Effects of unaffiliated external audit quality on earnings management:an investigation on trading companies in Borsa Istanbul

The accounting scandals experienced at the beginning of 2000's raised questions about the quality of independent external audit. Earnings management applications performed by managers in order to increase / decrease their earnings reduced the trust on companies' financial reporting. The purpose of independent external audit is to ensure the preparation of financial reporting in accordance with General Accepted Accounting Principles (GAAP) and their reflection of true and reliable information. The assurance there of is dependent on performing a quality audit. The basic purpose of this study is to identify the relation between audit quality and earnings management. In order to fulfill this purpose, annual observations covering the years of 2009-2015 on 1525 companies were utilized, which belong to different sectors and which are registered in the Istanbul Stock Exchange (BIST). Audit firm size and audit fees were used as the indicators quality of audit this study. Discretionary accruals were used during the measurement of earnings management. The regression analysis method was used during empirical analyses. Pursuant to the analysis made, a meaningful relation was found in negative and statistical terms between earnings management and audit firm size, which was used as the indicator of audit quality. On the other hand, a positive relation was found between earnings management and audit fees, which is another indicator of audit quality. The study further found that a relation existed between earnings management and firm size, debt ratio and profitability ratio, which are used as control variables.