THE IMPACT OF AUDIT QUALITY ON EARNING MANAGEMENT AND PERFORMANCE IN MAJOR SOUTH ASIAN ECONOMIES

Abstract

Purpose: The objective of the research is to assess whether a good quality audit has any negative or positive impact on earning management and performance of the firm. The firm quality as an independent variable has been measured by audit firm size and audit fee. The earning management as a dependent variable has been measured by discretionary accruals (modified jones model) and the performance as a dependent variable of the firm has been measured by ROA in the study. The researcher has aimed to focus on the stock exchange list ofIndia, Pakistan, Dhaka (Bangladesh) and Colombo (Srilanka). Methodology & Design: The data has taken from the stock exchange database or on the website ofthe company during the time period of 2013 to 2018. Stratified sampling is used in this research. It depicts that groups have been created out of the population’s sum that is all the firms listed under the stock exchanges of Bangladesh (Dhaka), Sri Lanka (Colombo), Pakistan, and India. Findings: The findings showed that for the audit firm size and earning management, there seemed to be a negative but significant impact on each other. Moreover, for the audit fee, an insignificant impact was noted. For the performance (ROA) and audit quality having proxies audit firm size and firm fee, it can be stated that the variables shared a positive relation with each other however; an insignificant impact was found which shows that good quality of audit will have no impact on performance (ROA). Moreover, a negative relation and insignificant impact was noted among audit fee and ROA. This means that audit fee will have no impact on ROA. The null hypothesis was rejected for the audit firm size showing significant impact of audit quality on discretionary accruals while the null hypothesis was accepted for the audit fee showing insignificant impact audit fee on discretionary accruals. The null hypothesis was accepted for audit firm size and audit fee showing an insignificant impact ofboth the variables on ROA. Limitations: The primary limitation ofthis study is the time constraint that has restricted the detailed analysis. However, the study is cross-sectional and aims to study the specific point at a time and further longitudinal study could make this study extensive. Recommendations: Lastly, this study is, therefore, giving the primary contribution by adding relevant literature and knowledge regarding the association among performance, earning management and audit quality and will also broaden the evidence towards the South Asian economy. Further study is recommended to be done on the other aspects apart from ROA and discretionary accruals such as the audit quality impact could be seen on audit firm rotation and auditor motivation.