Internal audit function and real earnings management practices in an emerging market

Belal Ali Abdulraheem Ghaleb, Hasnah Kamardin and Adel Ali Al-Qadasi

Meditari Accountancy Research, 2020, vol. 28, issue 6, 1209-1230

Abstract: Purpose - This study aims to investigate the monitoring role of internal audit function (IAF) on real earnings management (REM) practices. It examines the effect of investment in IAF (IIAF) and IAF sourcing arrangements on REM, unlike prior literature which has mainly examined the effects of IIAF on accrual-based earnings management. Design/methodology/approach - This study uses a sample of 1,056 observations from an emerging market, Malaysia, between 2013 and 2016. Feasible generalised least square (FGLS) regression is used to analyse the data. To corroborate the results of this study, the authors use an ordinary least square (OLS) regression model with robust standard errors adjusted and also consider alternative REM measures. Findings - The results of this study suggest that IIAF has a significant negative relationship with REM practices. Further, in-house IAF sourcing has a significant negative association with REM. The additional analysis supports the main results confirming the essential role of IAF in reducing REM in the Malaysian market. Practical implications - The evidence relates to the important role of IAF in mitigating REM practices. High-quality of IAF impairs managers’ ability to manage earnings in their own interests. The findings may be useful in informing regulators, managers, shareholders and other investors, as well as researchers, about improving the role of IAF. Originality/value - This study contributes to the existing literature by providing the first evidence of the significant role of IIAF and IAF sourcing arrangements in mitigating REM in an emerging country.

Keywords: Real earnings management; Investment in internal audit function; Internal audit function sourcing; Auditing; Corporate governance; Emerging market (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eme:medarp:medar-02-2020-0713

DOI: 10.1108/MEDAR-02-2020-0713

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