The Effect of Audit Quality on Earning Management within Manufacturing Companies Listed on Indonesian Stock Exchange

Abstract

Indonesia began to implementeconomic and tax reforms. Accordingly, it is important to explore further howmanagers of manufacturing companies listed on Indonesia Stock Exchange engagein earning management. Audit quality was measured by two different proxies;i.e., audit firm size and industry specialist auditors, while earningsmanagement was measured by discretionary accruals. Meanwhile, leverage, firmsize, and operating cash flow served as control variables. The sample involvedin this study comprises of manufacturing companies listed on the IndonesiaStock Exchange; covering 420 firm-year observations from the fiscal years 2010to 2013. This study applied a Multiple regression analysis in estimating therelationship between the audit quality and earning management. As hypothesizedin this study, the results showed that audit quality and earning management arenegatively related. The findings advance the current knowledge pertaining toaudit quality and earning management relationship in the context of emergingeconomies such Indonesia.Keywords: audit quality, earning management, Indonesianmanufacturing companies