Audit Quality and Earnings Management In Indonesian Initial Public Offerings

Abstract

This study examines the effect of audit quality on earnings management (as measured by discretionary current accruals) for Indonesian IPO firms. Earnings management is measured using current accruals, assuming that the manager has the flexibility and control to the current accruals than long-term accruals. The hypothesis predicts that Indonesian IPO firms with higher quality auditors engage in less earnings management in the periods prior to the IPO date. The sample consists of 62 firms making IPO between 2000 and 2006. The results show that high quality auditors are related to less earnings management in the periods prior to the IPO. Audit quality constrains the extent of earnings management for Indonesian IPO firms and provides more precise information that makes management has less incentive to manage earnings. Cash flows from operating activities and size of the firm have negative and significant effect on the level of current accruals. The study contributes to the literature that audit quality is an important determinant in earnings management practices for Indonesian IPO firms.