The effectiveness of audit committees and audit quality in mitigating real earnings management: Evidence from manufacturing companies

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Abstract

The purpose of this study is to explain, on the one hand, the effect of audit committee effectiveness measured using a composite index that captures the committee’s size, expertise, independence, and diligence on real earnings management. On the other hand, this study aims to investigate the moderating role of audit quality in the relationship between audit committee effectiveness and real earnings management. Using a sample of 625 firm-year observations from 2018 to 2022, we investigate the impact of audit committee effectiveness and audit quality on real earnings management. The results show that audit committee effectiveness has a significant negative impact on real earnings management, and this effect is strengthened when audit quality is high. These findings highlight the importance of both internal and external governance mechanisms in constraining opportunistic behavior by managers. The study contributes to the corporate governance literature by providing evidence on the complementary roles of audit committees and external auditors in enhancing financial reporting quality in an emerging market setting. The findings also have implications for regulators, investors, and other stakeholders who are interested in promoting effective governance practices and reducing earnings management.

Keywords: Audit Committee Effectiveness, Audit Quality, Real Earnings Management

Authors’ individual contribution: Conceptualization — F.N., B., and P.; Methodology — F.N. and B.; Validation — F.N.; Formal Analysis — F.N., B., and P.; Investigation — F.N. and P.; Data Curation — F.N.; Writing — Original Draft — F.N. and P.; Writing — Review & Editing — B. and J.W.; Supervision — F.N.; Project Administration — F.N.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: G3, M42

Received: 18.08.2024
Revised: 05.11.2024; 17.04.2025
Accepted: 16.05.2025
Published online: 20.05.2025

How to cite this paper: Nurjanah, F., Bandi, Payamta, & Winarna, J. (2025). The effectiveness of audit committees and audit quality in mitigating real earnings management: Evidence from manufacturing companies [Special issue]. Journal of Governance & Regulation, 14(2), 234–243. https://doi.org/10.22495/jgrv14i2siart2