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Audit quality and earnings management in less developed economies: the case of Saudi Arabia

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Abstract

This paper aims to determine if significant associations exist between audit quality and earnings management in less developed economies, providing their various shortcomings and differences. Five different measures of audit quality (auditor size, auditor industry specialization, auditor opinion, auditor change and timeliness of auditor report) were examined based on a sample of 337 non-financial Saudi listed firms from 2006 to 2009. The absolute value of discretionary accruals is used as a proxy for earnings management by using a cross-sectional variation of the Kothari model. The results of this research indicate that only auditor opinion indicates earnings management practice. The results support the argument that auditors are powerless in front of managerial opportunistic activities. Issues that may impair audit quality in Saudi Arabia are discussed.

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Acknowledgments

We are grateful for the kind support of Professor Robert Dixon and Dr Ann wood from Durham University Business School, UK. We are also grateful to Dr Yusuf Karbhari, from Cardiff Business School, UK for his useful comments. We also appreciate the useful comments of participants at the annual PhD seminars, held at Durham Business School, Durham University, UK, 2011.

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Authors and Affiliations

  1. Administrative and Financial Sciences School, King Khalid University, P.O. Box 2742, Abha, Saudi Arabia

    Murya Habbash

  2. Business School, Taif University, Taif, Saudi Arabia

    Salim Alghamdi

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  1. Murya Habbash
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  2. Salim Alghamdi
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Correspondence to Murya Habbash.

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Habbash, M., Alghamdi, S. Audit quality and earnings management in less developed economies: the case of Saudi Arabia. J Manag Gov 21, 351–373 (2017). https://doi.org/10.1007/s10997-016-9347-3

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