The Effect of Good Corporate Governance on Earnings Management with Audit Quality as a Moderating Variable

Elisa Nurmalita; Cornelius Rantelangi; Agus Setiawaty

doi:10.55980/ebasr.v5i2.445

Authors

Elisa Nurmalita Department of Accounting, Universitas Mulawarman, Samarinda, Indonesia
Cornelius Rantelangi Department of Accounting, Universitas Mulawarman, Samarinda, Indonesia
Agus Setiawaty Department of Accounting, Universitas Mulawarman, Samarinda, Indonesia

DOI:

https://doi.org/10.55980/ebasr.v5i2.445

Keywords:

Audit Quality, Corporate Governance, Discretionary Accruals, Earnings Management, Independent Commissioners

Abstract

This study investigated the effect of good corporate governance on earnings management, with audit quality serving as a moderating variable. The research focused on energy sector companies listed on the Indonesia Stock Exchange. In this context, corporate governance mechanisms were measured through independent commissioners, institutional ownership, managerial ownership, and the audit committee. Earnings management was operationalized through discretionary accruals using the modified Jones model. The results demonstrated that independent commissioners and audit quality exerted a significant negative effect on earnings management, confirming their roles in strengthening oversight functions and limiting managerial opportunistic behavior. Conversely, institutional ownership and managerial ownership showed no significant effect on earnings management. Interestingly, the audit committee exhibited a significant positive effect, which contradicted the initial hypothesis. Regarding the interaction effects, audit quality significantly moderated the relationships between independent commissioners, institutional ownership, and managerial ownership with earnings management, operating as a quasi-moderator. However, audit quality could not moderate the relationship involving the audit committee and acted only as a predictor variable. In conclusion, external audit quality interacts critically with internal governance structures to minimize agency conflicts and restrain discretionary accounting choices within capital-intensive and highly volatile sectors

References

Al-Shaer, H., & Zaman, M. (2021). Audit committee disclosure tone and earnings management. Journal of Applied Accounting Research, 22(5), 780–799. https://doi.org/10.1108/JAAR-12-2020-0243

Alexander, N. (2019). Ownership Structure and Earnings Management. GATR Accounting and Finance Review, 4(2), 38–42. https://doi.org/10.35609/afr.2019.4.2(1)

Ali, S. M. (2023). Exploring earnings management : I nstitutional ownership and audit size in Malaysia ’ s sustainability pathway Keyword s. International Journal of Management and Sustainability, 12(4), 535–560. https://doi.org/10.18488/11.v12i4.3536

Anderson, M., Mashruwala, R., Wang, Y., & Zhao, R. (2023). Cost uniqueness and information uncertainty. Contemporary Accounting Research, 40(4), 2226–2255. https://doi.org/10.1111/1911-3846.12893

Ariestiani, N. W., Sujana, I. K., & Hasibuan, H. T. (2026). Governance Mechanisms on Earnings Management : Does Audit Quality Moderate ? Evidence from Indonesia. Journal of Economics, Finance and Accounting Studies, 8(8), 46–55. https://doi.org/10.32996/jefas.2026.8.8.5

Asmaranti, Y., Lokman, N., & Rahman, R. A. (2024). Corporate Governance And Real Earnings Management: Evidence From Indonesian Fraudulent And Non-Fraudulent Listed Companies. Asia-Pacific Management Accounting Journal, 19(1). https://doi.org/10.24191/APMAJ.V19i1-01

Awais Amin, Q., & Cumming, D. (2023). Regulatory reforms, board independence and earnings quality. Journal of International Financial Markets, Institutions and Money, 88, 101840. https://doi.org/10.1016/j.intfin.2023.101840

Bansal, M. (2021). Board independence and earnings management: influence of family business generation. Journal of Asia Business Studies, 15(5), 748–768. https://doi.org/10.1108/JABS-07-2020-0280

Bryan, D. B., Mason, T. W., & West, A. N. (2025). Lead Independent Directors and Real Earnings Management. Journal of Corporate Accounting & Finance, 36(2), 85–102. https://doi.org/10.1002/jcaf.22759

Bugshan, A., Alnahdi, S., Ananzeh, H., & Alnori, F. (2022). Does oil price uncertainty affect earnings management? Evidence from GCC markets. International Journal of Energy Sector Management, 16(6), 1240–1258. https://doi.org/10.1108/IJESM-05-2021-0003

Cao, W., Linnenluecke, M., Tian, J., Xue, R., & Yang, H. (2023). How does investor attention affect energy firms’ managerial opportunistic behavior? New evidence from China. Business Strategy and the Environment, 32(7), 5025–5043. https://doi.org/10.1002/bse.3406

Comporek, M. (2023). Accrual-based earnings management and organizational life cycles: Two-dimensional analysis. International Entrepreneurship Review, 9(1), 97–108. https://doi.org/10.15678/IER.2023.0901.07

Eriandani, R., Pirzada, K., & Kurniawan, M. K. (2020). The role of auditor characteristics: earnings management and audit committee effectiveness. Entrepreneurship and Sustainability Issues, 7(4), 3242–3252. https://doi.org/10.9770/jesi.2020.7.4(44)

Garel, A., Martin-Flores, J. M., Petit-Romec, A., & Scott, A. (2021). Institutional investor distraction and earnings management. Journal of Corporate Finance, 66, 101801. https://doi.org/10.1016/j.jcorpfin.2020.101801

Herranz, C. Z., Alvarado, N. R., & López Iturriaga, F. J. (2022). Audit Committee Competence and Earnings Management in Europe. Revista de Contabilidad-Spanish Accounting Review, 25(1), 121–135. https://doi.org/10.6018/RCSAR.385331

Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360. https://doi.org/10.1016/0304-405X(76)90026-X

Jesslyn, J., Susanto, Y. K., & Wijaya, W. C. (2021). Factors that Motivate The Act of Earnings Management. Media Bisnis, 13(2), 131–148. https://doi.org/10.34208/mb.v13i2.1667

Karina, R. (2021). Corporate governance and earnings management: Does gender matter? Jurnal Akuntansi & Auditing Indonesia, 25(2), 125–135. https://doi.org/10.20885/jaai.vol25.iss2.art3

Khuong, N. V., Liem, N. T., & Minh, M. T. H. (2020). Earnings management and cash holdings: Evidence from energy firms in Vietnam. Journal of International Studies, 13(1), 247–261. https://doi.org/10.14254/2071-8330.2020/13-1/16

Krismiaji, Handayani, & Sumayyah. (2023). Audit Quality, Board Governance and Real Earnings Management – Indonesian Evidence. CECCAR Business Review, 4(8), 64–73. https://doi.org/10.37945/cbr.2023.08.07

Lukman, L., & Fayzhall, M. (2018). Pengaruh Discretionary Accruals, Beban Pajak Tangguhan dan Beban Pajak Kini Terhadap Manajemen Laba pada Perusahaan Pertambangan dan Energi di Bursa Efek Indonesia Tahun 2012–2016. Jurnal Ekonomi Manajemen, 1(2).

Mardessi, S. (2022). Audit committee and financial reporting quality: the moderating effect of audit quality. Journal of Financial Crime, 29(1), 368–388. https://doi.org/10.1108/JFC-01-2021-0010

Mardnly, Z., Badran, Z., & Mouselli, S. (2021). Earnings management and audit quality at Damascus securities exchange: does managerial ownership matter? Journal of Financial Reporting and Accounting, 19(5), 725–741. https://doi.org/10.1108/JFRA-06-2020-0162

Nuryana, I. (2022). Factors influencing earnings management on manufacturing company on BEI. International Journal of Multidisciplinary Research and Growth Evaluation, 103–110. https://doi.org/10.54660/anfo.2021.3.1.8

Özcan, A. (2019). Audit Quality and Earnings Management: Evidence From Turkey. Uluslararası İktisadi ve İdari İncelemeler Dergisi, 23, 67–78. https://doi.org/10.18092/ulikidince.464537

Pandey, A., Pattanayak, J. K., & Singh, P. (2022). Role of corporate governance in constraining earnings management practices: a study of select Indian and Chinese firms. Journal of Indian Business Research, 14(3), 231–250. https://doi.org/10.1108/JIBR-03-2021-0104

Potharla, S., Bhattacharjee, K., & Iyer, V. (2021). Institutional ownership and earnings management: Evidence from India. Cogent Economics & Finance, 9(1). https://doi.org/10.1080/23322039.2021.1902032

Ramalingegowda, S., Utke, S., & Yu, Y. (2021). Common Institutional Ownership and Earnings Management*. Contemporary Accounting Research, 38(1), 208–241. https://doi.org/10.1111/1911-3846.12628

Shan, Y. G., Troshani, I., & Loftus, J. (2021). Managerial ownership, audit committees and non-audit services. Australian Journal of Management, 46(3), 409–436. https://doi.org/10.1177/0312896220945763

Siraji, M., & Nazar, M. C. A. (2021). How do Family and Managerial Ownership Structure Effect Real Earnings Management? Asian Journal of Economics, Business and Accounting, 21(7), 50–58. https://doi.org/10.9734/ajeba/2021/v21i730401

Suhadak, S., Nawari, N., & Wardhani, D. K. (2022). Corporate Governance, Big4 and Earnings Management. Jurnal Akuntansi Dan Bisnis, 22(1), 17. https://doi.org/10.20961/jab.v22i1.721

Thi, C. D. (2023). Audit Quality, Institutional Environments, and Earnings Management: An Empirical Analysis of New Listings. SAGE Open, 13(2), 1–22. https://doi.org/10.1177/21582440231180672

Widijaya, W., & Veronica, J. (2022). Pengaruh Karakteristik Komite Audit terhadap Manajemen Laba. Jurnal Ekobistek, 367–375. https://doi.org/10.35134/ekobistek.v11i4.383

Wiratno, D. H., Krismiaji, K., Handayani, H., & Sumayyah, S. (2023). Financial Distress, Audit Quality, and Earnings Management–Indonesia’s Mining Sector Evidence. Jurnal Maksipreneur: Manajemen, Koperasi, Dan Entrepreneurship, 12(2), 499. https://doi.org/10.30588/jmp.v12i2.1502

Zakaria, N. B., Zulkefeli, H. A., & Abdul Rahman, R. (2022). Earnings Management and Audit Quality: Evidence from Malaysia. International Journal of Academic Research in Accounting, Finance and Management Sciences, 12(1). https://doi.org/10.6007/IJARAFMS/v12-i1/11621