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

Sumiadji,; Chandrarin, Grahita; Subiyantoro, Edi

doi:10.5430/ijfr.v10n1p86

Cited by 8 publications

(9 citation statements)

References 27 publications

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“…Additionally, the result demonstrates that the higher the AFT, the lower the EM processes. This is supported by the agency theory and is consistent with prior studies, such as Bauwhede et al (2003), Sumiadji and Subiyantoro (2009), Alsufy et al (2020) and Wijaya (2020). A possible explanation for this result is that the high audit firm turnover serves to promote audit independence, resulting in increased control levels and decreased EM practices in the client’s company.…”

Section: Data Analysis and Findingssupporting

confidence: 88%

“…According to previous literature, the audit quality is measured by three main proxies, namely, size of audit firm (whether or not the company is audited by a big-firm auditor), industry specialization of audit firms (whether or not the company is audited by industry-specialist audit firm) and an audit tenure (the length of the audit firm–client relationship) (Abu Afifa et al , 2020; Al-Thuneibat et al , 2011; Sumiadji and Subiyantoro, 2009). Hence, this study also used these main proxies to measure the audit quality, where audit quality is included in the study model as an independent variable.…”

Section: Methodsmentioning

confidence: 99%

“…Earlier audit quality studies (Sharf and Abu-Nassar, 2021; Sumiadji and Subiyantoro, 2009) concluded that the industry-specialist audit firm component is an important proxy for external audit quality. Audit firms that specialize in the client’s industry have a higher level of consistency than others; this is because they have more expertise and understanding in the client’s environment and industry as a result of previous audit work on rival clients in the same industry (Al-Thuneibat et al , 2011; Johnson et al , 2002).…”

Section: Literature Review and Hypotheses Developmentmentioning

confidence: 99%

“…The high audit firm turnover contributes to increase audit independence and user confidence in previous audit reports, ultimately improving audit quality (Wijaya, 2020). Therefore, we can note that industry-specialist audit firm and audit firm turnover can both improve and restrict accounting information quality and EM practices, respectively (Alsufy et al , 2020; Sumiadji and Subiyantoro, 2009).…”

Section: Literature Review and Hypotheses Developmentmentioning

confidence: 99%

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Does earnings management mediate the relationship between audit quality and company performance? Evidence from Jordan

Afifa

Saleh

Haniah

2021

JFRA

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Purpose The purpose of this study is to look at the direct relationship between audit quality, earnings management (EM) practices and company performance, as well as the indirect influence (mediation) of EM practices in the relationship between audit quality and company performance. It offers empirical evidence from the Jordanian market, which is considered an emerging market. Design/methodology/approach The population of this study is represented in Jordanian service companies listed on the Amman Stock Exchange (ASE), with a total of 344 company-year observations. Furthermore, panel data analysis was used in this study, and data for the study were acquired from yearly reports as well as the ASE’s database. Findings Based on generalized method of moments model, the present findings demonstrate that the size of the audit firm and the tenure of the audit firm have a positive and negative influence on EM practices, respectively, but that industry-specialist audit firm has a negative and insignificant effect. EM practices have a negative impact on two company performance proxies (ROA and ROE), but have no effect on earnings per share (EPS). Furthermore, the size of the audit firm has a positive and significant influence on the performance proxies of the company [i.e. return on assets (ROA) and return on equity (ROE)]. The presence of an industry-specialist audit firm has a positive and significant influence on two proxies of company performance (ROE and EPS), but a negative and significant impact on ROA. An audit firm’s tenure has a negative and significant impact on two performance proxies (ROA and EPS), but a positive and significant impact on ROE. Then, EM practices either fully or partially mediate the relationship between audit quality proxies and company performance as assessed by ROA, ROE and EPS. Research limitations/implications The current study’s limitation is that it only searched in Jordanian service companies listed on ASE from 2012 to 2019 to meet the study’s objectives; thus, the authors recommend that future work investigate the study model for other sectors, whether in Jordan or other emerging markets such as the Middle East and North Africa. Another limitation of this study is that the study models lack important variables, which may affect EM and company performance, such as corporate governance and ownership structure characteristics; as a result, the authors recommend that future work includes such variables in future research models to have more explanations in this context. Practical implications Analysts, investors and other strategic decision makers may use the findings of this study to improve the efficiency and efficacy of Jordan’s financial market. These findings will enhance policymakers’ willingness to establish appropriate regulations, which might improve Jordan’s financial market performance and efficacy. These findings may help investors make better judgments by using audit quality proxies and EM indicators, which can forecast business success. Originality/value First, this study distinguishes itself from prior studies through establishing a new research model, by investigating the mediating effect of EM in the relationship between audit quality and company performance. It provides empirical evidence from the Jordanian market; hence, it increases the body of the knowledge in this context. Second, to the best of the authors’ knowledge, this is the first study to look into the link between audit quality, EM and company performance together; hence, the model of this study is developed using agency theory and information asymmetry theory. Third, the current study adds new evidence to the role of audit quality and EM in companies, as well as how audit quality and EM practices affect company performance in emerging markets such as Jordan.

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Section: Data Analysis and Findingssupporting

confidence: 88%

Section: Methodsmentioning

confidence: 99%

Section: Literature Review and Hypotheses Developmentmentioning

confidence: 99%

Section: Literature Review and Hypotheses Developmentmentioning

confidence: 99%

See 2 more Smart Citations

Does earnings management mediate the relationship between audit quality and company performance? Evidence from Jordan

Afifa

Saleh

Haniah

2021

JFRA

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“…Hegazy, Al Sabagh, & Hamdy (2015) concluded that a specialized auditor is associated with less earnings management than a non-specialist auditor, and there is a relationship between earnings management and the auditor's specialization. yes Sumiadji, Grahita, & Edi (2019) indicated a positive effect between the tenure of the auditor and earnings management. Auditor tenure has a significant relationship with earnings management and minimizes earnings manipulation (Ibrahim, Mansor, & Ahmad, 2020;Putra & FitoMela, 2019;Yasser & Soliman, 2018).…”

Section: Audit Quality and Earnings Managementmentioning

confidence: 99%

The Mediating Effects of Key Audit Matters on the Relationship Between Audit Quality and Earnings Management: Evidence from Jordan

Alqam

Hamshari

Ali

2021

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The relationship between audit quality and earnings management has not been tested with consideration of key audit matters as a mediating variable. This study examined whether audit quality (AQ) decreases earnings management (EM) in shareholding corporations through improving key audit matters (KAMs) in Jordan’s emerging environment. A regression analysis was carried out on a sample that included financial reports and auditor reports of 105 industrial and service shareholdings companies listed on the Amman Stock Exchange (ASE) from 2017 to 2019. The study found a negative relationship between audit quality and earnings management. The results showed that audit quality increases key audit matters, which, in turn, decreases earnings management. Also, the study confirmed the mediating effect of KAMs between audit quality and earnings management. The study confirms the importance of key audit matters to provide more relevant and useful information for the users of financial reports and provides important indications to the regulatory authorities and standards bodies that key audit matters should be given more attention regarding the way that they are presented and disclosed.

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Board characteristics and audit quality: the moderating effect of board independence change

Almaqtari,

Farhan,

Alahdal

et al. 2024

Cogent Social Sciences

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

Cited by 8 publications

References 27 publications

Does earnings management mediate the relationship between audit quality and company performance? Evidence from Jordan

Does earnings management mediate the relationship between audit quality and company performance? Evidence from Jordan

The Mediating Effects of Key Audit Matters on the Relationship Between Audit Quality and Earnings Management: Evidence from Jordan

Board characteristics and audit quality: the moderating effect of board independence change

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