The Impact of Internal Audit Quality on Earnings Management for Non-Financial Companies Listed on The Palestine Exchange رسالة ماجستير

Abstract

This study's objective was to understand internal audit quality's (IAQ) influence on the earnings management (EM) of non-financial companies listed on the Palestine Exchange (PEX) from 2018- 2023. Data was gathered via qualitative and quantitative methods, to evaluate IAQ proxies. Researchers used the Modified Jones Model to quantitatively analyse financial reports for EM. Questionnaires and interviews were used to collect qualitative data on IAQ proxies through both internal and external auditors. The population was 29 non-financial Palestinian companies (145 firm-year observations). Control variables were company size and profitability. Both the objectivity and competency of the auditors had no statistically significant impact on EM (p > 0.05 for both). However, there did seem to be a slight negative relationship but not sufficient to assume a significant relationship between IAQ and EM. The size of the company did not significantly influence the EM. Profitability has a positive relationship to its EM (p < 0.001). Firms with higher profitability rates indulge in discretionary accruals. The main reason the overall regression model showed significant results was the powerful impact of profitability, while the internal audit quality measures explained little. The uniqueness of the Palestinian market, or the governance environments can play a major role. To combat the issue of EM, stronger and stricter corporate governance frameworks must be put in place to comply better with the international standards. Profitability had a major role in the rates of EM, and more advanced data analytics be utilised as well as developing software with the purpose of detecting certain audit's practice that could account for unwanted EM, especially when it comes to more profitable companies. Research in the future should focus on exploring alternative measures to IAQ and EM, as well as better understand the impact that other governance variables have on EM