, see for example (Mlawu et al, 2023) and (Phesa, 2021). After obtaining the general sentiment from AML, the tone factor was calculated in this study using the following equation, borrowed from (Carlsson & Lamti, 2015) and (Huang et al, 2014) and employs net pleasant or net unpleasant words as a percentage of total words to establish Tone:…”