Discretionary Accruals Research Articles

경제환경적 불확실성 하에서의 감사품질

[Purpose] This paper examines the impact of macro-uncertainty on audit quality. Furthermore, it explores whether the relationship between uncertainty and audit quality varies based on the audit effort exerted by senior CPAs within audit firms.
 [Methodology] This paper uses Korean listed firms from the years 2014 to 2019 and utilizes 9,772 number of observations. To quantify uncertainty, this study employs VKOSPI, an option-based measure of uncertainty provided by KRX. For assessing audit quality, the absolute magnitude of discretionary accruals is utilized.
 [Findings] Using regression analyses, this paper finds a negative relation between VKOSPI and discretionary accruals, meaning that audit quality improves under uncertainty. Further analyses indicate that this negative relationship between VKOSPI and discretionary accruals is observed specifically within the subsample of firms audited by auditors with above median input from senior managers.
 [Implications] By using recent sample after year 2014, this paper shows evidence that audit fee discount under uncertainty does not lead to deterioration of audit quality. Korea has put consistent effort to increase the responsibility of auditors. As one example, Korean companies are obliged to disclose number of staff put to audt process, audit hours, audit plan, and actual audit implementations. The results of our paper indicates that a series of efforts to strengthen auditors’ responsibilities are somewhat effective.

Firm Performance: An Analysis of Financial Policy and Audit Quality in Pakistan

Purpose: Having effective and well-structured financial policies is essential for a company's success. These policies provide the foundation for measuring and analyzing an organization's performance through a robust financial management system. This study introduces a novel element, namely, audit quality, to enhance our understanding of how financial policies impact a firm's performance. The primary objective of this research is to delve deeper into whether audit quality plays a moderating role in the relationship between financial policies and a firm's performance.
 Design/Methodology/Approach: Discretionary accruals were calculated using a regression model, and descriptive analysis was employed to analyze the data.
 Findings: The results of the study reveal that the connection between free cash flow, agency costs, and a firm's performance is significantly influenced by audit quality. This research particularly offers valuable insights into the manufacturing sector, where performance is of paramount importance.
 Implications: By considering the interplay of financial policy, audit quality, and firm performance, businesses and policymakers can make more informed decisions that contribute to the overall prosperity of the Pakistani corporate sector.

기업의 ESG 활동이 이익조정에 미치는 영향

[Purpose]This study emphasizes the importance of ESG (Environmental, Social, and Governance) management, proposing that it provides incentives for companies to achieve transparent and sustainable management. The study aims to analyze the impact of ESG management on corporate earnings management, particularly focusing on the effect of one financial characteristic, the Return on Sales (ROS), and how ESG influences this relationship. [Methodology]The study utilizes ESG rating data publicly disclosed by the Korea ESG Standards Authority from 2015 to 2022, focusing on manufacturing companies with available ESG ratings. The discretionary accruals were measured using the Jones model as the earnings management variable, and ROS was used to reflect financial characteristics. [Findings]The study found that ESG management tends to reduce corporate earnings management activities. Moreover, while companies with higher ROS were found to engage in more earnings management, the interaction between ROS and ESG management, particularly in terms of ESG integration, environmental (S), and governance (G) components, showed a negative relationship with earnings management. This suggests that ESG management contributes to reducing earnings management. [Implications]The study suggests that ESG management plays a crucial role in enhancing financial transparency and ethical standards in corporations. It was observed that companies with higher total sales profitability, when implementing ESG management, tend to show a decrease in earnings management activities. This indicates that ESG management can be a vital tool for enhancing financial soundness and transparency.

IFRS ADOPTION AND EARNINGS MANAGEMENT PRACTICES: EVIDENCE FROM NIGERIAN LISTED CONSUMER GOODS COMPANIES

Earnings Management, discretionary accruals, IFRS adoption, consumer goods firms, Nigeria. The study looked at earnings management practices in Nigerian consumer goods firms between pre and post-adoption of IFRS and earnings management in Nigeria. It involved twenty-one Nigerian firms in the Nigeria Exchange Group, with nine being sampled due to data availability. The Modified Jones Model, a well-known profits management model created by Dechow, Sloan, and Sweeney in 1995, was used. This research examined how IFRS has affected the way companies in Nigeria control their earnings from 2012 to 2022. The study examined earnings management practices in Nigerian consumer goods companies using an ex-post facto research design and non-parametric tests. Results showed no significant change in earnings management practices due to the adoption of IFRS.

The effect of audit committee financial expertise on earnings management tactics in the post-SOX era

To restore investor confidence and promote the integrity of financial accounting information provided to investors, following the passage of the Sarbanes-Oxley Act (SOX), the SEC adopted two new rules for public firms in early 2003, requiring the disclosure of audit committee financial expertise (ACFE) per SOX 407 and the reconciliation of non-GAAP financial measures to those most comparable in GAAP (Regulation G) per SOX 401(b). Using quarterly filing data in the post-SOX era from March 2003 to December 2016, this study examines the impact of these requirements, with a focus on the effect of ACFE on the main earnings manipulation tactics used to just meet or beat analyst expectations (JUSTMBE). Our study investigates the effects of overall ACFE and its components on three key earnings management tactics, namely, discretionary accruals, real activities management, and non-GAAP financial disclosures. We observe that firms with a higher level of ACFE, particularly accounting and finance expertise, exhibit a lower propensity to JUSTMBE. Furthermore, we posit that two upward earnings manipulations, accrual-based and real activities management, are significantly mitigated by ACFE through a complementary effect of its accounting and supervisory expertise components. However, we identify a clear strategic shift in which non-GAAP financial disclosures with unexpected exclusions become a popular alternative tactic for managers to JUSTMBE under the increasing presence of ACFE. This study provides empirical evidence with implications for regulators to consider more rigorous intervention and regulation on non-GAAP disclosures and to refine the requirement of audit committee financial experts with an emphasis on the complement of accounting and non-accounting financial expertise to effectively curtail earnings manipulation.

The Influence of Cash Flows Volatility on The Relationship Between Leverage and Accruals Earnings Management

This study examines how cash flow volatility affects leverage and accruals earnings management. The research objective achieves by analyzing a sample of non-financial Pakistani enterprises from 2004 to 2018. The paper examines leverage and earnings management in business risk, specifically cash flow volatility. The leverage includes short term, long term, and total debt, while cash flows volatility is used as business risk. The earnings management level is measured by accruals earnings management also by using John Modified Model that suggests measuring earnings management approach by using discretionary accruals. This analysis uses agency and positive accounting theory. This study uses two-step system Generalized Method of Moment (SYS-GMM) dynamic panel estimators to examine leverage and earnings management. The study also examines how business risk affects this relationship for Pakistani enterprises. Endogeneity between variables motivates the adoption of SYS-GMM. The study found that leveraged managers use accruals earnings management. Leverage and accruals earnings management are positively correlated. The firm managers deliberately eschew accruals-based earnings management and leverage long-term debt. This choice is predicated on the unfavorable link between long-term debt and accruals earnings management. The leverage impacts negatively on accruals earnings management in the presence of cash flows volatility that discourage the managers to manipulate the financial statements. When seeking external finance, managers are less likely to use accruals-based earnings management when facing cash flow instability.

'Till Death Do Us Part: An Examination of the Impact of Unbroken Auditor-Client Relationships on Audit Efficiency and Audit Quality

SUMMARY We examine whether audit engagements where the client has never switched auditors (original auditors) are associated with different audit fee and audit quality outcomes, relative to engagements that have experienced an auditor change. We document that clients with original auditors accrue nontrivial audit fee savings. Further, we find original auditor engagements are associated with lower levels of discretionary accruals and lower likelihood of misstatements, implying higher audit quality. We also find that investors appear to recognize the audit fee and quality benefits, as these auditors receive fewer votes from investors against their ratification. These results are consistent with a reduction in information asymmetry from greater client specific knowledge with original auditors, leading to more efficient and effective audits. Finally, we document that the audit fee and audit quality benefits diminish for engagements that exceed 40 years, providing some support for the benefit of an eventual fresh look in the audit. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: G18; H83; M4.

AN INTERACTION BETWEEN BOARD ATTRIBUTES AND EARNINGS MANAGEMENT OF LISTED MANUFACTURING COMPANIES IN NIGERIA

The study investigated an interplay between board attribute and earnings management of listed manufacturing companies in Nigeria. This study tested some board attributes indicators (audit fee, board independence, and board size), and earnings management was proxied using discretionary accruals using a sample of forty-two (42) manufacturing companies listed on Nigerian Exchange Group while purposeful sampling techniques were used to sampled from the population, covering the study period from 2010 to 2021. The data were analyzed using the Generalized method of moment by the use of E-View 12 econometric software and multivariate- regression model. The findings of the study show that there is a positive and statistically insignificant relationship between audit fees and earnings management. The study therefore concludes that a positive and statistical relationship exists between board attributes and earnings management of listed manufacturing companies in Nigeria. The study consequently recommends that ethical standards should be encouraged by the regulatory agencies if not mandated.

PENGARUH GOOD CORPORATE GOVERNANCE TERHADAP MANAJEMEN LABA PADA PERUSAHAAN MANUFAKTUR YANG TERDAFTAR DI BEI SEBELUM DAN SEMASA PANDEMI COVID

This study aims to obtain empirical evidence from Managerial Ownership, Institutional Ownership, Independent Board of Commissioners, and the Audit Committee which is an indicator of Good Corporate Governance as an independent variable, and other variables namely Leverage and Firm Size as control variables, and Pandemic Covid as a dummy variable, on the dependent variable namely Earnings Management in Manufacturing Companies sub-sector Food and Beverage listed on the Indonesia Stock Exchange (IDX). Discretionary accruals with the Kothari model used as a proxy for earnings management. The sample was obtained by purposive sampling method with predetermined criteria, and resulted 40 in manufacturing companies sub-sector food and beverage in the 2016-2020 period with a total of 200 data. Descriptive statistics and multiple regression were used as data analysis methods. The results of this study can be summarized as follows. The first regression analysis, namely before the covid pandemic period, showed that Institutional Ownership and Audit Committee had a significant negative effect on Earnings Management, while Managerial Ownership, Independent Board of Commissioners, Leverage, and Firm Size had no effect on Earnings Management. The second regression analysis, before and during the covid pandemic, showed that Managerial Ownership, Institutional Ownership, and Leverage had a significant negative effect on Earnings Management. Meanwhile, the Independent Board of Commissioners, Audit Committee, Firm Size, and the Covid Pandemic have no effect on Earnings Management. Based on this explanation, it can be concluded that the implementation of Good Corporate Governance in Manufacturing companies in the Food and Beverage Subsector can be said to be still relatively ineffective, because only Managerial Ownership, Institutional Ownership and Audit Committees in this study are able to carry out their duties effectively to minimize the practice of earnings management happened to the company.

The impact of co-opted executives on earnings management

PurposeThe authors seek to analyze the impact of weak corporate governance by top executives of a firm on the firm's earnings reports. This research is meant to further emphasize the impact of co-opted executives on a firm, primarily through their impact on earnings management.Design/methodology/approachUsing financial data from 11,473 firm-year observations, the authors utilize ordinary least squares (OLS), 2-stage IV regressions, propensity score matching (PSM) and entropy balancing to analyze the impact of a co-opted top management team on discretionary accruals and restatements.FindingsThe authors find empirical evidence that firms with weak corporate governance from top executives are more likely to manipulate reported earnings and have lower financial reporting quality. The authors also find that the effect of co-opted executives on earnings management is weaker when a chief executive officer's (CEO’s) incentives are not aligned with those of top executives, suggesting that executives prevent earnings management due to reputational concerns. Co-opted chief financial officers (CFOs) increase the magnitude of earnings management in a firm but are not solely responsible for the authors' results.Originality/valueThe authors' results suggest that the top executive team provides an important first defense in the prevention of earnings management and corporate wrongdoing. Co-option of the top executive team may be an important consideration when doing research into corporate governance.

Discretionary Accrual Earnings Management in a Sub-Saharan African Economy

This paper investigates the existence of discretionary total accrual earnings management and working capital accrual earnings management in Nigeria which is Sub-Saharan Africa's largest economy. Unlike previous studies that use the Ordinary Least Squares (OLS) technique that does not control for endogeneity that can invalidate results, our empirical methodology implements the maximum likelihood estimation that controls for endogeneity to estimate economically plausible levels of discretionary accrual earnings management. Our results find that discretionary accrual earnings management in Nigeria is characterized by statistically significant, tax-induced income-reducing discretionary accruals. This study contributes to the literature as it is the first emerging market, African and Sub-Saharan African economy study to the best of the researchers’ knowledge that estimates discretionary accrual earnings management for listed non-financial firms using various models based on the maximum likelihood estimation technique to control for endogeneity. The findings inform the political economy of economic development in Sub-Saharan Africa, particularly as it relates to how firms, especially multinationals, are motivated to extract rents from African economies. The results have policy implications for accounting regulatory interventions by policy and standard setting bodies that mitigate and/or eliminate capital flight, tax evasion, aggressive tax avoidance and financial corruption practices in Sub-Saharan African economies.

Does Debt Influence Earnings Management in Going Private Transactions in Brazil?

This paper aimed to analyze the influence of debt in earnings management of non-financial companies that were listed on the Brazilian capital market and went private by stock repurchase between 2002 and 2020. The companies that went private were matched by size and sector of activity with those that remained on the stock exchange market in the year prior to the offer announcement. Earnings management was estimated using discretionary accruals and debt was measured by Debt-to-Equity ratio and Total Debt ratio. The results suggest that companies that went public by repurchasing shares tend present negative earnings management. Also, it was found negative and significant relationship between earnings management and Debt-to-Equity ratio and company size. It is understood that the intensification of the monitoring of the managers' actions, mainly due to the publicity of the process implies the restriction of discretionary practices.

Mayor re-election and earnings management: evidence from Portuguese municipalities

PurposeThe aim of this paper is to investigate whether Mayors in Portugal engage in earnings management close to zero with the motivation of re-election.Design/methodology/approachThe data used in this study were annual financial information from Portuguese municipalities from 2005 to 2016, as well as data on elections and Mayor re-elections involving three political cycles. The methodologies employed were quantitative, including graphical and panel data regressions.FindingsThe results indicate that municipalities used discretionary accruals to engage in earnings management to report net earnings close to zero, and re-election seems to be a motivation for earnings management behaviour. Furthermore, the results suggest that municipalities in which the Mayor is re-elected are less likely to report positive net earnings close to zero.Originality/valueThis paper makes a valuable contribution to the literature on earnings management in municipalities. At the theoretical level, it makes it possible to identify whether re-election is a motivation for earnings management and, in this sense, to identify patterns of behaviour by managers. On a practical level, the knowledge of a manager's behaviour patterns will help to anticipate his or her future behaviour and, consequently, may prevent inefficiencies.

Do advisory directors increase discretionary accruals?

PurposeThis study aims to examine whether the presence of advisory directors affects firm discretionary accruals (DACC), a widely used proxy for financial reporting quality. The authors argue that the advisory director weakens the board monitoring role and impairs the firm financial reporting quality by increasing DACC.Design/methodology/approachThe sample consists of listed firms on the Australian Stock Exchange from 2001 to 2015 using 7,649 firm-year observations. The authors perform descriptive statistics, regression and propensity score matching analyses to examine the research hypothesis.FindingsThe research evidence that firms with a higher presence of advisory directors have more DACC, indicating poor financial reporting quality. Furthermore, the authors categorize the DACC and find that the firm has higher income-increasing DACC in the presence of higher advisory directors. The findings are robust concerning endogeneity issues.Research limitations/implicationsThe research evidence that firms with a higher presence of advisory directors have more DACC, indicating poor financial reporting quality. Furthermore, the authors categorize the DACC and find that the firm has higher income-increasing DACC in the presence of higher advisory directors. The findings are robust concerning endogeneity issues.Practical implicationsThe research contributes valuable insights for regulators and policymakers seeking to comprehend the implications of firms using more advisory directors. Additionally, the authors recognize the potential significance of the findings for the institution of directors, as they can provide a nuanced understanding of the specific roles played by advisory directors in organizational dynamics.Originality/valueWhile the extensive body of literature on corporate governance and financial reporting quality has been well-established, a noticeable void exists in academic research delving into the relationship between advisory directors and DACC management. This study seeks to fill this gap, making a distinctive and original contribution to the existing literature on corporate governance.

Analysis Of Discretionary Accrual, Differences In Profits, Cash Flow And Fiscal Profits On Profits Persistence Of National Manufacturing Companies Listed In Indonesian Stock Exchange

This study examines the effects of cash flow, discretionary accruals, and accounting profit on the persistence of profits in manufacturing enterprises. Manufacturing firms registered on the Indonesian Stock Exchange make up the study's population. Purposive sampling was the technique employed for sample selection. Secondary data, specifically financial reports of manufacturing firms that have gone public and are listed on the IDX, is the type and source of data used in this study. Descriptive statistics and multiple regression are the statistical techniques used to examine data and test hypotheses. Profit persistence is significantly harmed by the discrepancy between accounting profit and fiscal profit, which serves as a stand-in for deferred tax expense. Earnings permanence is significantly harmed by discretionary accrual. Profit persistence is significantly influenced favorably by operating cash flow. We can draw the conclusion that a company's earnings will last longer the higher its operating cash flow.

Anti-corruption corporate disclosures and earnings management: evidence from a developed market

Purpose This study aims to examine the association between anti-corruption corporate disclosure and earnings management practices by bringing evidence from a developed market. Design/methodology/approach The study uses data from non-financial FTSE 100 Shares in 2016 and 2017. This study develops a disclosure index to capture the anti-corruption disclosures and run pooled, fixed effects and generalized methods of moments regression models to explore the anti-corruption disclosure–earnings management association. This study also disentangles discretionary accruals into positive and negative, use adjusted discretionary accrual computation and take a more conservative view on discretionary accruals computation as an additional analysis. Findings The results show a negative and significant association between anti-corruption disclosure and earnings management practices. When disentangling discretionary accruals (overvalued/positive and undervalued/negative), the authors found that higher anti-corruption disclosures were negatively associated with positive discretionary accruals, but not associated with negative discretionary accruals. The additional analysis confirmed the previous results, showing that anti-corruption disclosures are perceived as a substantive practice, rather than a mere disclosure practice for legitimacy reasons. Originality/value This study contributes to debate on the symbolic versus the substantive uses of anti-corruption disclosures in the UK context.

Pengaruh Kualitas Audit Terhadap Hubungan Pengungkapan Other Comprehensif Income (OCI) dengan Earning Management

Change in accounting standards in Indonesia uses international standards became the focus of attention for company management because they had to report other comprehensive income (OCI). OCI components contain high assumptions, estimates and judgments from management, therefore high quality audits may reduce earnings management of OCI. The aim of this research is to analyze the effects of audit quality on relationship of other comprehensive income disclosure with earnings management. Research type is descriptive verification. The dependent variable in this research is the earnings management which proxy by discretionary accruals and use modified-Jones Model. Other comprehensive income as independent variable that measured by OCI ratio. While audit quality as moderator variable using dummy variable, KAP big four given a value of 1 and KAP non-big four given a value of 0. This research also use control variable and firm size as measured by total assets of the company and categorizing big and small companies by divided into 25% for the highest asset value for large companies and 25% of the lowest asset value for small companies. This research uses secondary data, financial data from the company’s official website and Icamel from 2019-2021. The sampling method used in this research is purposive sampling. Methods of data analysis in this research using multiple linear regression analysis, F-test and coefficient determination. The results of this research by F test with significant value 0.000 (<0.005) and the direction of negative coefficient indicates that there is significant influence of audit quality on the relationship of other comprehensive income disclosure with earnings management, a degree of influence is 18% as evidenced by the value of adjusted R2. Based on the results of the research are expected to related parties in the capital market may encourage capital market participants to optimize the information contained in the financial statements, including information on other comprehensive income.

MANAJEMEN LABA PADA PERUSAHAAN PERTAMBANGAN YANG TERDAFTAR DI BEI PERIODE 2020-2022 MELALUI PROFITABILITAS, LEVERAGE, DAN UKURAN PERUSAHAAN

This analysis, which is a causal study, attempts to assess how three variables—firm size, profitability, and leverage—affect profits management strategies. The firm's total assets serve as a proxy for the firm size variable, while the debt-to-asset ratio (DAR) indicates leverage and return on assets (ROA) indicates profitability. Discretionary accruals are used to measure the management of earnings. The corporate financial report data used in this quantitative study approach was sourced from the Indonesia Stock Exchange (IDX) website. The mining businesses that were listed on the IDX between 2020 and 2022 made up the study's population. Purposive sampling was used in the sample selection process, yielding eight organizations as study samples with an observation length of three years. With the aid of the Statistical Package for Social Sciences (SPSS) version 22, multiple linear regression analysis was employed in this study's hypothesis testing. Descriptive statistical tests, traditional assumption tests (including multicollinearity, autocorrelation, heteroscedasticity, and normality tests), and hypothesis testing are all a part of the analysis process. The findings of the ANOVA test demonstrate that variables related to leverage, profitability, and company size all influence profits management strategies. Individual study findings, however, indicate that while firm size has no appreciable impact on earnings management, profitability and leverage do have a favorable and significant impact. 
 Keywords: Profitability, Leverage, Company Size and Earnings Management

The impact of the IFRS adoption reform on audit market concentration, auditor choice and audit quality

PurposeThe study examines the changes in audit market concentration, auditor choice and audit quality in Russia following International Financial Reporting Standards (IFRS) adoption. Scholars have called for further examination of the effects of IFRS adoption on auditors, with an emphasis on the importance of analyzing emerging markets that are characterized by enforcement challenges and lack of proper infrastructure. It focuses on a unique feature of Russian companies – dual audits under Russian Accounting Standards (RAS) and IFRS – and investigates changes in audit concentration and audit quality for the two audit markets.Design/methodology/approachThe authors rely on the audited financial statements of Russian public companies and perform pre-/post-IFRS adoption estimation using a logit regression to ascertain whether public firms change auditors from local firms with limited IFRS expertise to those with global reputation, namely Big 4 audit firms. Further, they examine whether the change in audit market concentration post-2012 affects audit quality as proxied by companies' propensity to receive a modified audit opinion and discretionary accruals. Auditor attributes were hand-collected from audited financial statements and matched with financial variables from Datastream.FindingsThe IFRS audit market was dominated by the Big 4 audit firms prior to 2012, and there is strong evidence that audit market share (concentration) increases for IFRS reports but not for RAS reports. In addition, companies are more likely to choose a Big 4 audit firm for an RAS audit, conditional upon a Big 4 firm conducting the IFRS audit. The authors do not find evidence of decrease in the probability of audit firms issuing a modified audit opinion under either RAS or IFRS, indicating that, in the Russian setting, increased auditor concentration post-IFRS adoption does not lead to enhanced risk or decline in audit quality. Moreover, they find that discretionary accruals decline post-2012. Overall, the findings indicate that the concern of global regulators regarding audit market concentration is not justified.Research limitations/implicationsThe Russian reporting environment is unique and generally characterized by significant agency problems, and the study’s estimation sample is not large, compared to prior studies conducted predominantly in Western jurisdictions. Nevertheless, the authors shed light on the audit concentration phenomenon within emerging markets, for which empirical evidence is scarce. Future research could explore the impact of other capital market events and exogenous shocks, not limited to IFRS adoption, on the characteristics of Russia's audit market.Practical implicationsThe IFRS reporting regime is commonly associated with enhanced reporting quality and improved information transparency among public companies. Yet, impairment of audit quality as a result of IFRS-driven increase in audit market share of Big 4 can potentially negate these capital market effects. This study shows that the concerns of global regulators are not valid and that audit quality does not change with increased share of Big 4 post-IFRS adoption.Originality/valueDual audits, whereby companies must prepare two sets of financial statements per the IFRS mandate, are not unique to Russia, and the evidence of IFRS reporting on the structural changes in the audit market and implications for audit quality under a dual regime is scarce. Accordingly, the study's findings are important and timely and are expected to aid regulators of countries that have announced or are contemplating the adoption of IFRS for public reporting purposes.

Earnings management practices and effectiveness of auditing mechanisms in Islamic and emerging economies

Purpose This paper aims to investigate the impact of audit mechanisms on earnings management (EM) practices in listed Saudi Arabian companies. Specifically, it examines the association between audit committee (AC) characteristics, external audit quality and EM before and after the revision of Saudi Regulations on Corporate Governance (SRCGs) in 2017. Design/methodology/approach The study analyzes a data set comprising 135 Saudi-listed companies observed from 2013 to 2020. EM practices are measured using the absolute value of discretionary accruals, and external audit quality is assessed by the involvement of BIG 4 auditors. The authors also consider four variables to gauge AC characteristics: independence, size, meeting frequency and expertise. To test the hypotheses, the authors use multivariate regression on panel data. Findings The findings provide robust evidence regarding the impact of audit mechanisms on EM practices. The presence of accounting and finance experts within the AC is shown to have a substantial and statistically significant effect in reducing EM practices. Similarly, AC independence demonstrates a negative association with EM after the implementation of the SRCGs 2017. However, the study does not uncover any statistically significant impact of AC size and meeting frequency on EM practices. Moreover, the research highlights a noteworthy positive relationship between EM practices and engagement with BIG 4 audit firms before the SRCGs 2017. However, this relationship ceases to exist following the regulatory amendment. Practical implications The practical implications of this research are significant for policymakers and companies operating in Saudi Arabia, as well as for practitioners and auditors working in the region. The findings underscore the importance of high-quality auditing work to prevent EM practices and promote transparent financial reporting. The study recommends increasing the number of independent members and financial experts on the AC, as well as rigorous monitoring of AC size and meetings. It also emphasizes the need for compliance with governance regulations to focus on effective monitoring of the AC rather than mere fulfillment of requirements. Originality/value The study enhances the existing literature on the effectiveness of ACs and external audit quality in mitigating EM by providing evidence from a unique and Islamic context that has not been extensively studied before. This can help in validating or challenging the findings of previous studies and provide a more comprehensive understanding of the factors that impact EM in different contexts.