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The role of auditor characteristics: earnings management and audit committee effectiveness

Author

Listed:
  • Rizky Eriandani

    (University of Surabaya, Indonesia)

  • Kashan Pirzada

    (University Utara Malaysia, Malaysia)

  • Melly Karina Kurniawan

    (University of Surabaya, Indonesia)

Abstract

This study aims to analyze the moderating effect of auditor characteristics on the relationship between audit committee effectiveness and earnings management. Mechanisms of good corporate governance can limit and control the opportunistic actions of management. A highly effective audit committee will reduce the prevalence of earnings management. In addition to the audit committee as an internal party that oversees the credibility of financial statements, it is also necessary to supervise external parties, through the use of external auditors. With expectations of reducing earnings manipulation, this study examines the effects of the combination of an effective audit committee and an independent auditor. The research sample selection uses a purposive judgmental non-probability sampling technique. The sample obtained is 754 firm years, consisting of three years of company observations in the Indonesian capital market between 2016 and 2018, except those in the financial sector. Earnings management is measured by accrual value using a modified Jones model. The independent variable of the study is the effectiveness of the audit committee (EFAC) which will be assessed using the DeZoort index. The results of the empirical testing support the research hypothesis; the more effective the audit committee is and the longer the external audit period is, the more prevalent earnings management will be. In addition, the more effective the audit committee is, coupled with the use of one of the big four auditors, the less prevalent earnings management will be, which means the auditor's reputation also strengthens the relationship between the effectiveness of the audit committee and earnings management. Further, the moderating effect of auditor specialization on the influence of the audit committee on earnings manipulation did not provide significant results.

Suggested Citation

  • Rizky Eriandani & Kashan Pirzada & Melly Karina Kurniawan, 2020. "The role of auditor characteristics: earnings management and audit committee effectiveness," Entrepreneurship and Sustainability Issues, VsI Entrepreneurship and Sustainability Center, vol. 7(4), pages 3242-3252, June.
    • Handle: RePEc:ssi:jouesi:v:7:y:2020:i:4:p:3242-3252
    DOI: 10.9770/jesi.2020.7.4(44)
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    References listed on IDEAS

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    1. Nico Alexander, 2019. "Ownership Structure and Earnings Management," GATR Journals afr172, Global Academy of Training and Research (GATR) Enterprise.
    2. Fatin Fadhilah Hasib, 2017. "Islamic Model of Corporate Governance at The Islamic Boarding School," GATR Journals jber127, Global Academy of Training and Research (GATR) Enterprise.
    3. Sandra Alves, 2013. "The impact of audit committee existence and external audit on earnings management," Journal of Financial Reporting and Accounting, Emerald Group Publishing Limited, vol. 11(2), pages 143-165, October.
    4. Arya Pradipta, 2020. "Audit Report Lag: Specialized Auditor and Corporate Governance," GATR Journals gjbssr555, Global Academy of Training and Research (GATR) Enterprise.
    5. Friska Firnanti, 2019. "Company Characteristics, Corporate Governance, Audit Quality Impact on Earnings Management," GATR Journals afr173, Global Academy of Training and Research (GATR) Enterprise.
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    Cited by:

    1. Idris Gautama So & Hasnah Haron & Anderes Gui & Elfindah Princes & Synthia Atas Sari, 2021. "Sustainability Reporting Disclosure in Islamic Corporates: Do Human Governance, Corporate Governance, and IT Usage Matter?," Sustainability, MDPI, vol. 13(23), pages 1-23, November.
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    3. Rafael Ravina-Ripoll & María-José Foncubierta-Rodríguez & Eduardo Ahumada-Tello & Luis Bayardo Tobar-Pesantez, 2021. "Does Entrepreneurship Make You Happier? A Comparative Analysis between Entrepreneurs and Wage Earners," Sustainability, MDPI, vol. 13(18), pages 1-19, September.

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    More about this item

    Keywords

    earnings management; specialist auditor; audit committee; audit quality; governance;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing
    • M49 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Other

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