Publication: The moderating effects of CEO compensation on the association between external auditor attributes and earnings management practices
Date
2025-03-05
Authors
Hamzeh Fathi Ali Al-Share
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Abstract
Earnings management is an accounting technique aimed at manipulating accounting policy and concealing financial data or showing an improved financial position. Some managers seek to identify gaps in accounting principles and standards for personal opportunist purposes. Besides, disputes of interest can arise between the different stakeholders in a corporation, and information asymmetry between management and owners is the main reason behind earnings management practice. Thus, companies embark on earnings management practices to achieve these objectives. However, it provides a wrong impression to stakeholders, leading them to make a bad decision and lose their investment. Many scandals and corporate failures occurred in the Jordanian context due to earnings management practices. Despite the large number of studies that have dealt with this topic, many have neglected to investigate the joint effect between
external auditor attributes and CEO compensation on earnings management. This study examines the direct impact of external auditor attributes on earnings management, as well as the joint effect of the external auditor attributes with the CEO compensation on earnings management. This study sheds light on the importance of CEO compensation in the relationship between external auditor attributes and earnings management. It demonstrates its importance in limiting earnings management. This study used secondary data from all the services and industrial firms listed in the Amman Stock Exchange. It employed the diagnose test and fixed-effect model to test the hypotheses, and after that, it employed robustness tests. The discretionary accruals as a proxy for earnings management are measured by two models: (i) the Modified Jones Model (1995) and (ii) the Kothari model (2005). The results showed a significant negative association between the audit firm size and auditor industry specialisation with earnings management. However, the results show a positive and significant association between auditor tenure and earnings management and also reveal that CEO compensation as a moderating variable has a significant joint effect on earnings management with audit firm size, auditor industry specialisation, and auditor tenure. This study emphasised the importance of audit firm size and auditor industry specialisation and the need for the CEO to receive appropriate compensation to ensure the reduction of earnings management
Description
2023