Earnings Management and Audit Quality: Evidence from Malaysia

Nor Balkish Zakaria ,Hanis Athirah Zulkefeli,Rahayu Abdul Rahman

doi:10.6007/ijarafms/v12-i1/11621

Abstract

This paper aims at investigating the relationship of audit market share, industry specialisation and Big 4 towards earnings management. The research posits that audit market share and industry specialisation constrains earnings management. In addition, it hypothesized a positive relationship between Big 4 and earnings management. The data was gathered from Data Stream, Thomson Reuters to test the research hypotheses. Out of 1488 companies-years observation between 2015 to 2018, the results indicate that there is no significant difference between audit market share and industry specialist auditors in constraining earnings management. In addition, findings support that Big 4 was significantly higher when specialists conducted the audit. The results provide empirical evidence consistent with the hypothesis that auditor with big size improves audit quality.

Highlights

High quality financial reporting will assist users to make right decisions
In conjunction of the findings, it might be said that this proxy of audit quality could be the determinant to influence the likelihood of earnings management in Public Listed companies in Malaysia
Despite numerous studies pertaining to the earnings management issues, the relationship between earnings management and of audit market share, industry specialisation and Big 4 especially in developing country such as Malaysia are still scarce

Summary

Introduction

High quality financial reporting will assist users to make right decisions. The right decision will lead to optimum allocation of resources that plays a significant role in contribution to a country’s economic success. Financial performance is mainly evaluated based on the information gathered from earnings and its components. Earnings management is the choice by a manager of accounting policies so as to achieve some specific objective (Scott, 1997). Healy and Wahlen (1999) revealed that earnings management happens when managers use judgment in financial reporting and in structuring transactions to alter financial reports to either mislead certain stakeholders about the underlying economic performance of the company, or to influence contractual outcomes that depend on reported accounting numbers According to Siregar and Utama (2008), there are two types of earnings management; efficient earnings management that expands earnings in formativeness in communicating private information and opportunistic earnings management which reports earnings opportunistically to maximize companies’ utility. Healy and Wahlen (1999) revealed that earnings management happens when managers use judgment in financial reporting and in structuring transactions to alter financial reports to either mislead certain stakeholders about the underlying economic performance of the company, or to influence contractual outcomes that depend on reported accounting numbers

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