Academic journal article International Management Review

The Role of Auditing Quality as a Tool of Corporate Governance in Enhancing Earnings Quality: Evidence from Egypt

Academic journal article International Management Review

The Role of Auditing Quality as a Tool of Corporate Governance in Enhancing Earnings Quality: Evidence from Egypt

Article excerpt

[Abstract] This study explores the relationship between external auditing quality as a tool of corporate governance and the level of earnings quality in Egypt. This was accomplished by reviewing the literature and previous studies related to corporate governance, auditing quality, and earnings quality, then analyzing the relationship between the characteristics of the auditing quality at auditing firms and the possibility of reducing the total accruals as one of the indicators of the quality of earnings at the industrial corporations listed on the Egyptian exchange. The study model examined the relationship between the independent variables of auditing quality characteristics and the dependent variable of total accruals by using the multiple regression of Ordinary Least Squares (OLS) Data of (60) corporations of the industrial sector for the period 2005-2010, which were arranged in a way that makes it possible to apply the Pooled Data Regression. The study concluded that there was an acceptable level of earnings quality in the industrial corporations listed on Egyptian exchange ,there was an accepted level of the Auditing quality in Egyptian auditing firms, there was a positive impact on reducing the total accruals in the industrial corporations listed on the Egyptian exchange, thus improving the quality of earning for each of the specialties in a client's industry, the relationship with international audit firms, and auditor's qualifications.. On the other hand, there was a negative impact on reducing the total accruals for the client retention period.

[Keywords] corporate governance; auditing quality; earnings quality; Egyptian Industrial corporations

(ProQuest: ... denotes formulae omitted.)

Introduction

Financial statements provide information that can be used by interested parties to assess the performance of managers and to make economic decisions. Users may assume that the financial information they receive is reliable and fit for its purpose. Accounting regulation attempts to ensure that information is produced on a consistent basis in accordance with a set of rules that make it reliable for users. However, communications between entities and shareholders may be deliberately distorted by the activities of financial statement preparers who wish to alter the content of the messages being transmitted. This type of distortion is often referred to as "creative accounting." While opinions on the acceptability of accounting manipulation vary, it is often perceived as reprehensible (Gowthorpe & Amat, 2005).

The main target of external audit is to express an opinion about the fairness of the financial statements, and that will give confidence and credibility to the data contained in these statements, Recent years have seen many cases of the collapse of many of the major companies in various countries around the world and the loss of confidence in the information contained in the financial statements, accompanied by many of the cases against audit firms who were responsible for auditing the financial statements of these companies and for which was no indication of a lack of continuity in their reports.

The original need for corporate governance stems from the separation of ownership and control in publicly held companies. Investors seek to invest their capital in profit-making firms so that they can enjoy profits in the future. Yet, many investors lack the time and expertise necessary to operate a firm and ensure that it provides an investment return. As result, investors hire individuals with management expertise to run the company on a daily basis to see to it that the firm's activities enhance the company's profitability and long-term performance. Managers and directors are often not owners, and, thus, they will not bear the brunt in terms of lost investment and lost profits if the company fails to perform. As a result, managers and directors may take actions that hurt the value of shareholders investment "principal-agent problem" (CIPE, 2007). …

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