Effect of Audit Quality on Earnings Quality: Evidence From Indonesia Stock Exchange

Sumiadji Suparsono,Edi Subiyantoro,Grahita Chandrarin

doi:10.5430/ijfr.v10n1p86

Sumiadji Suparsono, Edi Subiyantoro + Show 1 more

Open Access

https://doi.org/10.5430/ijfr.v10n1p86

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Abstract

This research was conducted to test the effect of audit quality on earnings quality. Its observed data consisted of 116 annual data of manufacturing companies listed in the Indonesia Stock Exchange within 2011-2014. The proxies of audit quality are auditor size, audit tenure and audit specialization. The earnings quality was formed from the attributes of accrual quality, persistence, predictability, and income smoothing. The analysis techniques for this research involved (1) an confirmatory factor analysis to form the earnings quality and (2) multiple regression analysis to test the effect of the auditor size, audit tenure and audit specialization on earnings quality. Analysis results showed that earnings quality is formed by the attributes of persistence and predictability. Research results showed that auditor size and audit tenure have effect on earning quality, while audit specialization do not.

Highlights

Earnings quality is one of the pieces of information that investors rely on to make decisions
Audit quality had the proxies of several measurements, including audit firm size, audit tenure, audit industry specialization, re-presentation, litigation, accrual, and so on (Hu, 2015)
Test results indicate that auditor size has a positive significantly influence on earnings quality

Summary

Introduction

Earnings quality is one of the pieces of information that investors rely on to make decisions. External auditors are considered to be less sensitive to the risks that occur in clients, less-independent, and lack of professional objectivity and responsibility which tend to affect audit quality. Based on this phenomenon, this study examines the effect of audit quality on earnings quality. Audit quality had the proxies of several measurements, including audit firm size, audit tenure, audit industry specialization, re-presentation, litigation, accrual, and so on (Hu, 2015). Earnings quality had the proxies of the accrual approach (Al-Thuneibat et al, 2011; Francis and Wang, 2008; Kabir et al, 2011; Siagian and Tresnaningsih, 2011; and Wang et al, 2014) and earning respone coefficient (Ghosh and Moon, 2005; Teoh and Wong, 1993; Zakaria and Daud, 2013)

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