Does Auditing Detect and Suppress Earnings Management? Evidence from Türkiye

This study examines the relationship between auditing factors and earnings management practices. Specifically, it investigates the effects of audit opinion and audit firm size on earnings management. The methodology is a combination of qualitative and quantitative analyses. We constructed multivariate regression models to test research hypotheses. The contextual analysis of qualified audit reports provides definite segmentations for cross-sectional analysis. The findings suggest that a qualified audit opinion is a significant predictor of incomeincreasing earnings management practices in Türkiye. Major audit firms suppress these practices in line with the argument that they perceive them as a potential litigation threat to their reputation and assets. Firms potentially managing their earnings are observed to have more debt, less equity, and greater financial distress. This research provides comprehensive information for capital market regulators, investors, and other stakeholders to evaluate audit performance in mitigating earnings management problems. The present study contributes to the literature by providing evidence from Türkiye.

Authors

Publication Details

Journal
Istanbul Business Research
Published
2025-01-09
DOI
https://doi.org/10.26650/ibr.2024.53.1332658
Primary Topic
Auditing, Earnings Management, Governance
Type
article
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article

Does Auditing Detect and Suppress Earnings Management? Evidence from Türkiye

Ahmet Onay, Serdar Benligiray
Istanbul Business Research
Auditing, Earnings Management, Governance
article

Does Auditing Detect and Suppress Earnings Management? Evidence from Türkiye

Ahmet Onay, Serdar Benligiray
article en

Abstract

This study examines the relationship between auditing factors and earnings management practices. Specifically, it investigates the effects of audit opinion and audit firm size on earnings management. The methodology is a combination of qualitative and quantitative analyses. We constructed multivariate regression models to test research hypotheses. The contextual analysis of qualified audit reports provides definite segmentations for cross-sectional analysis. The findings suggest that a qualified audit opinion is a significant predictor of incomeincreasing earnings management practices in Türkiye. Major audit firms suppress these practices in line with the argument that they perceive them as a potential litigation threat to their reputation and assets. Firms potentially managing their earnings are observed to have more debt, less equity, and greater financial distress. This research provides comprehensive information for capital market regulators, investors, and other stakeholders to evaluate audit performance in mitigating earnings management problems. The present study contributes to the literature by providing evidence from Türkiye.

Istanbul Business ResearchVol. 53(3)
Gender equality
Openalex Percentile: Top 99%
Auditing, Earnings Management, Governance
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