The Effect of Audit Quality on the Earnings Management Activities

Reem J. Al-Mousawi, Ali Al-Thuneibat

Abstract


The main purpose of this study was to investigate the effect of audit quality, measured by average clients' size of auditing firm, on the earnings management activities, measured by the value of discretionary accruals. This study was done controlling two moderating variables, which are the client importance and auditor’s name.
Simple and Multiple Regressions were used to study the effects of audit quality on earnings management, and ANOVA was used for comparing the effects of auditor's name on the relation between audit quality and earnings management. The findings of the study indicated that audit quality has a relatively weak negative influence on discretionary accruals, and this, in turn, has a relatively weak negative influence on the manipulations done by management.
The moderating variable client importance has no significant effect on the relationship between audit quality and discretionary accruals. So auditor’s name is the moderating variable. The researchers recommend that audit firms should improve their performance and that regulatory agencies should improve their supervision over audit firms in order to enhance audit quality and help detect and prevent management manipulations in earnings.

Keywords


Auditing, Audit Quality, Earnings Management, Discretionary Accruals

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