Earnings management, audit quality, and cost of debt: evidence from ghana

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In the world of finance, companies often engage in earnings management (EM) to meet or exceed financial targets, which can have serious consequences for investors and stakeholders. One of the potential impacts of EM is increased cost of debt, as lenders may view these practices as a signal of financial instability or unreliability. To mitigate these risks, companies may turn to audit quality (AUQ) as a way to provide transparency and credibility to their financial reporting practices. This study therefore analysed the effect of AUQ and EM on the cost of debt (COD) of listed firms in Ghana. The study was based on the signalling theory and the agency theory. The study employed the explanatory and quantitative research designs. The data for the study was secondary which was obtained from the annual reports of the sampled firms. The study sampled 15 firms for the period 2010-2021. The study data was analysed using panel regression. The study found that EM had a negative significant effect on COD. The study further found that AUQ does not have a significant effect on COD. Also, AUQ had a significant negative effect on EM. Finally, the study found that AUQ negatively moderates the relationship between EM and COD. It is recommended that firms should focus on engaging reputable audit firms with a track record of providing high-quality audit services to help reduce the risk of earnings management. Firms can engage high-quality audit firms, and the audit committee should oversee the work of the audit firm to ensure they adhere to professional standards. Firms can also invest in training for their internal audit staff to ensure they have the necessary skills to detect and prevent earnings management.
A thesis submitted to the department of accounting and finance, school of business, kwame nkrumah university of science and technology in partial fulfilment of the requirements for the award of the degree of master of science in accounting and finance