Influential Factors Affecting Earnings Management in Public Listed Companies: A Conceptual Model

Xie Xiaojun,Sayaf Algrady

doi:10.32479/irmm.12920

Abstract

The issue of earnings management in public listed companies has gained an increasing attention from academicians and policy makers due to its impact on stakeholders’ decision-making. Researchers found that the main factors influencing earnings management can be grouped under internal and external corporate governance aspects. This study proposed a comprehensive model combining some internal and external corporate governance factors affecting earnings management. Based on a review and synthesis of relevant literature, the current study concludes that audit committee characteristics, auditor reputation and audit opinion have a significant impact on earnings management. Further, we predict that auditor reputation has a potential mediating role on the relationship between audit committee characteristics and earnings management, and on the relationship between audit committee characteristics and audit opinion. This research extends the scholarship on earnings management literature and has the potential to provide a set of recommendations to investors and regulatory entities.

Highlights

Financial reporting presented by listed companies and audit reports issued by external auditors maintain a significant impact on stakeholders’ decisions
This study argues that the size of the audit committee plays a major role in influencing earnings management and tends to empirically test the following hypothesis: H1a: The size of audit committees has a negative impact on earnings management in public listed companies
The following research hypothesis can be used to examine the validity of this argument in publicly traded companies: H1b: The presence of independent audit committees has a negative impact on earnings management in public listed companies

Summary

INTRODUCTION

Financial reporting presented by listed companies and audit reports issued by external auditors maintain a significant impact on stakeholders’ decisions. Corporate accounting scandals emphasized the influential role of auditing in ensuring both the soundness of financial statements and the quality of reported earnings (Maijoor and Vanstraelen, 2006; Lin and Hwang, 2010). Audit committees and external auditors, as corporate governance actors, provide supervision that is expected to reduce the potential for earnings management. Numerous studies focused on examining the association between audit quality and earnings management. Most of those studies were conducted in a western context and provide inconsistent evidence (Arnedo et al, 2008; Lin and Hwang, 2010; Maijoor and Varstraelen, 2006; Piot and Janin, 2007)

THEORETICAL FRAMEWORK

Earnings Management Earnings management, according to

Audit Committee Characteristics

Auditor Reputation

Audit Opinions

Audit Committee Characteristics and Earnings Management According to

Auditor Opinions and Earnings Management According to Rosner (2003) and

Audit Committee and Auditor Reputation

Auditor Reputation and Earnings Management According to Salehi and

3.10. Mediation Effect of Auditor Reputation on the Relationship between the Audit

3.11. Auditor Reputation and Audit opinions

3.12. Mediation Role of Auditor Reputation on the Relationship between the Audit