Abstract
In recent decades, there has been a noticeable increase in the practice of earnings management as a proxy for financial reporting, especially real activities, with effect on the quality of financial statements. The role of the audit committee in mitigating earnings management remains ambiguous because of inconclusive findings. Therefore, this study examines the moderating effect of audit quality and audit committee on financial reporting quality, also known as REM inn Malaysian companies. The results show that corporate governance mechanism such as financial accounting expert, meeting and indicate significant results with real earnings management while, audit committee independence and size, shows an insignificant result on real earnings management. In addition, the results show that audit quality of the audit committee leads to less aggressive earnings management practice in real activities. The findings also show that audit quality and audit committee has a significant role in restricting the real earnings management. Audit quality is found to significantly moderate the relationship between audit committee with financial reporting quality proxy. Overall, this study provides a reference point for the relevant parties such as regulatory bodies, policymakers and standard setters towards improving the quality of earnings and corporate governance practices in ensuring credible accounting information.Keywords: audit committee effectiveness, audit quality, real earnings management, MalaysiaJEL Classifications: G3, M42DOI: https://doi.org/10.32479/ijefi.10136
Highlights
These financial statements should not be intentionally prepared to mislead the user, but must provide reliable, timely, and relevant information to assist users when it comes to making important decisions (Kibiya et al, 2016)
In line is above argument the study hypothesized that: Hypothesis 10 (H10): The Audit Quality Change has a positive effect on Audit Committee Financial Accounting Expert and financial reporting quality (FRQ) proxy real earning management (REM)
In line is above argument the study hypothesized that: Hypothesis 11 (H11): The Audit Quality Change has a positive effect on Audit Committee Meeting and financial reporting quality (FRQ) proxy real earning management (REM)
Summary
These financial statements should not be intentionally prepared to mislead the user, but must provide reliable, timely, and relevant information to assist users when it comes to making important decisions (Kibiya et al, 2016). This implies that information should be recent, with additional facts supplied in the supporting foot note as a desire to assist in clarification. The information needs to faithfully present the business activity and other events, reproduce basic substance of events and cautiously represent estimates and uncertainties using proper disclosure (Okoye and Ofoegbu, 2011) The steadfastness of this information depends on the relevance and reliability of accounting earning. Previous studies found that managers choose between the two EM strategies (Braswell and Daniels, 2017; Cohen et al, 2008), or jointly use both these methods when they have to deal with EM (Chen et al, 2012)
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