Internal Audit Quality And Earnings Management Pdf


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Show all documents The effect of audit quality on earnings management: evidence from the Netherlands The main aim of this master thesis research is to examine whether there is a significant effect of audit quality on the level of earnings management. Prior literature suggests that audit quality depends on multiple characteristics.

Earnings management , in accounting , is the act of intentionally influencing the process of financial reporting to obtain some private gain. Earnings management has a positive effect on earnings quality , [3] and may weaken the credibility of financial reporting.

Written by Rachel E. The aim of this dissertation is to assess the relationship between earnings management and internal and external audit practices in the UK. A sample of non-financial UK firms is investigated throughout the years Abnormal accruals are used to represent earnings management.

Earnings management

Written by Rachel E. The aim of this dissertation is to assess the relationship between earnings management and internal and external audit practices in the UK. A sample of non-financial UK firms is investigated throughout the years Abnormal accruals are used to represent earnings management. The results show no significant effect of audit committee characteristics such as size and meeting frequency on earnings management.

At the same time, the findings from this dissertation suggest that companies audited by the Big Four are less likely to engage in earning management activities. The findings generally agree with the existing literature. Corporate governance has received great attention from practitioners and academics.

An audit committee is regarded as one of the most important board committees as it reduces the information asymmetry between managers and shareholders. However, the findings of the present analysis do not support this view. Indeed, no significant relationship is observed between abnormal accruals and internal audit committee characteristics. Nevertheless, the quality of external audit is found to produce a significant effect on reduction of earnings management.

This evidence proves that larger auditors are more effective in monitoring financial reporting. Corporate governance and audit quality have received great attention from scholars, managers, and shareholders. This area has become even more relevant in the context of the global financial crisis, as greater quality of accounting figures may reduce information asymmetry and strengthen financial stability.

Existing theoretical frameworks provide no consensus regarding the expected effect of internal and external audit on earnings management. Likewise, empirical findings on this relationship are mixed, suggesting that additional research could be useful to understand how the effectiveness of corporate governance tools might be improved.

The aim of the present paper is to investigate the relationship between earnings management and internal and external audit in the UK. To achieve this, several objectives are pursued.

The first objective is to assess the impact of audit committee size of earnings management. The second objective is to explore the influence of the meeting frequency of the audit committee on earnings management.

The present study contributes to the existing literature in several ways. The analysis covers a sample of large UK firms during the period As few recent studies exist that focus on European companies after the financial crisis, this could be useful for assessing how UK companies might differ from other firms with regards to audit practices.

Next, the sample includes smaller companies that are not audited by the Big Four. This becomes important as studies that investigate only larger firms may not capture the relationships between earnings management and external audit quality. Finally, the analysis explores both internal and external audit practices to examine the role of corporate governance in greater detail.

The paper is structured as follows. Section 2 discusses earnings management from the perspective of several theories. Key audit committee characteristics and relevant empirical evidence are described. Section 3 covers the sample and the model used to estimate abnormal accruals and their relationship with earnings management.

Main findings are presented in Section 4. The results are then discussed in the context of similar studies in Section 5. Section 6 concludes and offers recommendations on future research. The role of internal and external audit is linked to the understating of corporate governance in the context of several major frameworks, namely agency theory, stakeholder theory, and stewardship theory.

The agency theory Jensen and Meckling, provides a clear link between audit quality and earnings management. The framework proposes that managers act as agents for shareholders but ultimately seek to pursue their own interests. Shareholders pursue maximisation of the firm value, which might be hampered by managers engaging in opportunistic behaviour. Indeed, the theory suggests that agents would make decisions that benefit them the most regardless of the impact on the organisation.

This naturally creates a need for supervising and monitoring mechanisms that would limit such behaviour while still allowing for enhancing shareholder wealth. Audit quality can thus be regarded as a controlling tool that may discourage managers from focusing on their own interests Wiseman et al.

More specifically, stronger auditing tools could make earnings management less feasible, limiting the harm that could be caused by managers acting out of self-interest Jensen and Meckling, The agency framework predicts that improving internal and external audit would result in less or no earnings management. This may be regarded as a controlling tool as opposed to a rewarding mechanism such as stock-based remuneration Bonazzi and Islam, A larger external auditor may also be more effective at reducing agency costs as it would have more resources while being less inclined to cover earnings management due to potential reputation losses.

However, this influence might be offset by the increased costs associated with supervising Jensen and Meckling, As such, the impact of specific characteristics including audit committee size and structure would depend on how potential benefits compare to the incurred costs.

Social responsibility becomes an important concept within this framework, although financial stakeholders are likely to receive greater priority Brown and Fraser, Based on the stakeholder perspective, improving audit quality can be regarded as a strategic tool for reducing the information asymmetry across various groups Boyd et al.

However, this also reflects a potential problem as the central role of an organisation may clash with the conflicts of interests between different stakeholders. The alignment of interests between the parties may allow for accomplishment of organisational objectives as managers could regard this as an intrinsic reward associated with their position.

This contrasts the approach of the agency theory Jensen and Meckling, and leads to different predictions regarding audit quality.

Furthermore, greater independence of the audit committee might reduce its effectiveness as executive directors would likely have more relevant knowledge regarding the firm Al Mamun et al.

Earnings management has been measured by using abnormal accruals as well as estimating the propensity to meet earnings forecasts Prawitt et al. Audit committee AC can be regarded to be one of the most crucial committees as it reduces information asymmetry between managers and shareholders DeAngelo, The direct effect of the AC is reflected in the greater quality of financial reports and accounting figures Contessotto and Moroney, At the same time, the effectiveness of an AC could be limited as it depends on several characteristics Beasley, Several key factors were proposed by DeZoort et al.

The AC size constitutes an important characteristic of the committee Al-Matari et al. Greater number of members could allow for more effective use of resources and lead to lower agency costs Jensen, ; Reddy et al. From this point of view, larger committees should be associated with lower likelihood of earnings management. However, communication problems arising from the increased number of directors might outweigh the benefits of improved monitoring Sharma et al.

Therefore, the exact impact of AC size might be challenging to predict even in the agency framework. Furthermore, the theory implies that AC members could also be associated with conflicts of interest, which would be exacerbated in a larger committee as agency costs would increase Lipton and Lorsch, AC meeting frequency is another potential determinant of propensity of earnings management.

It might be argued that greater activity represented by more frequent meetings would allow directors to carry out their monitoring function more effectively Khanchel, This is in line with the agency theory as stronger supervising mechanisms should discourage managers from misreporting accounting figures.

The independence of the AC may also be an important factor behind audit quality Beasley, It can be regarded as the willingness to confront managers Contessotto and Moroney, , and it has been commonly measured as a ratio of the number of non-executive directors to the AC size Carcello et al. Alternatively, a board could be considered to be independent if it includes a specific number of independent members.

The positive role of independence is represented by the increased effectiveness of monitoring, as it separates the activity of executive managers from that of the committee Krishnan and Visvanathan, ; Carcello et al. However, non-executive directors could have less relevant knowledge on the company and industry as a whole, leading to a negative relationship between independence and reporting quality Sharma et al. This reflects the role of both education and experience of committee members Giacomino et al.

The presence of a Big Four auditor may increase the quality of financial reports Piot and Janin, This can be attributed to two key factors. Firstly, larger firms have more resources and knowledge to provide effective monitoring of a company McMullen, ; Francis et al. Secondly, the Big Four companies are less likely to cover opportunistic practices in financial reporting as they would seek to avoid reputation losses DeFond and Jiambalvo, ; Krishnan, This would require maintaining an independent opinion which is more feasible for larger auditors Piot and Janin, In general, the existing evidence regarding the role of audit is mixed.

There is evidence that effective audit committees help reduce earnings management as shown by Klein , Xie et al. Similar results were highlighted in the meta-analysis of Lin and Hwang The role of AC size is also related to the impact of general board characteristics which has been commonly examined by academics Reddy et al.

Observation of negative relationship between firm value and number of board members suggests that a larger AC could also become less effective Eisenberg et al. Similar findings were reported for audit committees by Bozec , Al-Matari et al. In other words, a greater number of directors may not necessarily result in more efficient monitoring, as communication issues and agency costs within the committee would offset the benefits of a larger board.

However, some evidence exists supporting the positive influence of firm size Reddy et al. No effect on earnings management was found by Xie et al. Several empirical studies investigated the frequency of AC meetings with regards to firm value.

Khanchel observed a positive impact of meeting frequency on performance. In contrast, Hsu and Petchsakulwong reported a negative relationship between the variables. However, both studies focused on emerging countries and might be less applicable to the case of the UK.

More general studies of Xie et al. No effect was reported by Bedard et al. The evidence regarding board independence is also mixed. Beasley reported a lower effectiveness of the committee that includes an executive. Similarly, Dey and Nuryanah and Islam observed a positive linkage between report quality and AC independence.

Vafeas found that more independent committees are associated with reduced earnings management. In contrast, the findings of Dar et al. The role of the largest auditors is similarly ambiguous.

Top PDF The effect of audit quality on earnings management: evidence from the Netherlands

This study aims to investigate the effect of information asymmetry toward real earnings management which are moderated by quality of internal audit function. The research design is quantitative method using secondary data. The sample used in this study consisted of manufacturing companies which are listed on Indonesian Stock Exchanges. Earnings management through real activities manipulation which is also called real earnings management is proxied with three patterns: cash flow from operation CFO , production costs, and discretionary expenses. The result shows that information asymmetry has a positif and significant effect toward real earnings management in the pattern of cash flow from operation and production costs. Meanwhile, information asymmetry has no effect toward real earnings management in the pattern of discretionary expenses.


Earnings management is measured using two separate prox- ies: (1) abnormal Keywords: corporate governance; internal audit function; internal audit quality; earnings //lab591.org of the Board/Auditing Standard lab591.org


Earnings quality and internal control in bank-dominated corporate governance

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INTERNAL AUDIT QUALITY AND EARNINGS MANAGEMENT

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По-видимому, ее работу прочел не только научный руководитель, потому что вскоре последовал телефонный звонок, а затем по почте ей доставили авиационный билет от АНБ. Все, кто имел отношение к криптографии, знали, что о АНБ собраны лучшие криптографические умы нашей планеты. Каждую весну, когда частные фирмы начинают охоту за талантливой молодежью, соблазняя ее неприлично высокими окладами и фондовыми опционами в придачу, АНБ внимательно наблюдает за этим, выделяет наиболее подходящих и удваивает предлагаемую сумму. АНБ покупает все, что ему требуется. Дрожа от нетерпения, Сьюзан вылетела в Вашингтон. В международном аэропорту Далласа девушку встретил шофер АНБ, доставивший ее в Форт-Мид.

Она села и начала, подобно пианисту-виртуозу, перебирать клавиши Большого Брата. Бринкерхофф посмотрел на мониторы, занимавшие едва ли не всю стену перед ее столом. На каждом из них красовалась печать АНБ. - Хочешь посмотреть, чем занимаются люди в шифровалке? - спросил он, заметно нервничая. - Вовсе нет, - ответила Мидж.  - Хотела бы, но шифровалка недоступна взору Большого Брата. Ни звука, ни картинки.

Глаза его отсутствующе смотрели в пространство. - Странное дело, ей-богу, все эти буквы - ни на один язык не похоже. - Может быть, японский? - предположил Беккер. - Определенно. - Так вы успели его рассмотреть.

3 Comments

Fabian S.
27.05.2021 at 00:27 - Reply

PDF | Internal auditors often perform work that is relevant to their host entities' financial reporting processes, yet little research attention has.

Nicole I.
27.05.2021 at 00:38 - Reply

Hence, we are including articles written in both languages, English and Spanish, broadening our scope to a larger audience.

Marcelina L.
01.06.2021 at 10:41 - Reply

This study examines the relationship between internal governance and earnings management in Japanese listed firms.

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