The Impact of Corporate Governance Mechanisms on Audit Quality and Real Earnings Management

Abstract

This research aims to find a proper scientific answer to the question "whether the corporate governance mechanism has a significant effect on real earnings management and audit quality?" The question is represented in the form of two main hypothesis and four sub- hypotheses. Corporate governance mechanisms are measured with ownership concentration, board size, board independence and internal auditing and audit quality is measured with audit firm size. The elements of abnormal operating cash flows, abnormal production costs and abnormal discretionary expenses are used to measure real earnings management. The sample consists of 81 firms during the years 2008 to 2012. Findings indicate that among the corporate governance mechanisms, board size and ownership concentration have no significant effect on audit quality however, the board independence and internal audit have significant relation with audit quality. Also, findings show that corporate governance mechanisms may decrease real earning management. Moreover, a significant negative relation between audit quality and real earnings management is confirmed. Thus, according to the findings, there is a significant relation between corporate governance mechanisms and audit quality as well as real earning management.

Keywords

• corporate governance mechanisms
• board independence
• Ownership concentration
• internal auditing
• Audit quality