Audit Quality and Its Impact on the Earnings Management in the Post-COVID Era: Evidence from Sri Lanka

Abstract

Purpose: The purpose of this study is to identify the impact of audit quality on the earnings management and explore the relationship between audit quality and earnings Management, with the main objective of identifying the impact of audit quality on the earnings management in the post-COVID era. The research utilizes a literature review that spans the recent years, focusing on audit quality-related literature and earnings management literature, such as the utilization of discretionary accruals and a modified version of the Healy’s Model. Design/Methodology/Approach: Audit quality is determined by looking at two proxies: the size of the audit firm and independence. The study was conducted using the data collected from 92 non-financial organizations with a financial year ending in March, during the post-COVID research period of 2019/20 to 2021/22. Descriptive statistics, correlation analysis, and regression analysis were among the methods utilized for analysing the acquired data. Findings: Although the results are inconclusive, the study suggests that the level of earnings management in Sri Lanka is not significantly influenced by the quality of audit conducted in the country. Therefore, this study concludes that audit quality has no significant impact on earnings management in the post-COVID era. Originality: This study focuses on the post-COVID years to examine the impact of audit quality on earnings management and the relationship between audit quality and earnings Management, given the limited research conducted in the Sri Lankan context and the inconclusive findings of previous literatures.