The Impact of Family Firms on Financial Reporting Quality: The Mediating Role of High-Quality Auditors

This study empirically examines how Big4 audit firms mediate the relationship between family-controlled enterprises and their earnings management practices. Analyzing a dataset of 61 non-financial family-listed companies listed on the Indonesia Stock Exchange from 2017 through 2019 reveals that family-controlled businesses and Big4 auditors are associated with lower earnings management, resulting in improved financial reporting quality. The study also shows that family-owned enterprises are more inclined to hire a higher-quality auditing firm for their financial statement assessments. Moreover, our results suggest that Big4 auditors partially mediate the relationship between family businesses and their earnings management practices. The additional tests conducted in this study highlight the significant role of family-run firms and Big4 auditors in curbing earnings management, primarily when corporate management is prone to decrease reported earnings. Robustness tests validate the reliability of the conclusions drawn from the primary findings. Our study shows that family managers align their goals with the firm and shareholders, enhancing company financial reporting integrity. Our finding also emphasizes the crucial role of Big4 auditors in minimizing intra-family agency conflicts in family firms, promoting transparency, and aligning family managers’ interests with external stakeholders.