Governance Mechanisms on Earnings Management: Does Audit Quality Moderate? Evidence from Indonesia

Abstract

This study examines the determinants of earnings management in Indonesia's consumer non-cyclical sector, focusing on the roles of leverage, board gender diversity, managerial ownership, and institutional ownership, with audit quality as a moderating variable. Using 375 firm-year observations from 75 companies listed on the Indonesia Stock Exchange between 2020 and 2024, the study applies Moderated Regression Analysis (MRA). Earnings management is measured using discretionary accruals derived from the Modified Jones Model. The findings reveal that leverage exerts a significant positive effect on earnings management, whereas gender diversity, managerial ownership, and institutional ownership each exert a significant negative effect. Regarding moderation, audit quality significantly weakens the effect of leverage on earnings management while strengthening the suppressive effect of board gender diversity. Audit quality does not moderate the effects of either ownership variable. These results suggest that gender-diverse boards, managerial equity stakes, and institutional ownership represent effective governance mechanisms, whose efficacy is further reinforced when coupled with high-quality external auditing.