ISSN: 2225-8329
Open access
This paper aims at investigating the relationship of audit market share, industry specialisation and Big 4 towards earnings management. The research posits that audit market share and industry specialisation constrains earnings management. In addition, it hypothesized a positive relationship between Big 4 and earnings management. The data was gathered from Data Stream, Thomson Reuters to test the research hypotheses. Out of 1488 companies-years observation between 2015 to 2018, the results indicate that there is no significant difference between audit market share and industry specialist auditors in constraining earnings management. In addition, findings support that Big 4 was significantly higher when specialists conducted the audit. The results provide empirical evidence consistent with the hypothesis that auditor with big size improves audit quality.
Rahman, R. A., & Ali, F. H. M. (2006). Board, audit committee, culture and earnings management: Malaysian evidence. Managerial Auditing Journal.
Balsam, S., Krishnan, J., & Yang, J. S. (2003). Auditor industry specialization and earnings quality. Auditing: A journal of practice & Theory, 22(2), 71-97.
Bauwhede, V. H., Willekens, M., & Gaeremynck, A. (2003). Audit firm size, public ownership, and firms' discretionary accruals management. TheIinternationalJjournal of Accounting, 38(1), 1-22.
Becker, C. L., DeFond, M. L., Jiambalvo, J., & Subramanyam, K. R. (1998). The effect of audit quality on earnings management. Contemporary Accounting Research, 15(1), 1-24.
Bonner, S. E., & Lewis, B. L. (1990). Determinants of auditor expertise. Journal of Accounting Research, 28, 1-20.
Cahan, S. F., Godfrey, J. M., Hamilton, J., & Jeter, D. C. (2008). Auditor specialization, auditor dominance, and audit fees: The role of investment opportunities. The Accounting Review, 83(6), 1393-1423.
Chia, Y., Lapsley, I., and Lee, H.-W. (2007). Choice of auditors and earnings management during the Asian financial crisis. Managerial Auditing Journal, 22 (2), 177-196.
Chih, H.-L., Shen, C.-H., and Kang, F.-C. (2008). Corporate Social Responsibility,Investor Protection, and Earnings Management: Some International Evidence. Journal of Business Ethics, 79, 179–198.
Choi, J. H., Kim, C., Kim, J. B., & Zang, Y. (2010). Audit office size, audit quality, and audit pricing. Auditing: A Journal of Practice & Theory, 29(1), 73-97.
Cohen, J. (1988). Statistical Power Analysis for the Behavioral Sciences; 2nd Edition. New Jersy: Lawrence Erlbaum Associates Inc.
Craswell, A. T., & Taylor, S. L. (1991). The market structure of auditing in Australia: The role of industry specialization. Research in Accounting Regulation, 5(1), 55-77.
DeAngelo, L. (1981). Auditor Size And Audit Quality. Journal of Accounting and Economics 3, 183-199.
Dechow, P., Sloan, R., and Sweeney, A. (1995). Detecting Earnings Management. The Accounting Review, 70(2), 193-225.
Dechow, P. M., and Sloan, R. G. (1991). Executive incentives and the horizon problem: An empirical investigation. Journal of Accounting and Economics, 14, 51?89.
DeFond, M. L., Francis, J. R., & Wong, T. J. (2000). Auditor industry specialization and market segmentation: Evidence from Hong Kong. Auditing: A Journal of Practice & Theory, 19(1), 49-66.
Feng, L., & Fei, X. (2002). Risk based auditing, litigation risk and auditing quality [J]. Accounting Research, 2.
Healy, P. (1985). The impact of bonus schemes on the selection of accounting principles. Journal of Accounting and Economics, 7, 85?107.
Healy, P., and Wahlen, J. (1999). A Review of the Earnings Management Literature and Its Implications for Standard Setting. Accouning Horizons, 13(4), 365-383.
Inaam, Z., Khmoussi, H. L. I. O. U. I., & Fatma, Z. (2012). Audit quality and earnings management in the Tunisian context. International Journal of Accounting and Financial Reporting, 2(2), 17.
Jensen, M., and Meckling, W. (1976). Theory of the Companies: Managerial Behavior , Agency Costs and Ownership Structure. Journal of Financial Economics, 3(4), 305–360.
Jeong, S. W., & Rho, J. (2004). Big Six auditors and audit quality: The Korean evidence. The International Journal of Accounting, 39(2), 175-196.
Keefe, T. B., King, R. D., & Gaver, K. M. (1994). Audit fees, industry specialization, and compliance with GAAS reporting standards. Auditing, 13(2), 41.
Knechel, W. R., Krishnan, G. V., Pevzner, M., Shefchik, L. B., & Velury, U. K. (2013). Audit quality: Insights from the academic literature. Auditing: A Journal of Practice & Theory, 32(Supplement 1), 385-421.
Kothari, S., Leone, A., and Wasley, C. (2005). Performance Matched Discretionary Accrual Measures. Journal of Accounting and Economics, 39(1), 163–197.
Krishnan, G. V. (2003). Does Big 6 auditor industry expertise constrain earnings management?. Accounting Horizons, 17, 1-16.
Lee, H. L., & Lee, H. (2013). Do Big 4 audit firms improve the value relevance of earnings and equity?. Managerial Auditing Journal.
Mansor, N., & Maruhun, E. N. S. (2013). Audit market concentration and auditor's industry specialization. Procedia-Social and Behavioral Sciences, 91, 48-56.
Mayangsari, S., & Sudibyo, B. (2006). An empirical analysis of auditor litigation. The Indonesian Journal of Accounting Research, 9(1).
Owhoso, V. E., Messier, Jr, W. F., & Lynch, Jr, J. G. (2002). Error detection by industry?specialized teams during sequential audit review. Journal of accounting research, 40(3), 883-900.
Reichelt, K. J., & Wang, D. (2010). National and office?specific measures of auditor industry expertise and effects on audit quality. Journal of Accounting Research, 48(3), 647-686.
Rhode, J. G., Whitsell, G. M., & Kelsey, R. L. (1974). An analysis of client-industry concentrations for large public accounting firms. The Accounting Review, 49(4), 772-787.
Saleh, N. M., Iskandar, T. M., & Rahmat, M. M. (2003, October). Management intention to avoid losses and earnings decreases: Evidence from Malaysia. In Proceeding of International Seminar on Sustainable Economic and Business Development in An Era of Globalization, Universiti Kebangsaan Malaysia, Universitas Syiah Kuala and Universitas Bengkulu (pp. 13-14).
Scott, W. (2011). Financial Accounting Theory. 6th edition (Prentice Hall).
Schipper, K. (1989). Earnings management. Accounting Horizon, 3(4), 91.
Siregar, S. V., & Utama, S. (2008). Type of earnings management and the effect of ownership structure, firm size, and corporate-governance practices: Evidence from Indonesia. The International Journal of Accounting, 43(1), 1-27.
Sulaiman, M., & Govindan, K. (2000, June). Macroeconomic fundamentals of the Malaysian economy: before and after the crisis. In National Seminar on Strengthening the Macroeconomic Fundamentals of the Malaysian Economy, organized by UUM and UKM, June (p. 5).
Sun, J., & Liu, G. (2013). Auditor industry specialization, board governance, and earnings management. Managerial Auditing Journal.
Tangjitprom, N. (2013). The Role of Corporate Governance in Reducing the Negative Effect of Earnings Management. International Journal of Economics and Finance, 5(3) , 213-220.
Tariverdi, Y., Moradzadehfard, M., & Rostami, M. (2012). The effect of earnings management on the quality of financial reporting. African Journal of Business Management, 6(12), 4603-4611.
Zakaria, N. B., and Daud, D. (2013). Does Big 4 Affect the Earnings Response Coefficient? Evidence From Malaysia. Journal of Modern Accounting and Auditing, 9(9), 1204-1215.
In-Text Citation: (Zakaria et al., 2022)
To Cite this Article: Zakaria, N. B., Zulkefeli, H. A., & Rahman, R. A. (2022). Earnings Management and Audit Quality: Evidence from Malaysia. International Journal of Academic Research in Accounting Finance and Management Sciences, 12(1), 98–118.
Copyright: © 2022 The Author(s)
Published by Human Resource Management Academic Research Society (www.hrmars.com)
This article is published under the Creative Commons Attribution (CC BY 4.0) license. Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. The full terms of this license may be seen at: http://creativecommons.org/licences/by/4.0/legalcode