The incidence of earnings management on audit quality

Abstract

The purpose of this article is to analyse the impact of earnings management on audit quality, taking into consideration the transparency of financial reporting under IFRS (International Financial Reporting Standards). The global reporting has undergone important changes in the last decade of time. IFRS represents a revolution concerning the accounting principles and these standards were created to aid the investors and the auditors with the globalisation. Although there is a replete foundation of rules, the high degree of competition has decreased the accuracy of financial reporting through different ways and consequently the level of audit quality. Earnings management has the root in the incentives for management taking into consideration the linkage between the values of entities, the reported earnings figures and the measure of discretionary (abnormal) accruals. The main purpose of the research is represented by the investigation of accuracy of financial reporting concerning the linkage between earnings management and audit quality. The in-depth acquaintance of these elements highlights the actual circumstances of institutional context related to IFRS and ISA framework. In the present survey, a sample of 14 countries, during 2010-2019 was analysed. The study involves a quantitative model based on Jones model in order to verify the incidence of earnings management on audit quality. The results attest that the positive relationship between earnings management and audit quality is highly influenced by the accuracy of financial reporting under IFRS. At the same time, the present paper argues a continuous improvement of the financial reporting under audit inspections by Public Interest Oversight Board (PIOBs).