The Effect of Audit Committee Effectiveness on Earnings Management: Indonesian Evidence (original) (raw)
ABSTRACT Taufik Harris Edyna, S.E. NIM: S4312013 THE EFFECT OF AUDIT COMMITTEE EFFECTIVENESS AND AUDIT QUALITY ON EARNINGS MANAGEMENT INDONESIAN EVIDENCE The study aims to know the extent to which audit committee effectiveness and audit quality affect on earnings management in Indonesian listed manufacturing firms. Audit committee effectiveness is measured by audit committee features including competence, diligence, and independence. Audit quality is assessed by either audit firm size or industry specialization. This study utilizes the Cross-sectional Modified Jones Model since it is more likely to detect earnings management rather than other alternative models. The research uses secondary data from the Indonesia Stock Exchange and purposive sampling involving 85 manufacturing listed companies for the year 2011. Data analyses employ the descriptive statistics, multiple regression, and logistic regression to test the hypotheses. The main findings of the study show that audit committee independence is significantly negative associated with earnings management. In all models, this audit committee feature reduces earnings management consistently. In contrast, other audit committee characteristics and audit quality are less likely to undermine earnings management. In conclusion, audit committee independence is a crucial tool to minimize a likelihood of earnings management practices in Indonesian listed manufacturing firms. The results contribute more understanding regarding the effect of audit committee effectiveness and audit quality on earnings management in Indonesian manufacturing industry. The implications of the results are that government and regulators have more incentives to enhance audit quality so as to ensure financial reporting quality and in turn, improve the confidence of investors. Another implication, the findings also encourage policy makers to rule audit committee members that consist of all independent members as a response of the important roles of audit committee independence to mitigate earnings management. Keywords: audit committee effectiveness, audit quality, earnings management
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