Political connections and earnings management: the role of audit quality and local corruption: Accounting, Corporate Governance & Business Ethics

Abstract

This study explores the relationship between political connections (PCs) and earnings management (EM), focusing on how audit quality and local corruption influence this relationship. Using a sample of 2,363 firm-year observations from Vietnamese listed firms between 2015 and 2022, this study measures real earnings management (REM) through three distinct proxies. To mitigate endogeneity concerns, multiple robustness tests are conducted to confirm the stability of results. The results reveal that politically connected firms engage in significantly lower REM. This effect is particularly stronger for firms audited by Big4 firms and those operating in highly corrupt regions. This study contributes to the literature by providing empirical evidence that, in transition economies with weak institutional frameworks, PCs appear to constrain EM rather than facilitate it. It also underscores the critical role of audit quality and local corruption in shaping EM practices. The study contributes to the literature by offering new insights into the role of PCs in EM, particularly in transition economies like Vietnam. The findings offer valuable insights for policymakers, regulators, investors and auditors, who must assess firm risk and governance structures in politically connected firms operating in highly uncertain regulatory environments.