Environmental, Social and Governance (ESG), Earnings Management and High-Quality Auditors: A Conceptual Framework in the Malaysian Context

HRMARS - This paper develops a conceptual framework that explains the effect of Environmental, Social and Governance (ESG) disclosure on accrual earnings management in Malaysian public-listed companies, and how high-quality auditors may strengthen or weaken this relationship. This paper develops a detailed conceptual framework by combining existing studies on ESG, earnings management, agency theory and audit quality. The framework suggests that the relationship between ESG and earnings management is affected by two proxies of high-quality auditors which are the competence of industry-specialist auditors and the independence shown based on audit fees. Based on the analysis from the results of previous evidence, both variables show inconsistent results between ESG and earnings management, especially in the context of Malaysia. This paper argues that high-quality auditors can strengthen the trustworthiness of a company’s ESG disclosures and reduce managerial discretion, thus moderating the effect of ESG disclosure on earnings management. This paper is constrained by the lack of readings from multidisciplinary literature to obtain a more comprehensive theoretical understanding. This paper represents a review from another publication and the data is currently being collected but not yet been regressed. Furthermore, because of the time restrictions, the literature related to the topic is not thoroughly explored.