The Effect of Audit Firm Size on Earnings Management: Using the

CEO Compensation as Moderator

HAMZEH FATHI ALSHARE1, MOHD RIZUAN BIN ABDUL KADIR2,

KHAIRUL ANUAR KAMARUDIN3, HASMAIZAN BINTI HASSAN4

1College of Management, Universiti Tenaga Nasional (UNITEN), MALAYSIA

2College of Graduate Studies, Universiti Tenaga Nasional (UNITEN), MALAYSIA

3Faculty of Business, University of Wollongong, Dubai, UNITED ARAB EMIRATES

4College of Energy Economics and Social Science, Universiti Tenaga Nasional (UNITEN),

MALAYSIA

Abstract: - This study investigates the impact of the audit firm size on earnings management by using the CEO

compensation as a moderating variable. This study was conducted in service and industrial firms listed on the

Amman Stock Exchange from 2015 to 2019. The results of this research were examined using a fixed-effect

model, and many robustness tests were used to show that the conclusions are reliable when using different

measures. The size of the audit company and the management of earnings were shown to be significantly

correlated in the research. However, show how the combined effects of CEO remuneration and audit firm size

have a considerably detrimental impact on the management of profitability. When making decisions on external

audits and earnings management, the government, investors, and shareholders would benefit from this study. It

highlights several strengths and flaws in the audit firm size and CEO compensation that aid in restricting

earnings management.

Key-Words: - Audit firm size, CEO compensation, Earnings management.

Received: June 16, 2022. Revised: December 26, 2022. Accepted: January 27, 2023. Published: February 28, 2023.

1 Introduction

The most important official reports of economic

activity are financial statements, which tell

stakeholders about the financial health of the firm.

It seeks to deliver accurate and trustworthy

information so that users may decide without

consulting the earnings management (EM), [1]. The

International Financial Reporting Standards

(IFRS), which provide the preparers with a variety

of accounting methodologies while being impartial,

serve as a guide for the creation of financial

reports.

The management seeks to select the most

promising accounting methods that will be

advantageous to them while compiling financial

statements. They will thus use EM to demonstrate

the successful outcome of their financial conditions

and company activities, [2]. By manipulating

numerous strategies, which are permitted when

generating financial statements to accomplish the

pre-set aims, and either raising or lowering

earnings that are shadowing the management, EM

activity may be either legal or unlawful, [3].

Kitiwong, [4], believed that EM is essential for

the company to have a say in their financial

situation and create the greatest financial reports

for the public. In order to satisfy analyst

expectations, attract investors, and boost incentives

based on performance, businesses may have little

choice but to adopt EM. Thus, they represent the

intended outcomes using all accessible accounting

approaches, such as increasing corporate gearing,

[5].

The success of the firm is misrepresented by

the excessive use of EM. It diminishes the value of

financial information by giving stakeholders a

misleading impression of the company's true

performance. It, therefore, undermines shareholder

trust in financial reporting, which lowers the firm's

performance and value, [6].

Previously, academics have discovered a wide

range of factors that drive business EM. For

instance, managers may exaggerate results to drive

up stock prices during initial public offerings [7],

justice offerings [8], [9], to avert disclose

misplacements [10], [11], to prevent violations of

the law governing debt contracts, creative profit

offense, and personal gain and compensation, [12].

As many businesses have experienced

bankruptcy and accounting scandals, the overuse of

EM practices has led to several concerns and

problems. Penn West Exploration (2012 to 2014),

Tesco (2014), Toshiba (2015), Patisserie Valerie

(2018), and General Electric (2018) are among the

WSEAS TRANSACTIONS on BUSINESS and ECONOMICS

DOI: 10.37394/23207.2023.20.46

Hamzeh Fathi Alshare, Mohd Rizuan Bin Abdul Kadir,

Khairul Anuar Kamarudin, Hasmaizan Binti Hassan

E-ISSN: 2224-2899

505

Volume 20, 2023

large corporations that suffered as a result of

excessive usage of EM, [13]. Due to incorrect

judgments made as a consequence of inflated

information disclosed in the business financial

statements that are vulnerable to EM practices,

many investors have lost their assets. As a result,

this behavior hinders the movement of capital,

which has an impact on the financial market, [13].

As a result, guarantees are required to

safeguard stakeholder investments, implement

optimal resource utilization, cut down on

accounting mistakes, and influence revenues. The

external audit firm's assurance services are meant

to improve the financial data's integrity and

guarantee that it is free of fraud and mistakes. In

addition, it's to rebuild users' faith in the sharing of

financial information, [14].

In order to practice their profession, external

audits must be impartial and pertinent. The Big

Four accounting companies have distinguished

themselves as a leader in the sector that offers

substantial auditing services across the services

provided by numerous audit firms, [15]. Market

confidence in The Big Four's capacity to provide

qualified employees in a wide range of professional

services to their client has grown. They have a lot

going for them that makes major organizations

want to employ their services. As a result, when

evaluating the effect of audit services, the big four

are frequently separated from the non-big four in

accounting and auditing studies, [16].

Previous studies have frequently looked at

what motivates CEOs to disclose their achievement

through financial reporting, including how much

they are paid and given incentives, [17], [18], [19].

There are agreed-upon compensations to be

provided when they attain the specified targets that

are set for them to achieve. Therefore, anytime

remuneration levels are high, there is a greater

propensity for EM practices, and good assurance

services are required to adhere to financial

statement transparency, [20].

This study looks at how AFS affects EM

practices at the Amman Stock Exchange (ASE) and

if CEO remuneration influences this connection in a

positive or negative way. Jordan is a developing

nation, therefore it seems sensible that Jordanian

businesses use EM extensively, [21], [22]. For

Jordanian investors, foreign investors, society, and

the economy, this study is important.

2 Literature Review and Proposed

Hypothesis

The vast majority of the study on this topic has

been agency theory-based, and it has examined

audit firm size as a suitable method for resolving

agency issues between directors and shareholders

as well as for aligning management and investor

interests, [23]. It is doubtful that the size of the

audit firm will restrict the EM in the Jordanian

environment, which is distinguished by limited

investor protection, significant company ownership

concentration, and minimal corporate controller

influence, [24].

It is doubtful that the size of the audit firm will

restrict the EM in the Jordanian environment,

which is distinguished by limited investor

protection, significant company ownership

concentration, and minimal corporate controller

influence, [25]. Therefore, by reducing agency

issues, the quality of financial reports can be

assured, and they reflect the company's reality

without providing false information, [26].

Li, Park, and Bao, [27], emphasized that the

EM happens when managers alter IFRS-mandated

financial report preparation procedures or utilize

their own judgment to benefit them. It modifies an

organization's actual performance or the

transactions' actuality as reported in financial

statements, [28]. An example is when a firm adopts

the accrual basis in its financial system because it

allows for flexibility in information communication

and because management may use it

opportunistically to further its own interests by

concealing the company's losses, [29].

Abdallah, [30], advised that managers are

given the tools to monitor through a well-designed

incentive structure. Additionally, employing a

trustworthy external auditor, like the Big 4, can

stop the management's opportunistic activities and

acts. As one of the key variables in EM, the

influence of audit firm size is examined in this

study. There is increasing pressure on politicians,

investors, and proponents of corporate governance

reform to enact measures that would curb excessive

opportunistic behavior in corporate management.

2.1 Audit Firm Size and Earnings

Management

When it comes to the accounting and auditing

services offered, audit companies are categorized

based on their size. The Big 4, who are comprised

of Ernst & Young, Deloitte and Touche, KPMG,

and Price Waterhouse Coopers, were shown to

perform well in the prior survey. Investors have

WSEAS TRANSACTIONS on BUSINESS and ECONOMICS

DOI: 10.37394/23207.2023.20.46

Hamzeh Fathi Alshare, Mohd Rizuan Bin Abdul Kadir,

Khairul Anuar Kamarudin, Hasmaizan Binti Hassan

E-ISSN: 2224-2899

506

Volume 20, 2023

faith in the accuracy and fairness of financial

accounts because of their capacity to uphold a high

level of independence and integrity while providing

a variety of services to customers, [31].

Due to the significant clientele they serve, any

flaw in the Big 4 audit firms' work will have a

detrimental impact. Therefore, they will suffer

severe losses. The audit quality of the non-Big 4

audit firms is occasionally subpar because they are

more susceptible to reputational risks and

litigation-related concerns, [32].

Previous research on the association between

AFS and EM produced a variety of findings.

Orazalin & Akhmetzhanov [6] and Al-Haddad &

Whittington, [33] found no proof that AFS can

discourage EM. Similarly, Habbash & Alghamdi

[34], Abid, Shaique, & Anwar ul Haq [35],

Almarayeh et al. [22] and Ching et al. [36] observe

an insignificant role between AFS and EM.

However, a negative and significant relation

between AFS and EM was discovered by Nguyen

et al. [37], Selahudin, Fauzan, & Ahmad [38] and

Lin & Hwang [39]. Opposite, Alimoradi & Faraj

[40] and Al-Rassas & Kamardin [41] existed a

negative but insignificant relationship between

AFS and EM. Yet, Alves [42], Persakis & Iatridis

[43] and Musa & Saidu [44] indicated the existence

of a positive significance between AFS and EM.

According to the previous studies, this research

tests the following hypothesis:

H1: There is a significant relationship between

audit firm size and EM practices.

2.2 CEO Compensation and Earnings

Management

If CEO compensation is based on earnings, it may

be detrimental to organizations since it pushes

managers to EM. Accordingly, Bergstresser &

Philippon, [17], raised the possibility that managers

would get pay based on performance despite not

delivering services worthy of the award. It is

because managers have total authority over both

clarity and remuneration. Consequently, it would

be wise to look at the relationship between CEO

pay and EM.

Managers must take steps to display a

favorable picture of the firm while creating

financial reports in order for EM to occur in the

organization. Financial reporting, which has a

direct impact on managers' own wealth, becomes a

place to misrepresent, [45]. Managers may boost

and magnify their incentives by using the EM. As a

result, in contrast to experts' predictions, it also had

an influence on the company's operations, [17].

Since companies that employ CEO

remuneration do better than those that don't, Cheng

& Warfield [50], have issued a warning regarding

CEO, compensation. They found that the

businesses with unethical CEO compensation have

larger discretionary accruals. Previous research on

the relationship between CEO salary as reflected by

(CEO) and EM produced a variety of findings. a

positive relationship between CEO and EM was

discovered by Park [46]; Almadi and Lazic [47]; Li

and Kuo [18]; Ye [48]. However, Hassen [49];

Cheng and Warfield, [50], document a negative

relevance between CEO and EM. However,

Armstrong, Jagolinzer & Larcker [51] failed to

provide any evidence between CEO pay and

falsification of accounting reports. The

organizations where CEOs have higher levels of

incentives showed no indication of accounting

manipulation reports, on the other hand.

To stop directors from taking advantage of

their favorable position in order to boost their pay.

To oversee the practice of EM, the shareholders

may employ a respected external auditor, such as a

significant audit firm. The link between these

factors is anticipated to be moderated by the CEO

salary. The purpose of this study is to examine the

following hypothesis in light of prior studies:

H2: The CEO compensation moderates

relationship between audit firm size and

EM practices.

3 Research Methodology

The study investigates the relationship between

AFS and CEO compensation as a moderator

variable on EM. All corporates listed on the ASE

were included in the study’s population between

2015 and 2019. The financial sectors are omitted

due to different features used in reporting [52], as

they prepare their financial statements according to

different norms and accounting standards, [53].

All service and industrial businesses listed on

the ASE from 2015 to 2019 are included in the

sample. The sample consists of 81 businesses, of

which 43 are service-related and 38 are industrial.

405 balanced panel data observations in total were

collected. The ASE website's business financial

records were used to calculate the research

variables. (http://www.ase.com.jo).

3.1 Measurement of Variables

Based on Mcnichols & Wilson, [54], this study

employs discretionary accruals to measure EM

(dependent variable). This study employed the

WSEAS TRANSACTIONS on BUSINESS and ECONOMICS

DOI: 10.37394/23207.2023.20.46

Hamzeh Fathi Alshare, Mohd Rizuan Bin Abdul Kadir,

Khairul Anuar Kamarudin, Hasmaizan Binti Hassan

E-ISSN: 2224-2899

507

Volume 20, 2023

same equation as [30], [6], and [22] to quantify

discretionary accruals (DA) as a proxy for EM

using the Kothari, Leone, and Wasley [55] model:

DAi,t = TACi,t - NDAi,t (1)

The NDA stands for non-discretionary accruals,

where the TAC is for total accruals. Using the

following equation, the total accruals TAC was first

determined:

TACi,t = NIi,t - OCFi,t (2)

Where OCFi,t stands for operating cash flows and

NIi,t refers to net income before exceptional items.

After that, non-discretionary accruals NDA must be

found as follows:

NDA = β0+ β1(1/ TAi,t-1) + β2 (ΔREVi,t / TAi,t-1

– ΔRECi,t / TAi,t-1 ) + β3(PPEi,t / TAi,t-1)

+ β4(ROAi,t / TAi,t-1) (3)

Where I is for the company, t for the year, TA

stands for total assets, REV stands for change in

operating revenues, REC stands for change in net

receivables, PPE stands for change in gross

property, plant, and equipment, and ROA stands for

return on assets. Lastly, the DA is determined by

applying equation (1), total DA in equation (2)

minus the non-DA in equation (3).

Our main measure for Audit firm size (AFS) is

measured by using A dummy variable 1 if the firm

is audited by a Big 4 auditor, 0 otherwise, [43].

This study also used a Log of total CEO

compensation for the year to measure the CEO

compensation (CEO) [45].

3.2 Regression Model

This study evaluated the following regression to

test the study hypotheses and examined the

association between AFS and CEO as a moderate

with EM:

EM = β 0 + β 1AFS + β 2CEO + β 3AFS* CEO +

β4LEV + β 5ROA + β6FSIZE + β6MTB+

β7CURRENT + β8BSIZE + ei,t (4)

4 Result & Discussion

4.1 Descriptive Statistics

The variables' minimum, maximum, mean, and

standard deviation values are included in Table 1's

descriptive statistics. The mean value of earnings

management as measured by DA is 0.02, which is

strikingly comparable to research by Kamarudin,

Mohamad Ariff, and Wan Ismail from other

countries [56], The Big 4 auditors are utilized by

around 48% of Jordanian businesses, according to

the mean value for the AFS, which is 0.48. The

CEO remuneration in Jordan is substantial, as

indicated by the CEO mean of 77446JD, which

demonstrates the CEO's influence over decision-

making. The data also reveals that the average LEV

value is 0.352, meaning that 35% of a company's

assets are financed by debt. The typical ROA value

is 0.016. The typical value of the variable FSIZE is

4.89. Knowing that there are organizations with

strong performance, the highest value for

CURRENT is 902.165 and the CURRENT mean is

7.69. This result also shows that current assets

constitute 7.69% of total assets, which is a

relatively low proportion. The MTB mean is 1.24.

The BSIZE variable ranges in value from 5 to 14,

with a typical value of 7.88.

The Pearson correlation analysis of the

independent and dependent variables is shown in

Table 2. The findings indicate that the majority of

independent factors are positively correlated.

According to the results, the CEO and DA have

positive correlations (r = 0.143; p=0.004) and AFS

has a positive association (r = 0.041; p=0.41).

BSIZE and CEO had the strongest connection (r =

0.493; p=0.000) among the variables in Table 3.

Table 1. Descriptive statistics

variables

Minimum

Maximum

Mean

Std. Deviation

-0.365

2.106

0.029

0.231

AFS

0.484

0.50

CEO

400

533335

77446

LEV

0.001

0.959

0.353

0.228

ROA

-0.613

0.387

0.015

0.097

FSIZE

2.602

5.727

4.889

0.493

MTB

0.117

12.41

1.239

1.252

CURRENT

0.02

902.165

7.695

59.856

BSIZE

7.879

2.344

WSEAS TRANSACTIONS on BUSINESS and ECONOMICS

DOI: 10.37394/23207.2023.20.46

Hamzeh Fathi Alshare, Mohd Rizuan Bin Abdul Kadir,

Khairul Anuar Kamarudin, Hasmaizan Binti Hassan

E-ISSN: 2224-2899

508

Volume 20, 2023

4.2 Main Empirical Results

This study used fixed effect regression models to

examine the hypotheses. The regression estimates

for the influence of AFS and CEO as a moderator

variable on EM are shown in Table 3. The findings

of this study, shown in Table 3, show a strongly

positive connection between AFS and EM, which

rules out the Big 4's effectiveness in lowering EM.

This finding contradicts the agency theory.

Table 2. Correlation analysis

Probability

AFS

CEO

LEV

ROA

FSIZE

MTB

CURRENT

BSIZE

-----

AFS

0.041

0.41

-----

CEO

0.143

0.272

0.004

-----

LEV

0.035

-0.043

0.388

0.479

0.388

-----

ROA

0.185

0.16

0.283

-0.241

0.001

0.002

-----

FSIZE

0.095

0.057

0.317

0.144

0.099

0.056

0.248

0.004

0.046

-----

MTB

0.045

0.082

0.137

0.095

0.329

0.02

0.371

0.098

0.006

0.056

0.694

-----

CURRENT

0.035

-0.087

-0.228

-0.161

-0.018

0.003

0.061

0.478

0.08

0.002

0.692

0.095

0.223

-----

BSIZE

0.095

0.255

0.493

0.003

0.176

0.367

0.046

-0.114

0.055

0.095

0.001

0.355

0.021

-----

But it contradicts [40, [41] and is in line with [42,

[43], [44]. In light of this finding, the first

hypothesis is accepted, which states: there is a

significant relationship between AFS and EM.

The CEO result in Table 3 shows a negligibly

beneficial impact on EM. This outcome shows that

the CEO frequently manipulates company earnings

to increase remuneration. This finding conflicts

with the agency theory, which claimed that if the

CEO had a larger salary, he or she would be more

likely to disclose critical information about the

business that would help to minimize conflicts of

interest, [57]. This outcome is in line with [19] and

[18]. Table 3 showed that the combined effect of

the CEO and the AFS was significantly and

negatively related to EM. This demonstrates the

significance of the joint effect in reducing EM

behaviors and its crucial role as a moderator.

According to this, the Big 4 audit firms and CEO

compensation assist Jordanian businesses boost the

legitimacy of their revenues. This outcome

supports the agency theory. On the basis of the

aforementioned, the second hypothesis, which

states: The CEO compensation moderates

relationship between audit firm size and EM

practices. Additionally, the control variables LEV,

FSIZE, MTB, and BSIZE had negligible

relationships to EM. However, there is a significant

correlation between CURRENT and ROA and EM.

WSEAS TRANSACTIONS on BUSINESS and ECONOMICS

DOI: 10.37394/23207.2023.20.46

Hamzeh Fathi Alshare, Mohd Rizuan Bin Abdul Kadir,

Khairul Anuar Kamarudin, Hasmaizan Binti Hassan

E-ISSN: 2224-2899

509

Volume 20, 2023

Table 3. Fixed effect model

Variables

Result of regression model

AFS

1.25*** (2.67)

CEO

.524 (1.57)

CEO*AFS

-.173*** (-2.82)

LEV

.056 (.87)

ROA

.737*** (7.39)

FSIZE

-.005 (-.16)

MTB

-.003 (-.37)

CURRENT

.001*** (8.11)

BSIZE

.008 (0.84)

-3.88 (-164)

R- squared

0.316

F- Statistic

1068.3***

No. of obs

405

*, ** and *** represent signiﬁcance at p<0.10, <0.05 and <0.01, respectively.

Table 4. Unit Root Test

Variables

ADF

LLC

I(0)

I(1)

I(0)

I(1)

284.891***

388.847***

-36.354***

-52.277***

AFS

65.513

23.212

-4.744***

-2.343***

CEO

202.573**

279753***

-7.603***

-1096.2***

LEV

190.454*

269.803***

-14.917***

-49.384***

ROA

276.468***

378.379***

-92.663***

-103.655***

FSIZE

226.87***

308.818***

-21.603***

-46.16***

MTB

248.173***

340.572***

-14.358***

-88.533***

CURRENT

250.032***

340.462***

-19.439***

-66.395***

BSIZE

3.637

16.096**

-4.307***

-6.517***

*, ** and *** represent signiﬁcance at p<0.10, <0.05 and <0.01, respectively.

4.3 Robustness Analysis

This study involves a number of tests to make sure

the conclusions hold up to different metrics. The

tests include tests for serial correlation,

heteroscedasticity, and unit root. First, the

enhanced Dickey-Fuller (ADF) and Levin-Lin-Chu

(LLC) tests were performed in this study. To

ascertain whether a time series is stationary, or

whether a change in time does not result in a

change in the distribution's shape, a unit-root test

was undertaken. The dependent variable DA has p

values less than 0.01, which indicates that the

variable is stationary, according to the LLC test.

Table 4 present a unit root test determines whether

a variable in a panel data set is stationary or

nonstationary. Further evidence that all the factors

in the panel data are stationary comes from the fact

that both the control and moderating variables

produced the same outcome. In order to rule out

biases and confirm that the regression model is

significant, this study also tests the data for

heteroscedasticity. In order to identify a

heteroscedasticity problem in the dataset, this

research applied the Modified Wald test for

GroupWise heteroscedasticity in a FEM. The panel

data used for this analysis's p-value (probability >

chi2) was found to be more than 0.1, showing that

there is no heteroscedasticity problem for DA. The

outcome is shown in table 5 below.

Third, serial correlation is tested in this study. A

dataset with serial correlation produces a biased

model that is unsuitable for sophisticated data

analysis. As a result, the Wooldridge test analysis

was utilized in this study to identify the problem of

WSEAS TRANSACTIONS on BUSINESS and ECONOMICS

DOI: 10.37394/23207.2023.20.46

Hamzeh Fathi Alshare, Mohd Rizuan Bin Abdul Kadir,

Khairul Anuar Kamarudin, Hasmaizan Binti Hassan

E-ISSN: 2224-2899

510

Volume 20, 2023

serial correlation. Table 6 presented the

Wooldridge test results. The outcome demonstrated

that there was no serial association in this

investigation.

Table 5. Modified Wald test

H0: sigma(i)^2 = sigma^2 for all i

Chi2 (81) = 1.3e+05

Prob>chi2 = 0.256

*, ** and *** represent signiﬁcance at p<0.10,

<0.05 and <0.01, respectively.

Table 6. Wooldridge test for autocorrelation

H0: no first order autocorrelation

F(1, 80) = 0.001

Prob>f = 0.9697

*, ** and *** represent signiﬁcance at p<0.10,

<0.05 and <0.01, respectively.

5 Conclusions

The aim of this research is to investigate the effect

of AFS on EM and combined influence of CEO

compensation as a moderating variable in

companies listed on the ASE. A panel data set from

81 industrial and service companies from 2015 to

2019 was used in the study. The study's findings

showed that EM has a positive and significant

impact on AFS; this suggests that the Big 4 audit

firms are unable to reduce EM because of the

results' increased firm size; and this suggests that

major corporations are eager to report financial

statement errors and provide transparent, truthful

information. The findings also revealed that just a

small percentage—35% of the company's assets—

were derived from indebtedness, indicating that

managers are not actively seeking to take risks by

engaging in opportunistic conduct to escape debt

arrangements. Based on this, shareholders and

stakeholders shouldn't rely solely on Big 4

companies to solve EM and agency issues, as well

as CEO compensation when it is a somewhat

variable. It can be said that corporate governance

must be done fully and jointly and be under

supervision to ensure its full application in order to

reduce opportunistic practices and reducing agency

problems. The study revealed that the joint effect of

AFS and CEO compensation on EM had a

significant and negative relationship; this indicates

the strength of the joint effect in limiting EM.

This study used CEO compensation as a

moderating variable to address a knowledge gap

about earnings management in Jordan. New

analyses on the prospect of restricting profits

management were offered. This study's coverage of

the time before and after the 2017 changes to the

Corporate Governance Law is one of its

contributions. This study suggests that companies

should not rely just on the Big 4 to audit their data;

instead, they should pay attention to the industry

specialty of their auditors and be able to afford

audit costs in addition to offering the CEO the

proper incentives.

References:

[1] I. Lisboa and A. Kacharava, “Does financial

crisis impact earnings management? Evidence

from Turkey,” Eur. J. Appl. Bus. Manag., vol.

31, no. 1, pp. 64–71, 2018,.

[2] R. Mustafa Ali, “The Relation Between

Auditor’s Fees and Earnings Management,” The

Islamic University–Gaza, 2016.

[3] B. A. AbdulGhani, “Measuring earnings

management practices in the telecom sector

companies in Algeria,” Qasdi Mrbah University/

Algeria, 2018.

[4] W. Kitiwong, “Earnings Management and Audit

Quality : Evidence From Southeast ASIA, Phd

thesis University of York,” 2014.

[5] X. Wang, “Earnings Management to Meet

Analysts’ Forecasts,” University of Oulu, 2016.

[6] N. Orazalin and R. Akhmetzhanov, “Earnings

management , audit quality , and cost of debt :

evidence from a Central Asian economy,”

Manag. Audit. J., vol. 34, no. 6, pp. 696–721,

2019.

[7] J. M. FRIEDLAN, “Accounting Choices of

Issuers of Initial Public Offerings,” Contemp.

Account. Res., vol. 11, no. 1, pp. 1–31, 1994.

[8] L. L. DuCharme, P. H. Malatesta, and S. E.

Sefcik, “Earnings management, stock issues,

and shareholder lawsuits,” J. financ. econ., vol.

71, no. 1, pp. 27–49, 2004.

[9] H. Jo and Y. Kim, “Disclosure frequency and

earnings management,” J. financ. econ., vol. 84,

no. 2, pp. 561–590, 2007.

[10] D. Burgstahler and I. Dichev, “Earnings

management to avoid earnings decreases and

losses,” J. Account. Econ., vol. 24, no. 1, pp.

99–126, 1997.

[11] C. Charoenwong and P. Jiraporn, “Earnings

management to exceed thresholds: Evidence

from Singapore and Thailand,” J. Multinatl.

Financ. Manag., vol. 19, no. 3, pp. 221–236,

2009.

[12] M. L. DeFond and J. Jiambalvo, “Debt covenant

violation and manipulation of accruals,” J.

Account. Econ., vol. 17, no. 1–2, pp. 145–176,

1994.

[13] K. S. Abu Saleem, “The Impact of Audit

Committee Characteristics on the Creative

Accounting Practices Reduction in Jordanian

Commercial Banks,” Mod. Appl. Sci., vol. 13,

no. 6, p. 113, 2019.

WSEAS TRANSACTIONS on BUSINESS and ECONOMICS

DOI: 10.37394/23207.2023.20.46

Hamzeh Fathi Alshare, Mohd Rizuan Bin Abdul Kadir,

Khairul Anuar Kamarudin, Hasmaizan Binti Hassan

E-ISSN: 2224-2899

511

Volume 20, 2023

[14] I. Iriyadi, “Prevention of Earnings Management

through Audit Committee and Audit Quality in

the Award-Winning and Non-Winning

Companies,” J. Account. Res. Organ. Econ., vol.

2, no. 2, pp. 155–169, 2019.

[15] A. K. Ghadhab, A. K. Matrood, and A. M.

Hameed, “Factors affecting the quality of

external auditor performance: An analytical

study of the opinions of auditors working in

iraqi audit firms and companies,” Acad. Strateg.

Manag. J., vol. 18, no. 1, pp. 1–27, 2019.

[16] M. K. Harris and L. T. Williams, “Audit quality

indicators: Perspectives from Non-Big Four

audit firms and small company audit

committees,” Adv. Account., vol. 50, p. 100485,

2020.

[17] D. Bergstresser and T. Philippon, “CEO

incentives and earnings management,” J. financ.

econ., vol. 80, no. 3, pp. 511–529, 2006.

[18] L. Li and C. Kuo, “CEO equity compensation

and earnings management : The role of growth

opportunities,” Financ. Res. Lett., vol. 20, pp.

289–295, 2016.

[19] G. Abdelwahed, “Earnings Management

Constraints in the UK and the US The

Moderating Role of CEO Compensation,” 2018.

[20] M. Harakeh, W. El-Gammal, and G. Matar,

“Female directors, earnings management, and

CEO incentive compensation: UK evidence,”

Res. Int. Bus. Financ., vol. 50, pp. 153–170,

2019.

[21] L. Qudah, M. Hamidat, and Y. Alhrout, “The

impact of the size of the audit office and the

period of customer retention in reducing the

practice of earnings management (An Empirical

study on the Industrial companies listed on the

Amman Stock Exchange: Jordan),” J. Econ.

Adm. Sci. / Qassim Univ., vol. 10, no. 2, pp.

171–205, 2018.

[22] T. S. Almarayeh, B. Aibar-Guzmán, and M.

Abdullatif, “Does audit quality influence

earnings management in emerging markets?

Evidence from Jordan,” Rev. Contab. Account.

Rev., vol. 23, no. 1, pp. 64–74, 2020.

[23] Z. Inaam and H. Khamoussi, “Audit committee

effectiveness, audit quality and earnings

management: a meta-analysis,” Int. J. Law

Manag., vol. 58, no. 2, pp. 179–196, 2016.

[24] W. Bank, “World development report 2016:

digital dividends,” World Bank Publications,

2016.

[25] E. F. Fama, “Agency Problems and the Theory

of the Firm,” J. Polit. Econ., vol. 88, no. 2, pp.

288–307, 1980.

[26] C. Jensen and H. Meckling, “Theory of the

Firm: Managerial Behavior, Agency Costs and

Ownership Structure,” J. financ. econ., vol. 3,

pp. 305–360, 1976.

[27] S. Li, S. H. Park, and R. S. Bao, “How much can

we trust the financial report ? Earnings

management in emerging economies,” Int. J.

Emerg. Mark., vol. 9, no. 1, pp. 33–53, 2014.

[28] R. L. Watts and J. L. Zimmerman, “Agency

Problems, Auditing, and the Theory of the Firm:

Some Evidence,” J. Law Econ., vol. 26, no. 3,

pp. 613–633, 1983.

[29] P. M. Healy, “The effect of bonus schemes on

accounting decisions,” J. Account. Econ., vol. 7,

no. 1–3, pp. 85–107, 1985.

[30] S. Abdallah, “External auditor type ,

discretionary accruals and investors ’ reactions,”

J. Account. Emerg. Econ., vol. 8, no. 2, pp. 352–

368, 2018.

[31] A. M. Alrshah, “Corporate Governance ,

Auditor Quality And The Reliability Of Audited

F Inancial Statements In Libyan Banking

Sector,” Universiti Utara Malaysia, 2014.

[32] I. K. Khurana and K. K. Raman, “Litigation risk

and the financial reporting credibility of big 4

versus non-big 4 audits: Evidence from Anglo-

American countries,” Account. Rev., vol. 79, no.

2, pp. 473–495, 2004.

[33] L. Al-Haddad and M. Whittington, “The impact

of corporate governance mechanisms on real

and accrual earnings management practices:

evidence from Jordan,” Corp. Gov., vol. 19, no.

6, pp. 1167–1186, 2019.

[34] M. Habbash and S. Alghamdi, “Audit quality

and earnings management in less developed

economies : the case of Saudi Arabia,” J.

Manag. Gov., vol. 21, no. 2, pp. 351–373, 2016.

[35] A. Abid, M. Shaique, and M. Anwar ul Haq,

“Do Big Four Auditors Always Provide Higher

Audit Quality? Evidence from Pakistan,” Int. J.

Financ. Stud., vol. 6, no. 2, p. 58, 2018.

[36] C. P. Ching, B. H. Teh, O. T. San, and H. Y.

Hoe, “The Relationship among Audit Quality,

Earnings Management, and Financial

Performance of Malaysian Public Listed

Companies.,” Int. J. Econ. Manag., vol. 9, no. 1,

2015.

[37] L. Q. T. Nguyen, D. T. Le, H. N. Luu, A. H.

Nguyen, and T. G. Hoang, “The role of audit

quality in preventing firm misreporting :

empirical evidence from China,” Int. J. Manag.

Financ., vol. 16, no. 1, pp. 83–100, 2019.

[38] N. F. Selahudin, M. Fauzan, and M. Ahmad,

“Do Female Director , Audit Quality and Audit

Committee Characteristics Influence the

Earnings Management ?,” Glob. Bus. Manag.

Res. An Int. J., vol. 10, no. 3, pp. 130–140,

2018.

[39] J. W. Lin and M. I. Hwang, “Audit Quality ,

Corporate Governance , and Earnings

Management : A Meta-Analysis,” Int. J. Audit.,

vol. 14, no. 3, pp. 57–77, 2010.

[40] A. Alimoradi and S. A. Faraj, “Investigating the

Relationship between Audit Quality and Profit

Management Case Study: Companies Accepted

in Tehran Stock Exchange,” Qalaai Zanist Sci.

WSEAS TRANSACTIONS on BUSINESS and ECONOMICS

DOI: 10.37394/23207.2023.20.46

Hamzeh Fathi Alshare, Mohd Rizuan Bin Abdul Kadir,

Khairul Anuar Kamarudin, Hasmaizan Binti Hassan

E-ISSN: 2224-2899

512

Volume 20, 2023

J., vol. 3, no. 3, pp. 696–702, 2018.

[41] A. H. Al-Rassas and H. Kamardin, “Internal and

External Audit Attributes, Audit Committee

Characteristics, Ownership Concentration and

Earnings Quality: Evidence from Malaysia,”

Mediterr. J. Soc. Sci., vol. 6, no. 3, pp. 458–470,

2015.

[42] S. Alves, “The impact of audit committee

existence and external audit on earnings

management,” J. Financ. Report. Account., vol.

11, no. 2, pp. 143–165, 2013.

[43] A. Persakis and G. E. Iatridis, “Audit quality,

investor protection and earnings management

during the financial crisis of 2008: An

international perspective,” “Journal Int. Financ.

Mark. Institutions Money,” vol. 41, pp. 73–101,

2015.

[44] J. Musa and S. A. Saidu, “The Impact of Audit

Firm Size on Financial Reporting Quality of

Listed Insurance Companies in Nigeria,” Iran. J.

Account., vol. 02, no. 01, pp. 19–47, 2018.

[45] O. Harris, J. B. Karl, and E. Lawrence, “CEO

compensation and earnings management: Does

gender really matters?,” J. Bus. Res., vol. 98, no.

February 2018, pp. 1–14, 2019.

[46] K. Park, “Does peer firm executive

compensation affect earnings management?,”

Manag. Financ., vol. 45, no. 1, pp. 54–71, 2019.

[47] M. Almadi and P. Lazic, “CEO incentive

compensation and earnings management The

implications of institutions and governance

systems,” Implic. institutions Gov. Syst., vol. 54,

no. 10, pp. 2447–2461, 2016.

[48] K. Ye, “Independent director cash compensation

and earnings management,” J. Account. Public

Policy, vol. 33, no. 4, pp. 391–400, 2014.

[49] R. Ben Hassen, “Executive Compensation and

Earning Management,” Int. J. Account. Financ.

Report., vol. 4, no. 1, p. 84, 2014.

[50] Q. Cheng and T. Warfield, “Equity incentives

and earnings management,” Account. Rev., vol.

80, no. 2, pp. 441–476, 2005.

[51] C. S. Armstrong, A. D. Jagolinzer, and D. F.

Larcker, “Chief Executive Officer Equity

Incentives and Accounting Irregularities,” J.

Account. Res., vol. 48, no. 2, pp. 225–271, 2010.

[52] N. Sun, A. Salama, K. Hussainey, and M.

Habbash, “Corporate environmental disclosure ,

corporate governance and earnings

management,” Manag. Audit. J., vol. 25, no. 7,

pp. 679–700, 2010.

[53] A. Kouaib and A. Jarboui, “External audit

quality and ownership structure: interaction and

impact on earnings management of industrial

and commercial Tunisian sectors,” J. Econ.

Financ. Adm. Sci., vol. 19, no. 37, pp. 79–89,

2014.

[54] M. Mcnichols and G. P. Wilson, “Evidence of

earnings management from the provision for bad

debts,” J. Account. Res., pp. 1–31, 1988.

[55] S. P. Kothari, A. J. Leone, and C. E. Wasley,

“Performance matched discretionary accrual

measures,” J. Account. Econ., vol. 39, no. 1, pp.

163–197, 2005.

[56] K. A. Kamarudin, A. Mohamad Ariff, and W. A.

Wan Ismail, “Intensity of product market

competition, institutional environment and

accrual quality,” Pacific Account. Rev., vol. 32,

no. 3, pp. 391–419, 2021.

[57] H. L. Tosi, A. L. Brownlee, P. Silva, and J. P.

Katz, “An empirical exploration of decision-

making under agency controls and stewardship

structure,” J. Manag. Stud., vol. 40, no. 8, pp.

2053–2071, 2003.

WSEAS TRANSACTIONS on BUSINESS and ECONOMICS

DOI: 10.37394/23207.2023.20.46

Hamzeh Fathi Alshare, Mohd Rizuan Bin Abdul Kadir,

Khairul Anuar Kamarudin, Hasmaizan Binti Hassan

E-ISSN: 2224-2899

513

Volume 20, 2023

Contribution of Individual Authors to the

Creation of a Scientific Article (Ghostwriting

Policy)

The authors equally contributed in the present

research, at all stages from the formulation of the

problem to the final findings and solution.

Sources of Funding for Research Presented in a

Scientific Article or Scientific Article Itself

No funding was received for conducting this study.

Conflict of Interest

The authors have no conflicts of interest to declare

that are relevant to the content of this article.

Creative Commons Attribution License 4.0

(Attribution 4.0 International, CC BY 4.0)

This article is published under the terms of the

Creative Commons Attribution License 4.0

https://creativecommons.org/licenses/by/4.0/deed.en

_US