The Role of Institutional Ownership and Audit Quality in Moderating the Effect of Free Cash Flow on Earnings Management

Purpose: The aim of this research is to examine how audit quality and institutional ownership affect the way free cash flow affects earnings management in Indonesian non-financial firms. Methodology/approach: “In this study, 179 observations are collected using proportionate stratified random sampling, and multiple linear regression analysis and moderated regression analysis (MRA) are used to analyze non-financial companies that were listed on the IDX for at least a year prior to the observation period (2019) and had not been delisted until the end of 2023.” Findings: The study's findings suggest that earnings management benefits from free cash flow. It has been demonstrated that audit quality reduces the beneficial impact of free cash flow on earnings management, even though institutional ownership cannot mitigate this effect. Businesses audited by top-notch KAP will restrict opportunistic managers' ability to manipulate earnings. Practical implications: Unless audited by a reputable KAP, investors and prospective investors should exercise caution when funding businesses with significant free cash flow since it may encourage managers to engage in earnings management. If managers are audited by a top-notch KAP, their incentive to engage in earnings management will decline. Originality/value: In order to explain how free cash flow affects earnings management, this study adopts a novel strategy by combining audit quality and institutional ownership characteristics as moderating variables.