Internal corporate governance mechanisms and earning quality in Indonesia: external audit quality as a moderator

Earnings quality reflects the integrity and quality of financial reporting which minimises the information asymmetry and agency conflicts amongst the management and shareholders. The issue of earnings quality has become a concern, especially in respect to corporate governance as an internal and external monitoring mechanism to ensure the financial reporting quality. The objective of the study is to examine the relationships amongst the internal corporate governance mechanisms, namely, board of commissioners, audit committee, and earnings quality based on the agency theory and resource dependence theory. Furthermore, this study has examined the moderating effect of external audit quality on the relationships between the internal corporate governance mechanisms and earnings quality. The fixed effects regression was used to analyse the data. The sample of the study was 864 firm-year observations of the non-financial companies in the Indonesian Stock Exchange for the period of 2013 to 2016. Real earnings management models were used to measure earnings quality. This study has revealed that board size, audit committee independence and audit committee tenure increased the quality of the earnings. In contrast, audit committee duality role reduced the earnings quality. In further analysis, external audit quality is found to be significantly moderate the relationship between the board size, audit committee independence, audit committee meetings and audit committee duality role with earnings quality. The results of this study have implications for regulators, investors, and market participants. Policy makers might use the findings regarding earnings quality to recognise the important roles played by the board of commissioners, audit committee, and external audit in enhancing the earnings quality in Indonesian companies