Turkish Listed Manufacturing Companies’ Audit Structure and Its Effect on Earnings Management

Abstract

Using a sample of 1,333 firm year observations during 2005-2013, this research focuses on Turkish listed manufacturing companies’ audit structures’ effect on their earnings management via accruals and business activities. Audit structure was divided into the internal audit function and audit committee. Provision of the internal audit (a department, parent company or both) and audit committee characteristics (size, independence and meeting frequency) are the independent variables of this research and the earnings management is the dependent variable which was calculated as a magnitude for discretionary accruals and manipulation of business activities with Kothari, Leone and Wasley (2005) and Roychowdhury (2006) respectively.

The results revealed that manipulating the business activities are correlated with neither the internal audit nor the audit committee. Also, internal audit solely provided by the parent company has no effect on the earnings management via discretionary accruals but internal audit department and the department supported by the parent company’s internal audit decrease the earnings management via accruals. On the other hand, I didn’t find any statistical significance with the audit committee characteristics and discretionary accruals. Although it was not the main focus of this research, the results show that female Turkish auditors are more risk-averse than their male counterparts.

Keywords: audit comittte, internal audit, discretionary accruals, earnings management