Audit certification, earnings management and risk governance : a moderated-mediation analysis

Purpose: The purpose of this study is to document the mediating effect of earnings management on the relation between the components of audit certification. The study is performed under different levels of corporate governance effectiveness in the Tunisian context. The main objective is to empirically examine the ability of discretionary accruals to mediate the relationship between the audit reporting quality and audit risk and to define how the levels of risk governance moderate this relation. Design/methodology/approach: Structural equation modeling (SEM) approach is applied for a panel data set of 28 Tunisian companies listed in the Tunis Stock Exchange (TSE) between 2006 and 2013. Furthermore, a moderated-mediation model is developed to examine the mediating role of earnings management. This model is considered to emphasize the moderating role of corporate governance on the relationship between audit-reporting quality and audit risk. Findings: The results of this study show that earnings management mediates the moderating role of corporate governance on the relationship between timely disclosure and audit risk. Thus, this investigation empirically demonstrates that risk governance moderates both the relationship between the timely disclosure and earnings management, and the relationship between earnings management and audit risk, i.e., the mediating role of earnings management varies depending on the level of risk governance. Practical implications: Investors and other external users of financial statements need to care about the audit risk by the audit-reporting quality (audit accuracy and timely disclosure). Moreover, all factors that may influence the audit risk should be identified. This identification can help guide the reforms to improve the functioning of the financial market. Originality/value: This study can enhance knowledge and understanding on how motivational and environment factors influence the audit risk. Using data from the Tunisian market, this work fills a research gap by examining the audit risk and identifies a new governance risk index. The specificity of the country where the study is elaborated refers to its accurate “revolutionary” transitional phase. Tunisia aims to enhance economic growth and to establish general strategic governance of the country, particularly strategic governance of companies.