The Mediating Effect of Audit Quality between Audit Committee and Earnings Management: An Applied Study on Listed Companies in Palestine Exchange رسالة ماجستير

Abstract

This study aims to examine the mediating effect of audit quality (AQ) represented by audit fees and audit firm size, particularly the big four on the association between audit committees (ACs) and accrual earnings management (AEM). Data was sourced from the annual reports of 27 non-financial companies listed on the Palestine Exchange (PEX) from 2014 to 2022. Furthermore, ordinary least square (OLS) regression with robust standard error, as well as logistic regression was used to test the study models. The findings revealed that the characteristics of ACs don’t play a significant role in reducing AEM, except for the accounting and finance experience of committee members, which is positively associated with AEM. On the other hand, the study showed that the characteristics of ACs don’t significantly affect the increase of audit fees, except for the number of meetings that showed a positive relationship with auditor fees. On the contrary, independence, frequency of meetings, and the presence of female members in ACs don’t play a significant role in the selection of the big four audit companies, while the size and its members accounting expertise are positively associated with the selection of big four companies. Finally, the results showed that AQ, through audit fees and big four audit companies doesn’t affect the reduction of AEM. Thus, according to Baron and Kenny (1986) mediation test, the AQ fails to achieve the role of mediator in the association between ACs and AEM. Furthermore, robust analysis was used to check the validity and robustness of the results, including the use of alternative regression estimators and alternative AEM model. The sample was also divided based on signed accruals, and it was found that the presence of ACs doesn’t affect AEM and AQ. Finally, the issue of endogeneity was discussed. The main contribution of this study is to examine the AQ as a potential mediating variable between ACs and AEM. The study recommends that regulatory bodies and policymakers in Palestine and other developing countries should review and update their governance mechanisms and develop legislative and supervisory instructions align with global governance standards, thereby contributing to strengthening the regulatory environment and improve better oversight of governance practices