Impact of audit quality on earnings management: Case of lebanon

Abstract

The lack of transparency in financial statements in Lebanon is a chronic problem that induced less confidence of the shareholders. This paper addresses the latter in order to have a better understanding about how audit quality affects the level of earnings management in companies operating in Lebanon. The findings will help inter alia remedy issues such as fraud, fiscal evasion, and enhance the legitimacy of the financial statements. The audit quality is measured by the audit firm size, and the level of earnings management is measured by the discretionary accruals reported in the financial statements. Using an empirical study with a sample of 50 companies operating in the Lebanese market, the research findings suggest that the level of earnings management of audited companies is significantly lower compared to non-audited companies. There no significant difference between mandatory and voluntary audits in mitigating earnings management, Companies audited by large auditors proved to have a significantly lower level of earnings management than companies audited by small auditors. Finally, the effect of Big 4, the four largest international audit firms in the world, in mitigating earnings management does not significantly differ from other auditors, yet it was proved that the odds of having a high level of earnings management is lower when companies are audited by Big 4 audit firms.