This study empirically examines the relationship between audit quality and earnings management, with particular attention to the moderating influence of the regulatory environment. Grounded primarily in agency theory and supported by signaling and stakeholder perspectives, the analysis assesses whether stronger audit quality constrains managerial discretion in financial reporting across differing regulatory regimes. Using archival data from 674 firm-year observations of FTSE 350 firms in the United Kingdom (2005-2008), regression and correlation analyses are employed to test associations between audit quality proxies and discretionary accrual-based earnings management. Earnings management is measured via the Modified Jones Model, while audit quality is captured through a composite Audit Quality Score (AQS) incorporating auditor tenure and industry specialization. A critical methodological limitation is that the AQS excludes the auditor reputation (Big Four) component due to sampling restrictions. Results indicate a significant negative association between audit quality and earnings management (β = ？0.421, p < 0.01), with the constraining effect stronger under stringent regulatory environments (βstringent = ？0.521, p < 0.001) compared to less stringent regimes (βless stringent = ？0.358, p < 0.05), confirmed by a Chow test (F = 4.87, p = 0.028). Industry-level variation is also evident, with technology and finance sectors exhibiting the most pronounced effects. Nonetheless, findings should be interpreted cautiously, given the restricted audit quality construct and the dated sample period. The study contributes to the literature by highlighting the interaction between audit quality proxies and regulatory context, though practical implications remain bounded by measurement constraints. Future research should adopt more comprehensive and contemporary audit quality measures to better inform efforts to strengthen financial reporting credibility and investor confidence.
References
[1]
Ado, A. B., Rashid, N., Mustapha, U. A., & Ademola, L. S. (2020). The Impact of Audit Quality on the Financial Performance of Listed Companies in Nigeria. Journal of Critical Reviews,7, 37-42.
[2]
Agyei-Mensah, B. K. (2019). The Effect of Audit Committee Effectiveness and Audit Quality on Corporate Voluntary Disclosure Quality. AfricanJournalofEconomicandManagementStudies,10, 17-31. https://doi.org/10.1108/ajems-04-2018-0102
[3]
Agyei-Mensah, B. K., & Yeboah, M. (2019). Effective Audit Committee, Audit Quality and Earnings Management: Evidence from the Ghana Stock Exchange. InternationalJournalofManagerialandFinancialAccounting,11, 93-112. https://doi.org/10.1504/ijmfa.2019.099765
[4]
Alareeni, B. A. (2019). The Associations between Audit Firm Attributes and Audit Quality-Specific Indicators. ManagerialAuditingJournal,34, 6-43. https://doi.org/10.1108/maj-05-2017-1559
[5]
Almarayeh, T. S., Aibar-Guzman, B., & Abdullatif, M. (2020). Does Audit Quality Influence Earnings Management in Emerging Markets? Evidence from Jordan. Revista de Contabilidad,23, 64-74. https://doi.org/10.6018/rcsar.365091
[6]
Alyaarubi, H. J., Alkindi, D. S., & Ahmed, E. R. (2021). Internal Auditing Quality and Earnings Management: Evidence from Sultanate of Oman. JournalofGovernanceandIntegrity,4, 115-124. https://doi.org/10.15282/jgi.4.2.2021.6054
[7]
Alzoubi, E. S. S. (2019). Audit Committee, Internal Audit Function and Earnings Management: Evidence from Jordan. MeditariAccountancyResearch,27, 72-90. https://doi.org/10.1108/medar-06-2017-0160
[8]
Amahalu, N. (2020). Effect of Audit Quality on the Financial Performance of Quoted Conglomerates in Nigeria. International Journal of Management Studies and SocialScience Research,2, 87-98.
[9]
Anton, O., & Nguyen, T. T. D. (2021). Audit Materiality and Cost of Debt. https://www.bayes.citystgeorges.ac.uk/__data/assets/pdf_file/0008/628802/Paper_Omar_Materiality-and-debt.pdf
[10]
Assad, N. F., & Alshurideh, M. T. (2020). Financial Reporting Quality, Audit Quality, and Investment Efficiency: Evidence from GCC Economies. Waffen-und Kostumkunde, 11, 194-208.
[11]
Balsam, S., Krishnan, J., & Yang, J. S. (2003). Auditor Industry Specialization and Earnings Quality. Auditing:AJournalofPractice&Theory,22, 71-97. https://doi.org/10.2308/aud.2003.22.2.71
[12]
Becker, C. L., Defond, M. L., Jiambalvo, J., & Subramanyam, K. R. (1998). The Effect of Audit Quality on Earnings Management. ContemporaryAccountingResearch,15, 1-24. https://doi.org/10.1111/j.1911-3846.1998.tb00547.x
[13]
Chae, S. J., Nakano, M., & Fujitani, R. (2020). Financial Reporting Opacity, Audit Quality and Crash Risk: Evidence from Japan. The Journal of Asian Finance, Economics and Business,7, 9-17. https://doi.org/10.13106/jafeb.2020.vol7.no1.9
[14]
Chatterjee, C. (2020). Board Quality and Earnings Management: Evidence from India. GlobalBusinessReview,21, 1302-1324. https://doi.org/10.1177/0972150919856958
[15]
Darmawan, I. P. E., Sutrisno, T., & Mardiati, E. (2019). Accrual Earnings Management and Real Earnings Management: Increase or Destroy Firm Value? InternationalJournalofMulticulturalandMultireligiousUnderstanding,6, 8-19. https://doi.org/10.18415/ijmmu.v6i2.551
[16]
Davis, L. R., Soo, B. S., & Trompeter, G. M. (2009). Auditor Tenure and the Ability to Meet or Beat Earnings Forecasts. ContemporaryAccountingResearch,26, 517-548. https://doi.org/10.1506/car.26.2.8
[17]
DeAngelo, L. E. (1981). Auditor Size and Audit Quality. JournalofAccountingandEconomics,3, 183-199. https://doi.org/10.1016/0165-4101(81)90002-1
[18]
Dechow, P. M., & Skinner, D. J. (2000). Earnings Management: Reconciling the Views of Accounting Academics, Practitioners, and Regulators. Accounting Horizons, 14, 235-250. https://doi.org/10.2308/acch.2000.14.2.235
[19]
Dechow, P. M., Sloan, R. G., & Sweeney, A. P. (1995). Detecting Earnings Management. TheAccountingReview,70, 193-225. https://doi.org/10.2308/tar-9505096112
[20]
Francis, J. R. (2004). What Do We Know about Audit Quality? The British Accounting Review, 36, 345-368. https://doi.org/10.1016/j.bar.2004.09.003
[21]
Francis, J. R., & Wang, D. (2008). The Joint Effect of Investor Protection and Big 4 Audits on Earnings Quality around the World. Contemporary Accounting Research, 25, 157-191. https://doi.org/10.1506/car.25.1.6
[22]
Freeman, R. E. (1984). Strategic Management: A Stakeholder Approach. Pitman.
[23]
Ghosh, A., & Moon, D. (2005). Auditor Tenure and Perceptions of Audit Quality. TheAccountingReview,80, 585-612. https://doi.org/10.2308/accr.2005.80.2.585
[24]
Healy, P. M., & Wahlen, J. M. (1999). A Review of the Earnings Management Literature and Its Implications for Standard Setting. AccountingHorizons,13, 365-383. https://doi.org/10.2308/acch.1999.13.4.365
[25]
Hribar, P., & Collins, D. W. (2002). Errors in Estimating Accruals: Implications for Empirical Research. JournalofAccountingResearch,40, 105-134.
[26]
Jensen, M. C., & Meckling, W. H. (1976). Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure. JournalofFinancialEconomics,3, 305-360. https://doi.org/10.1016/0304-405x(76)90026-x
[27]
Kaawaase, T. K., Nairuba, C., Akankunda, B., & Bananuka, J. (2021). Corporate Governance, Internal Audit Quality and Financial Reporting Quality of Financial Institutions. AsianJournalofAccountingResearch,6, 348-366. https://doi.org/10.1108/ajar-11-2020-0117
[28]
Kalanjati, D. S., Nasution, D., Jonnergård, K., & Sutedjo, S. (2019). Auditor Rotations and Audit Quality: A Perspective from a Cumulative Number of Audit Partner and Audit Firm Rotations. Asian Review of Accounting,27, 639-660.
[29]
Kalbuana, N., Suryati, A., & Pertiwi, C. P. A. (2022). Effect of Company Age, Audit Quality, Leverage and Profitability on Earnings Management. InternationalJournalofEconomics,BusinessandAccountingResearch,6, 305-315. https://doi.org/10.29040/ijebar.v6i1.4796
[30]
Khudhair, D. Z., Al-Zubaidi, F. K. A., & Raji, A. A. (2019). The Effect of Board Characteristics and Audit Committee Characteristics on Audit Quality. ManagementScienceLetters,9, 271-282. https://doi.org/10.5267/j.msl.2018.11.012
[31]
Kliestik, T., Belas, J., Valaskova, K., Nica, E., & Durana, P. (2021). Earnings Management in V4 Countries: The Evidence of Earnings Smoothing and Inflating. EconomicResearch-EkonomskaIstraživanja,34, 1452-1470. https://doi.org/10.1080/1331677x.2020.1831944
[32]
Komal, B., Bilal,, Ezeani, E., Shahzad, A., Usman, M., & Sun, J. (2023). Age Diversity of Audit Committee Financial Experts, Ownership Structure and Earnings Management: Evidence from China. InternationalJournalofFinance&Economics,28, 2664-2682. https://doi.org/10.1002/ijfe.2556
[33]
Kothari, S. P., Leone, A. J., & Wasley, C. E. (2005). Performance Matched Discretionary Accrual Measures. JournalofAccountingandEconomics,39, 163-197. https://doi.org/10.1016/j.jacceco.2004.11.002
[34]
Lee, H. S., Nagy, A. L., & Zimmerman, A. B. (2019). Audit Partner Assignments and Audit Quality in the United States. TheAccountingReview,94, 297-323. https://doi.org/10.2308/accr-52218
[35]
Ngo, D. N. P., & Le, A. T. H. (2021). Relationship between the Audit Committee and Earning Management in Listed Companies in Vietnam. The Journal of Asian Finance, Economics and Business,8, 135-142.
[36]
Nwoye, C. M., Anichebe, A. S., & Osegbu, I. F. (2021). Effect of Audit Quality on Earnings Management in Insurance Companies in Nigeria E. AthensJournalofBusiness&Economics,7, 173-202. https://doi.org/10.30958/ajbe.7-2-4
[37]
Orazalin, N., & Akhmetzhanov, R. (2019). Earnings Management, Audit Quality, and Cost of Debt: Evidence from a Central Asian Economy. ManagerialAuditingJournal,34, 696-721. https://doi.org/10.1108/maj-12-2017-1730
[38]
Park, B. (2019). Audit Committees and Managerial Influence on Audit Quality: ‘Voluntary’ versus ‘Mandatory’ Approach to Corporate Governance. AustralianAccountingReview,29, 266-280. https://doi.org/10.1111/auar.12263
[39]
Roychowdhury, S. (2006). Earnings Management through Real Activities Manipulation. JournalofAccountingandEconomics,42, 335-370. https://doi.org/10.1016/j.jacceco.2006.01.002
[40]
Spence, M. (1973). Job Market Signaling. TheQuarterlyJournalofEconomics,87, 355-374. https://doi.org/10.2307/1882010
[41]
Subramanyam, K. R. (1996). The Pricing of Discretionary Accruals. JournalofAccountingandEconomics,22, 249-281. https://doi.org/10.1016/s0165-4101(96)00434-x
[42]
Sundvik, D. (2019). The Impact of Principles-Based vs Rules-Based Accounting Standards on Reporting Quality and Earnings Management. JournalofAppliedAccountingResearch,20, 78-93. https://doi.org/10.1108/jaar-05-2018-0063
[43]
Wijaya, A. L. (2020). The Effect of Audit Quality on Firm Value: A Case in Indonesian Manufacturing Firm. https://www.um.edu.mt/library/oar/handle/123456789/49952
[44]
Zandi, G., Sadiq, M., & Mohamad, S. (2019). Big-Four Auditors and Financial Reporting Quality: Evidence from Pakistan. Humanities&SocialSciencesReviews,7, 369-375. https://doi.org/10.18510/hssr.2019.7243
