Do Chief Audit Executives Affect the Relationship Between Earnings Management and Firm Risk?

This study aims to obtain empirical evidence on the effect of real earnings management (REM) on firm risk. Furthermore, this study also examines the effect of Chief Audit Executive (CAE) tenure in weakening the positive relationship between real earnings management and firm risk. The study examined manufacturing companies listed on the Indonesia Stock Exchange from 2012 to 2018. The statistical analysis used in this study was panel-random effect data regression, considering that the panel random effect data test allows control of unobserved heterogeneity between companies, resulting in more efficient estimates. The research results show that companies that engage in real earnings management have a positive impact on firm risk. REM not only reduces the quality of financial reports but also increases firm risk. Likewise, CAE tenure has a positive impact on firm risk. Longer CAE tenure can weaken the effectiveness of internal oversight, exposing the firm to greater risks. However, CAE tenure does not affect the relationship between real earnings management and firm risk. A strategy of strengthening the CAE's role through rotation alone is unable to mitigate the increase in firm risk due to real earnings management, requiring a more comprehensive governance approach. This study fills the gap regarding research on the effect of real earnings management on firm risk and the role of CAE tenure on the relationship between real earnings management and firm risk in manufacturing companies in Indonesia, which is still rarely researched.