The Role of Internal Audit Quality on Earnings Management

Abstract

Financial statements are used by companies to evaluate their performance. They can help investors make informed decisions and improve their investments. However, they should be accompanied by independent evidence. Misuse of information is a common issue that managers can make. In the case of earnings management, the company's management uses accounting policies to ensure that the profits are not as transparent as possible. This practice can also lead to financial statements being non-transparable. Besides the quality of the audits, another important factor that an organization should consider is the internal auditor and the audit committee's performance. The goal of an audit is to ensure that the financial statements of a company are not filled with irrelevant information. Auditors' quality is often compared with that of financial reporting of an organization, as the internal control system of an organization is very important to the accuracy of its financial statements. This is also supported by a study that revealed that the coordination between the activities of the internal auditor and the external auditor is related to the quality of work. An internal auditor can provide a company with high-quality reports. By having a collaboration between BIG4 and an auditor, earnings management actions can be reduced.