Effects of Management Ingratiation, Earnings Management Incentives, and Audit Committee Communication with the External Auditor on Auditors' Judgment Quality

Abstract

In the last decade, Securities and Exchange Organization has required issuers listed in Tehran Stock Exchange and Iranian over the counter market to establish an audit committee (internal audit guidelines) having communication with an external auditor (audit committee charter) in order to improve firms’ internal controls. Therefore, this study investigates effects of management ingratiation, earnings management incentives and audit committee communication with the external auditor on the quality of auditor's judgment. The statistical test method is MANCOVA. Results indicate that "management ingratiation", "earnings management incentives " and "audit committee communication with external auditors" have positive significant effects on auditors' judgment quality. In addition, interactions of "management ingratiation and earnings management incentives", "earnings management incentives and audit committee communication with external auditors", and "management ingratiation and earnings management incentives and audit committee communication with external auditors" have positive significant effects on auditors' judgment. Finally, results show that, according to the source credibility theory, when there is management ingratiation, high earnings management incentives result in positive significant effects of the audit committee communication with external auditor, on the quality of auditor's judgment.

Keywords

• management ingratiation
• management incentives on earnings management
• audit committee communication with the independent auditor
• auditor's judgment quality
• information source credibility