Investigating the Consequences of Internal Audit Quality in Preventing Accrual-Based Earnings management and Real Earnings Management

In this study, the relationship between the quality of companies' internal audit units and earnings management (earnings based on accruals and real earnings management) has been investigated.

This study is a descriptive research that examined data of 179 companies listed in Tehran Stock Exchange during 2012 to 2019. To test the hypotheses of this research, regression and multiple correlation models have been used In which the quality of the internal audit unit is considered as an independent variable and Earnings management as a dependent variable.

The results indicate that there is a significant negative relationship between the quality of the internal audit unit and accrual-based earnings management; however, no significant relationship was observed between the quality of the internal audit unit and real earnings management.

Despite the requirement of the Exchange Organization to establish an internal audit unit in companies, the quality of this unit has not yet favorably prevented earnings management. Although the amount of accrual based earnings management has gradually decreased with the enactment of laws and supervision, but no change has been observed in real earnings management.

Contribution:

Due to the newly established internal audit units and Iran’s environmental features as a developing country with an emerging economy, internal audit and its quality may have been affected compared to other developed countries. Also, in previous researches, the effect of the quality of companies' internal audit units on earnings management based on accruals and real earnings management has not been studied.