Audit Committee Expertise and Earnings Management in South Africa: The Moderating Role of Audit Quality

Abstract

This study examines the moderating effect of audit quality (AQ) on the relationship between audit committee expertise (ACE) and earnings management (EM). A quantitative approach was used to investigate 128 non-financial companies listed on the Johannesburg Stock Exchange (JSE) from 2021 to 2025. The data collection sources included annual reports, the Osiris database, and the Who Owns Whom database. ACE was measured using audit committee financial expertise (ACFE), educational level expertise (ACEL), and industry expertise (ACIE). AQ was proxied by a dummy variable equal to 1 if the audit was conducted by a Big 4 audit firm (BIG4), and 0 otherwise. EM proxies included accrual earnings management (AEM) and real earnings management (REM). The fixed effects model (FEM) was used to test the hypotheses. The FEM regression results without a moderating variable indicate that ACFE has an insignificant positive impact on AEM and REM.  ACEL has an insignificant negative impact on AEM, while a significant positive impact on REM. However, ACIE has a significant negative impact on AEM, while a significant positive impact on REM. On the other hand, the FEM regression results with a moderating variable indicate that the interaction of BIG4*ACFE has an insignificant negative impact on AEM, while a significant negative impact on REM. Yet BIG4*ACEL has an insignificant positive impact on AEM, while an insignificant positive impact on REM. Yet, the interaction of BIG4*ACIE has a significant negative impact on AEM, while a significant positive impact on REM. The results highlight that non-financial companies listed on the JSE should not presume that any single type of ACE will mitigate all forms of EM. This research enriches the existing corporate governance literature by providing comprehensive insights into the relationship between ACE and EM proxies, moderated by AQ proxied by Big 4 audit firms.