Audit committee and financial reporting quality: the moderating effect of audit quality

Published date19 May 2021
Date19 May 2021
Subject MatterAccounting & finance,Financial risk/company failure,Financial crime
AuthorSana Mardessi
Audit committee and f‌inancial
reporting quality: the moderating
ef‌fect of audit quality
Sana Mardessi
Department of Accounting and Law, High Business School,
Université de Sfax École Supérieure de Commerce de Sfax, Sfax, Tunisia
Purpose The purpose of this study is to addressthe impact of audit quality on f‌inancial reporting quality
proxied by real earningsmanagement. To further clarify the mentioned links,this study empirically assesses
the moderatingeffect of audit quality.
Design/methodology/approach The study is based on a sample consisting of 90 non-f‌inancial
companies that are listed in the Amsterdam stock exchange in AEX all share index over the 20102017
period. This studyapplies a quantitative approach and secondary data asthe main source of information for
analysis. This paperperforms an ordinary least squares regression to examinethe moderating effect of audit
qualityon the relationshipbetween f‌inancial reporting quality.
Findings Empirical f‌indings demonstrate that corporate governance mechanism, mainly independence
members, f‌inancial expert and audit committee size has a statistically signif‌icant relationship with real
earnings management. However,the effect of audit committee meetings on real earnings management is not
signif‌icant. There is also evidence that audit quality moderates the audit committee real earnings
Originality/value This study extendsthe existing literature by examining the moderatingeffect of audit
quality on the relationship between f‌inancialreporting quality proxied by real earnings management in the
Dutch context.
Keywords Audit committee, Financial reporting quality, Audit quality, Real earnings management
Paper type Research paper
1. Introduction
Triggered by the corporate scandals and fraudcases that hit the corporate world in the f‌irst
years of the 2000s, regulators have prescribed corporate-governance structures to protect
investors and avoid fraudulent f‌inancial reporting.Thus, there has been much debate over
the fundamental role played by corporate governance in increasing f‌inancial reporting
quality (FRQ) from the theoretical perspective of agency theory and signaling theory
(Bedard and Gendron, 2010). More precisely,the quality of the f‌inancial report is ultimate to
shareholders, creditors and investors, providing them with f‌inancial information about a
company, depending on its reliability translating into an investment decision. Hence, we
highlight the need forproviding reliable, timely and relevant informationcrucial for eff‌icient
markets. The absence of this information spurs on market manipulation. This implies that
information should not have any bias and material error and ought not to be misleading.
However, the information needs to truly present the business activity and other events,
The author would like to thank the Journal Editors and the anonymous reviewers at each stage of the
review process for their clear and insightful comments and suggestions, which greatly benef‌ited this
Journalof Financial Crime
Vol.29 No. 1, 2022
pp. 368-388
© Emerald Publishing Limited
DOI 10.1108/JFC-01-2021-0010
The current issue and full text archive of this journal is available on Emerald Insight at:
reproduce the basic substance of events and cautiously represent estimates and
uncertainties, using proper disclosure (Okoye and Ofoegbu, 2011). Accordingly, corporate-
governance mechanisms are set up to positively affect the quality of earnings, thus
discouraging motivation for earnings manipulation. Nevertheless, the reliably reported
cases of fraud-related cases, distress and bankruptcy cases have had an impact on the
quality of f‌inancial reporting (Olowokure et al.,2016). Affording to Cohen et al. (2017)
indicate that a strong f‌inancial reporting process includes diligence by preparing and
monitoring parties such as, the Audit Committee (AC) and auditors, in providing accurate
and transparent f‌inancialreports and associated disclosures.
Due to the f‌inancial fraud cases highlighted above, fraudulent f‌inancial reporting,
usually beginning with earnings management, expands the most aggressive Generally
Accepted Accounting Principles.Yet, earnings management might be favorable to inf‌luence
stockholdersincentives and improve the information value of earnings. There are two
categories of earnings management procedures, specif‌ically real earnings management
(REM) and accruals earnings management (Roychowdhury, 2006;Cupertino et al.,2015).
Several researchershave used many proxies for the purpose of measuring reporting quality.
Nonetheless, given the likelihoodthat REM is hardly ever detected and as the passage of the
Sarbanes-Oxley Act when managers have moved away from accrual-based toward REM,
we have chosen to adopt it.
Hence, this study aimsat seeking to address the effect of audit quality on FRQ (via REM).
To further account for the links mentioned, this paper empirically assesses the moderating
effect of audit quality in the Netherlands.
This paper makes several contributions to the existing literature. As a matter of fact, to
the best of our knowledge, the Dutch context has not been yet explored, especiallyfollowing
the issue of the long-awaited new Dutch Corporate-Governance Code in 2016. The
Netherlands is a civil law country, which has general rules of civil laws relating to the
governance of corporations. The f‌irst Dutch Civil Code holds rules regarding f‌inancial
reporting and disclosure for listed companies, which has been adopted in 2003 and entered
into effect in 2004. It was amended in 2008 so as to get more transparency, accountability,
fairness and responsibility. In addition, more attention was paid to risk management, the
supervisory duties of the supervisory board and the level and structure of remuneration.
This code has become a model to many other civil law countries having developing Codes.
Continuing developments,globalization and overlaps with legislation have pushedthe issue
of a new code in 2016 through the corporate-governance monitoring committee at the
request of the National Federationof Christian Trade Unions in The Netherlands. This Code,
also, provides guidancefor effective cooperation and management. The merit of this Code as
an instrument of self-regulation is that it focuses more on the behavior of management
board members, supervisoryboard members and shareholders.
There has been much work on the direct relationships between AC Characteristics and
FRQ. With the aim of accentuating this relationship,we have added the moderating effect of
audit quality. Indeed, despite the widespread acknowledgment of the importance of audit
quality, a gap exists in the empirical body of literature that examines the moderatingeffect
of this factor. It will help corporations improve the audit quality and avoid f‌inancial
reporting problems.
The remainder of this study is organized as follows. Section 2 provides the literature
review and develops the exploratory research questions addressed in the current study.
Section 3 presents research methods and Section 4 deals with results and discussion.
Eventually, Section5 summarizes and concludes the study.
ef‌fect of audit

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