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ISSN: 0212-5730
Vol. 1, Page: 150-158 (2015)
ABSTRACT
This paper examines the impact of internal audit quality on earnings management. In this study, earnings
management is measured by discretionary accruals. Benefit accruals from on one hand allow managers to
calculated interest so that it indicates the actual value of the enterprise and on the other hand they let the
managers to exploit flexibility of the accepted accounting methods and principles and change the
information content. The Board also can not directly control the opportunistic behavior of managers.
Therefore, the company's internal audit unit can operate with precision and quality to reduce the accruals
used by managers and limit management earnings. The modified Jones model is used to estimate
discretionary accruals. Quality of internal audit is measured by the five criteria of auditor experience,
having a degree of official accounting, reporting method, average firm size and training hours. In this
study, Multiple Regression was used and a correlation method is used to test the hypothesis. Findings of
the study indicate a strong correlation between the quality of the internal audit and earnings management.
Key words: internal audit, earnings management.
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INTRODUCTION
Due to the turbulent world of today and the uncertainty of the market, creating competitive advantage
through cost reduction seems necessary. Today, competition and technological change are increasing
pressure on organizations and their various methods to increase the productivity of their human
capital. The labor force of organizations is expected to be more effective in the products and services
they offer, as well. That is what makes competence important in the competitive environment. Human
resources environment of Iran is also affected by this change and is changing aimed to keep pace with
global developments.
Over the past 50 years, the primary focus of financial reporting has been on information about
business performance produced through measures of income and its components. The subject of this
thesis is to investigate the relationship between internal audit and earning management of the Bam
and Pars Ofogh companies. Therefore, if the relationship between internal audit and earning
management is approved, internal audit functions can be used to reduce earnings management.
However, to whom the auditor reports their results of operations and which reports are important for
them and the pursuit of flaws are important cases in the research.
SIGNIFICANCE OF THE STUDY
The company from the legal point of view is an independent and separate legal entity, however, Cass
(1937), Watts and Zimmerman (1986) believed that the company can be regarded as a series of
agreements between the various parties. The most important of these agreements, are contracts
between managers and other stakeholders for the separation of ownership and company management
that will be formed based on agency theory. Shareholders in their contracts gave the corporate
governance to the representatives (managers) and instead have the right to be answered about the
performance of managers. Management commitment to attempt to maximize the wealth of the
capitalists and shareholders commitment to pay them in the form of compensation are one of the
conditions mentioned in these types of contracts. Accounting and audit play a fundamental role of all
such contracts and determination of contracts in monitoring implementation of the agreement.
For example, in the contract between shareholders and company management, accounting earnings as
the best index of economic performance measurement which is the product of financial accounting
processes plays an essential role for various purposes such as compensation schemes (bonus) and to
assess the management task of stewardship. Thus, due to the importance of accounting earnings and
decisive role in terms of the contract between shareholders and management, this strong assumption is
created that because of a conflict of interest between shareholders and managers and the expectations
of self-interest, managers affect the quality of earnings. Enterprises have realized that to establish full
compliance with procedures and policies, the internal audit department is essential for its cooperation
with the firm persistence, persistence and follow-up flaws.
RESEARCH OBJECTIVES
The aim of study was to evaluate the impact of internal audit quality on earnings management. In this
study earnings management will be measured by discretionary accruals. Benefit accruals from on one
hand allow managers to calculated interest so that it indicates the actual value of the enterprise and on
the other hand they let the managers to exploit flexibility of the accepted accounting methods and
principles and change the information content. Specific objectives are as follows:
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Determining the relationship between auditors experience and earning management in Pars
Ofogh and Bam companies.
Determining the relationship between the reporting and earnings management in Pars Ofogh
and Bam companies.
Determining the relationship between CPA and earnings management in Pars Ofogh and Bam
companies.
Determining the relationship between training hours and earnings management in Pars Ofogh
and Bam companies.
Determining the relationship between firm size and earnings management in Pars Ofogh and
Bam companies.
Research model
Research model is as follows
:
RESEARCH HYPOTHESES
MAIN HYPOTHESIS
There is a relationship between internal audit quality and earning management in Pars Ofogh
and Bam companies.
SECONDARY HYPOTHESES
There is a relationship between auditors experience and earning management in Pars Ofogh
and Bam companies.
There is a relationship between the reporting and earnings management in Pars Ofogh and
Bam companies.
There is a relationship between CPA and earnings management in Pars Ofogh and Bam
companies.
There is a relationship between training hours and earnings management in Pars Ofogh and
Bam companies.
There is a relationship between firm size and earnings management in Pars Ofogh and Bam
companies.
SCOPE OF RESEARCH
TIME PERIOD OF RESEARCH
Studying the earnings management and accounting practices quality as since February 2013 to
September 2014, or in other words the time period of this study is cross-sectional.
THE SPATIAL DOMAIN
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Accurate and reliable financial statements and other information which will be published;
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Earnings is the maximum amount that a person can bring to the consumer over a specified period as
his wealth at the end of the period is same as his wealth at the beginning.
THEORY OF EARNINGS QUALITY
Earnings quality theory first propounded by financial analysts and stock brokers, they felt that the
amount of earnings a company's reported earnings do not show their imagination.
They found that the expected future earnings on the basis of the reported results is difficult.
Meanwhile, analysts found that analysis of the company's financial statements is difficult due to
numerous weaknesses in the accounting measurement.
The big question is why financial analysts in their assessment do not use the reported net earnings or
earnings per share (without adjustment).
The answer that the value of the company is not only determined by the quantity of interest but its
quality should also be noted. The quality of earnings and dividend growth potential areas of future
earnings is likely to happen.
In other words, the value of a share depends not only on the company's earnings per share this year
but it depends on our expectations of future profitability of the company and future years and
confidence about the future earnings.
Financial analysts are trying to assess the outlook for corporate earnings. The outlook refers desirable
and undesirable features combined with net income. For example, a company with stable elements in
benefit and loss has higher earnings quality compared to the company with unstable elements. This
would allow analysts predict the future earnings of the company more confidently.
QUALITY OF EARNINGS
Suitable fields for "earnings" due to conflicts of interest and also due to some inherent limitations of
accounting including a) the failure of the process, estimates and projections of future b) possibility to
use multiple methods of accounting caused the real benefit of an economic unit differ from the
income reported in the financial statements. Accounting professionals, researchers and practitioners
consider benefit as one of the most important measures of performance and value the company
inevitably to evaluate the benefits reported by economic units. To assess the benefits, the concept of
earnings quality is used.
The study based on the nature and purpose of application is cross - correlation, because it discussed
and described what is being. Descriptive study included a set of methods aimed at describing the
situation or phenomenon under investigation. Implementation of the descriptive study can help further
understanding of existing conditions and the decision making process.
RESEARCH VARIABLES
Dependent variables
independent variables
RESEARCH POPULATION
The present research is studying the earnings management and accounting practices quality since
February 2013 to September 2014. The research population by considering the constraints to increase
the reliability of the applied research is determined as follows:
1. Data available from the beginning of 2007 to the end of 2013
2. The data should be available so the data not available for 36 periods was eliminated.
of professors and experts and its ambiguities were resolved, this indicated that the test has an
acceptable content validity.
RELIABILITY
Reliability is one of the technical characteristics of measuring instruments and deals with the fact that
the measurement instrument gets the same results in the same condition. This means the accuracy,
reliability, stability and reproducibility of test results. The reliability coefficient indicates that to what
extent measurement tool characteristics are stable or measure the attributes of a variable. Using
questionnaires data obtained from SPSS software, Cronbach's alpha reliability coefficient method was
calculated as an index of reliability and Cronbach's alpha for the total scale as 85.1% indicating the
stability and internal consistency of the questionnaire. The alpha coefficient of variance of scores for
each subset of the Questionnaire and the total variance should be calculated.
DATA ANALYSIS
In order to analyze the data collected, after the valuation of options from number one to five for
strongly disagree to strongly agree, the data was collected using Software 18 SPSS.
Suggestions
Based on the results of the present study, it is suggested
1. Considering the first hypothesis that there is a relationship between earnings management and
quality audit which has been approved, it is suggested other definitions of earnings quality and other
models should be used to measure performance.
2. Using criteria P / B instead of P / E ratio for the classification of companies.
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