The influence of audit quality on accrual profit management with financial distress as a moderation variable

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Abstract

Earnings management is a common problem in public companies that challenges auditors in overseeing the realisation of financial reports that are relevant and accurate to external parties. The purpose of this research is to examine the influence of auditor’s role on manager’s behaviour. The four independent variables of the auditor’s role consist of auditor independence, measured using the proxy formula, client importance, public accounting firm (PAF) size, PAF industry specialization and audit tenure measured using dummy variables. The dependent variable, accrual earnings management, is measured using the modified Jones’ model (Dechow et al., 1995). The moderation variable, financial distress, is measured using the Altman Z-score. The research data sample includes 61 public manufacturing companies listed on the Indonesia Stock Exchange (IDX) for the period 2016–2022, obtained through purposive sampling techniques. The data analysis method uses multiple linear regression. The results of this study indicate that auditor independence through client importance and audit tenure does not significantly affect accrual-based earnings management. Public accountant size has a negative effect on accrual-based earnings management, while industry specialization of public accountant has a positive effect. FD can strengthen the impact of auditor independence through client importance and public accountant size on accrual-based earnings management and weaken the influence of public accountant’s industry specialization and audit tenure on accrual-based earnings management.

Keywords: Audit Quality, Earnings Management, Financial Distress, Financial Statement

Authors’ individual contribution: Conceptualization — T.S.; Methodology — T.S. and R.Y.P.; Software — R.Y.P.; Validation — T.S. and R.Y.P.; Formal Analysis — T.S.; Investigation — R.Y.P.; Resources — R.Y.P.; Data Curation — R.Y.P.; Writing — Original Draft — R.Y.P.; Writing — Review & Editing — T.S.; Visualization — T.S.; Supervision — T.S.; Project Administration — T.S. and R.Y.P.; Funding Acquisition — T.S.

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

JEL Classification: M40, M41, M42

Received: 01.07.2024
Revised: 01.11.2024; 01.04.2025; 31.05.2025
Accepted: 17.06.2025
Published online: 19.06.2025

How to cite this paper: Sihombing, T., & Pamungkas, R. Y. (2025). The influence of audit quality on accrual profit management with financial distress as a moderation variable [Special issue]. Journal of Governance & Regulation, 14(2), 405–415. https://doi.org/10.22495/jgrv14i2siart19