Audit Quality and Earnings Management: Review and Synthesis of Empirical Evidence

Earnings management (EM) is the choice of accounting policy by a manager to achieve multiple goals. EM activity can be divided into two types: accrual manipulation activity and real manipulation activity. However, both of these have a major difference: the accrual manipulation does not affect cash flow, whereas real manipulation affects cash flow. Whether misleading or not to the users of financial statements, good or bad for the practice, controversy arises when earnings management is associated with morals / ethics. EM practices are suspected to arise due to agency problems arising from a conflict of interest between the principal and the agent. In accordance with agency theory, the function of the independent auditor can reduce agency problems. A qualified auditor, trusted to provide trust to stakeholders about the performance of management. High-quality auditors are more likely to detect dubious accounting practices. Thus, in the context of research, audit quality is often regarded as an antecedent variable and a variable that can reduce the occurrence of EM practice. Furthermore, the practice of Accrual Earnings Management (AEM) and Real Earnings Management (REM) in some empirical results turns out to be a substitution.

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Publication Details

Journal
Zenodo (CERN European Organization for Nuclear Research)
Published
2025-11-09
DOI
https://doi.org/10.5281/zenodo.17562697
Primary Topic
Auditing, Earnings Management, Governance
Type
article
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article

Audit Quality and Earnings Management: Review and Synthesis of Empirical Evidence

Zenodo (CERN European Organization for Nuclear Research)
Auditing, Earnings Management, Governance
article

Audit Quality and Earnings Management: Review and Synthesis of Empirical Evidence

article en

Abstract

Earnings management (EM) is the choice of accounting policy by a manager to achieve multiple goals. EM activity can be divided into two types: accrual manipulation activity and real manipulation activity. However, both of these have a major difference: the accrual manipulation does not affect cash flow, whereas real manipulation affects cash flow. Whether misleading or not to the users of financial statements, good or bad for the practice, controversy arises when earnings management is associated with morals / ethics. EM practices are suspected to arise due to agency problems arising from a conflict of interest between the principal and the agent. In accordance with agency theory, the function of the independent auditor can reduce agency problems. A qualified auditor, trusted to provide trust to stakeholders about the performance of management. High-quality auditors are more likely to detect dubious accounting practices. Thus, in the context of research, audit quality is often regarded as an antecedent variable and a variable that can reduce the occurrence of EM practice. Furthermore, the practice of Accrual Earnings Management (AEM) and Real Earnings Management (REM) in some empirical results turns out to be a substitution.

Zenodo (CERN European Organization for Nuclear Research)
Universitas Jember (ID)
Decent work and economic growth
Openalex Percentile: Top 32%
Auditing, Earnings Management, Governance
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Audit Quality and Earnings Management: Review and Synthesis of Empirical Evidence · Zenodo (CERN European Organization for Nuclear Research) (2025) | TGRS Research Map | TGRS