GOOD CORPORATE GOVERNANCE, AUDIT TENURE, AND THEIR JOINT EFFECT ON EARNINGS MANAGEMENT: EVIDENCE FROM INDONESIAN LISTED FIRMS

Abstract

The paper examines the effect of corporate governance and audit tenure on earnings management among Indonesian Stock Exchange (IDX)-listed firms. The paper examines how the corporate governance mechanisms, as gauged by the Corporate Governance Index (CGI), and the audit tenure, affect the probability of earnings management, in the background of an emerging market. In particular, the paper will evaluate the possibility of reducing the possible adverse impacts of longer audit tenures on earnings management by stronger governance structures. Through regression models and data of Indonesian firms in a 10-year period between 2010-2020, the results show that although the positive association of higher CGI scores with better governance practices is common, it does not always result in lower earnings management. Actually, tight governance structures can also co-exist with opportunistic earnings manipulation as a result of symbolic compliance or low enforcement. The paper also indicates that longer audit term increases earnings management, especially in firms with poorly developed systems of governance. The findings also add to the literature by illuminating on the multifaceted interplay between corporate governance and audit tenure in influencing earnings management. The results have significant policy implications on policy makers and regulators in the emerging markets, with the fact that there should be more governance controls and the audit tenure should be well managed so as to promote more financial transparency and less earnings manipulation.