A study of earning quality among MESDAQ listed companies

Abstract

This study attempted to find out whether the size of audit firm, internal audit establishment and former senior auditor as company director have any significant effect on earning management. All data were extracted from the annual reports. The sample firms used in this study were all the companies listed on Bursa Malaysia under Malaysia Exchange for Securities Dealing and Automated Quotation (MESDAQ) technological sector in 2006. There were 128 MESDAQ Companies listed in 2006. However due to unavailability of reports, 113 were used for analysis. Earning Management can be viewed from financial reporting perspective. From a financial reporting perspective, managers may use earning management to meet analysts’ earning forecast, thereby avoiding the strong negative share price reaction that quickly follow a failure to meet investor expectations. Too much earning management, however, reduces the earning quality and the ability investor to interpret current net income as well, particularly if the earning management is buried in core earning or otherwise not fully disclosed. The reported net income is useful to investor in evaluating future firm performance but excessive earning management may reduce this usefulness. Thus this study is very important because from the research findings shows that the size of audit firm, internal audit establishment and former senior auditor as company director have no significant effect on earning management. An understanding of the earning management is also important to accountants because it enables an improved understanding of the usefulness of the net income, especially for reporting to investor. It also may assist them to avoid some of the serious legal and reputation consequences that arise when firms become financially distress where such distress is often preceded by serious abuse of earnings management.