The impact of surplus free cash flow and audit quality on earnings management

Abstract

If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service information about how to choose which publication to write for and submission guidelines are available for all. Please visit www.emeraldinsight.com/authors for more information. About Emerald www.emeraldinsight.comEmerald is a global publisher linking research and practice to the benefit of society. The company manages a portfolio of more than 290 journals and over 2,350 books and book series volumes, as well as providing an extensive range of online products and additional customer resources and services.Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation. AbstractPurpose -The purpose of this paper is twofold. First, it investigates whether high free-cash-flow companies with low-growth opportunities (surplus free cash flow (SFCF)) are associated with income-increasing earnings management. Second, it scrutinizes the effect of audit quality on the income-increasing earnings management and SFCF and earnings management relationship. Design/methodology/approach -This study focusses on companies listed on the Bursa Efek Indonesia, Bursa Malaysia, and Stock Exchange of Singapore over the period 2005-2010. The cross-sectional modified Jones (1991) model is used to measure discretionary accruals (DACs) (the proxy for earnings management). SFCF is an indicator variable with firm j scored 1 if their retained cash flows is above the sample median and their price to book ratio is below the sample median in fiscal year t; otherwise is scored 0. Audit quality refers to the quality of the auditor. Indicator variable with firm j scored one (1) if their auditor in fiscal year t is a Big 4 audit firm; otherwise scored zero (0). Findings -The empirical result provides supports for the hypothesis suggesting that company managers with high free cash flow and low-growth opportunities tend to use their discretion to select income increasing accounting choices. Investigation based on each of the three-country sub samples indicates that the relationship between SFCF and managers' income-increasing accounting choice is applicable in Malaysia, partially applicable in Singapore but it is not valid in Indonesia. In addition, the statistical analyses based on all sample and country sub-samples indicate that audit quality has negative relationships with earnings management measure. The result of univariate analysis suggests that mean of DACs in companies audited by Big 4 auditors are significantly smaller compared to that of in non-Big 4 audited firms. However, the results of multivariate analysis suggest that audit quality has only partially significant association with earnings management. Moreover, this study finds that Big 4 auditors insignificantly moderate the SFCF-earnings management relationships. Practical implications -This research may have implications for ...

The Influence of Earnings Management and Tax Planning on Firm Value with Audit Quality as Moderating Variable

“…The characteristics of the audit committee have a positive role on the firm value significantly (Afza and Nazir, 2014). One of the audit functions as a controller, Audit Quality can overcome earnings management actions by companies in manipulating information (Alhadab & Clacher, 2018;Alzoubi, 2018;Muttakin et al, 2017;Alzoubi, 2016;Huguet & Gandia, 2016;Zgarni et al, 2016;Rusmin et al, 2014;Lin et al, 2012;Rusmin, 2010;Prawitt et al, 2009). So the hypothesis of this study is: Hipotesis 4.…”

“…At this stage, the role of auditors is necessary for investors to get their rights in receiving financial information company (Almutairi et al, 2009). By functioning as a controller, auditor qualified to suppress acts of earnings management by the company (Alhadab & Clacher, 2018;Asthana, 2014;Prawitt et al, 2009;Alzoubi, 2016;Huguet & Gandia, 2016;Rusmin, 2010;Rusmin et al, 2014;Zgarni et al, 2016) are also tax planning actions (Lin et al, 2012) resulting in the quality of financial statements (Alzoubi, 2018) according to regulations (Bepari, 2015) and have a good impact on performance (Hua et al, 2016) and firm value (Afza, 2014;Houmes et al, 2013;Khan et al, 2016),…”

Earnings Management Incentives and the Pricing of Discretionary Accruals

“…Several studies (Bhundia, 2012;Nekhili, Amar, Chtioui, & Lakhal, 2016;Rusmin, W. Astami, & Hartadi, 2014) ijbm.ccsenet.org International Journal of Business and Management Vol. 14, No.…”

Faktor-Faktor Internal PenentuPertumbuhan Perusahaan Pertambangan Yang Terdaftar Di Bursa Efek Indonesia Tahun 2010-2014

“…Banyak faktor yang mempengaruhi harga asetseperti inflasi, kurs, dan suku bunga. (Rudra P. Pradhan, Mak B. Arvin, Atanu Ghosray, 2015;Alberto Petrucci, 1997;Rusmin, Emita W. dan Bambang Hartadi, 2014). Inflasi (tingkat inflasi tinggi), melemahkandaya beli masyarakat.…”

“…Tahun 2012-2014, growth lebih dipengaruhi oleh ekonomi makro, seperti yang disebutkan pada studi literatur. Beberapa ekonomi makro yang disebut dalam beberapa penelitian adalah inflasi (Rudra P. Pradhan, Mak B. Arvin, Atanu Ghosray, 2015; dan), kemudian kurs atau nilai tukar (Rusmin, Emita W., Bambang Hartadi, 2014;Anthony Flint & Andrew Tan & Gary Tian, 2010).…”