External Auditors and Earnings Management: Palestinian Evidence

Abstract

Managers in large companies may manipulate earnings reports to suit their desire at the detriment of shareholders and other stakeholders. This may obstruct the companies and their sustainability. The objective of this study is to examine a relationship between external audit characteristics and Earnings Management (EM) in Palestine. Secondary data is collected for a sample of 480 observations of companies listed in the PSE for the period of 2010-2019. Earnings management is measured by the level of discretionary accruals using the modified Jones model (1995). The results show that external auditors’ type is negative and significantly related to discretionary accruals and may reduce EM. However, external auditors’ independence is positive and significantly related to discretionary accruals and may increase EM. Studying the impact of external auditors’ characteristics on EMhave not been well researched in the past literature, especially in the Palestinian context.