AUDIT QUALITY ON EARNINGS MANAGEMENT AND FIRM VALUE

Abstract

This study aims to investigate the effect of audit quality (measured by the size of the audit firm and industry spe cialization) on earnings managemen (accrual and real activities earnings management) and on firm value. This study uses samples from Indonesian Stock Exchange with 912 firm-years fo the period 2006 to 2009. The results show that firms audited by industry-specialis auditors have lower accrual earnings management, but higher real activities earnings management. On the othe hand, firms audited by the Big 4 has higher accrual earnings managemen than firms audited by non-Big 4. This may occur because firms probably find diffi culties to engage in accrual earnings management when audited by industry specialist auditors, hence they choose the real earnings management instead However, the size of the audit firm can decrease the real activities earnings management. These findings sugges that accrual earnings management and real activities earnings management are used in substitute by management. This study also shows that real activities earn ings management has negative impac on firm value.