Does audit quality influence earnings management in emerging markets? Evidence from Jordan

• Main Authors: Taha Suleiman Almarayeh, Beatriz AIBAR-GUZMAN, Modar Abdullatif
• Format: Article
• Language: English
• Published: Universidad de Murcia 2020-01-01
• Series: Revista de Contabilidad: Spanish Accounting Review
• Subjects: Audit quality; Auditor size; Audit fees; Earnings management; Discretionary accruals; Jordan
• Online Access: https://revistas.um.es/rcsar/article/view/365091
• ISSN: 1138-4891; 1988-4672

This study investigates whether some audit quality attributes are capable to restrict earnings management in a developing country, Jordan, whose cultural, economic and institutional context is very different from most previously analyzed countries’ context. Generalized least square regression (GLS) was used to study the association between two audit quality attributes (auditor size and audit fees) and discretionary accruals, as a proxy of earnings management, for a sample of industrial firms listed on the Amman Stock Exchange during the period 2012 – 2016. The findings are consistent with the expectation that in emerging countries external audit can function differently from that in Anglo-Saxon and West-European countries with regard to its role in restricting earnings management and indicate that, given the institutional environment in Jordan, auditor size and audit fees have no significant effect on earnings management. This study provides readers with information about if and how the institutional setting influences the relationship between audit quality and earnings management. Furthermore, it presents new evidence regarding the moderating effect of the level of audit fees on their relation with earnings management. This study’s findings could provide valuable information to regulators and standards setters, both in Jordan and other countries with a similar economic and institutional environment, which can help in preventing earnings management practices.