TITLE:
The Relationship between Audit Quality and Earnings Management: An Empirical Investigation
AUTHORS:
Migara Kaluwila
KEYWORDS:
Audit Quality, Earnings Management, Regulatory Environment, Corporate Governance, Modified Jones Model, United Kingdom
JOURNAL NAME:
Open Journal of Accounting,
Vol.15 No.2,
April
3,
2026
ABSTRACT: This study empirically examines the relationship between audit quality and earnings management, with particular attention to the moderating influence of the regulatory environment. Grounded primarily in agency theory and supported by signaling and stakeholder perspectives, the analysis assesses whether stronger audit quality constrains managerial discretion in financial reporting across differing regulatory regimes. Using archival data from 674 firm-year observations of FTSE 350 firms in the United Kingdom (2005-2008), regression and correlation analyses are employed to test associations between audit quality proxies and discretionary accrual-based earnings management. Earnings management is measured via the Modified Jones Model, while audit quality is captured through a composite Audit Quality Score (AQS) incorporating auditor tenure and industry specialization. A critical methodological limitation is that the AQS excludes the auditor reputation (Big Four) component due to sampling restrictions. Results indicate a significant negative association between audit quality and earnings management (β = −0.421, p βstringent = −0.521, p βless stringent = −0.358, p p = 0.028). Industry-level variation is also evident, with technology and finance sectors exhibiting the most pronounced effects. Nonetheless, findings should be interpreted cautiously, given the restricted audit quality construct and the dated sample period. The study contributes to the literature by highlighting the interaction between audit quality proxies and regulatory context, though practical implications remain bounded by measurement constraints. Future research should adopt more comprehensive and contemporary audit quality measures to better inform efforts to strengthen financial reporting credibility and investor confidence.