Abstract
Keywords
Introduction
Corporate financial performance is a central metric of firm health and strategic viability in increasingly volatile economic environments (Khan & Kamal, 2023). As firms strive to maintain stakeholder confidence and regulatory compliance, the interdependencies among audit quality, earnings management (EM), and corporate governance have come under heightened scrutiny (Abu & Jaffar, 2020; Khan et al., 2024). Reliable audit mechanisms ensure that financial information is transparent, accurate, and timely—thus supporting capital market efficiency and investor decision-making (DeFond & Zhang, 2014). However, firms often navigate complex trade-offs between reporting accuracy and performance signaling, especially through strategic forms of earnings management (Dechow et al., 1996; Habib et al., 2022). In this context, corporate governance serves as a vital organizational safeguard that either constrains or enables managerial discretion in financial reporting (Alhababsah & Azzam, 2024; Nazir & Afza, 2018).
Although the link between audit quality and financial performance is well acknowledged, recent scholarship has emphasized the need to unpack how this relationship is shaped by internal behaviors such as EM and contextual enablers like governance mechanisms (Ming et al., 2024; Tan & Hooy, 2024). Accrual-based earnings management (AEM) and real earnings management (REM) are two predominant pathways through which firms adjust reported performance, each with distinct implications for firm value and audit detection (Hussain et al., 2024). When left unchecked, these practices may erode long-term credibility; when strategically moderated by governance, they may serve adaptive purposes under environmental uncertainty. Thus, a comprehensive model integrating audit quality, EM strategies, and corporate governance is vital to explain performance dynamics more holistically.
This study is situated in the context of Jordan, an emerging market with distinctive institutional, regulatory, and ownership structures that offer a compelling lens for analyzing audit-performance dynamics. The Jordanian capital market is relatively small, family-controlled, and characterized by high insider ownership, underdeveloped regulatory enforcement, and fragmented audit oversight—conditions often associated with elevated agency costs and earnings manipulation risks (Al-Akra et al., 2009; Almasarwah, 2019; Alqirem et al., 2020; Alsufy et al., 2020). While the adoption of international auditing and financial reporting standards through the Company Law (1997) and Securities Law (2002) has improved disclosure norms, the Shamayleh Gate scandal and subsequent governance crises have underscored persistent weaknesses in audit independence and governance accountability (Alzoubi, 2016). Moreover, Jordan’s dependency on foreign investment, combined with low market liquidity and high information asymmetry, makes it an ideal empirical setting to explore how firms navigate regulatory pressures and performance demands through audit and governance mechanisms (Abu Afifa et al., 2023). By focusing on Jordan, this study also contributes to the underdeveloped literature on audit governance in emerging economies, which differ significantly from Western institutional contexts in terms of risk exposure, audit enforcement, and financial market development (Abu Afifa et al., 2024; Al-Mousawi & Al-Thuneibat, 2011).
Despite the growing scholarly interest in audit quality, earnings behavior, and corporate governance, few studies have integrated these elements within a unified theoretical framework that explains their collective influence on financial performance. Prior research often treats these constructs in isolation or uses fragmented models that fail to capture the strategic interplay among monitoring mechanisms and managerial behavior (Kalembe et al., 2023; Mwangi, 2024). Drawing on Agency Theory, this study advances a moderated mediation model where audit quality impacts financial performance, mediated by both AEM and REM, and moderated by the strength of corporate governance mechanisms. This integrative perspective responds to recent calls for more nuanced and context-specific investigations into how institutional quality and managerial discretion interact to shape firm outcomes (Hussain et al., 2024; Nejad et al., 2024). To guide this inquiry, the following research questions are addressed:
This study contributes to the literature in several key ways. First, it reconceptualizes earnings management not merely as a manipulative act but as a strategic adaptation, allowing firms to respond to environmental and market pressures while navigating performance expectations. Second, it positions corporate governance as a boundary condition that either enhances or undermines audit effectiveness, highlighting the importance of institutional context in moderating audit outcomes. Third, it extends Agency Theory by integrating structural and behavioral dimensions—linking audit quality, strategic financial behavior (EM), and governance mechanisms to organizational performance. This enriched conceptualization advances the literature by offering a dynamic view of how firms in under-regulated environments manage accountability and performance through layered control systems. From a practical standpoint, this study provides actionable insights for auditors, corporate boards, and policymakers. For regulators in Jordan and similar emerging markets, the findings underscore the importance of strengthening audit independence and governance frameworks to reduce earnings manipulation and enhance stakeholder trust. For audit practitioners, the study highlights the need to consider the interaction between technical audit quality and contextual governance variables. For firm managers, the findings offer strategic guidance on leveraging EM responsibly and transparently, particularly in high-pressure financial environments where balancing stakeholder expectations and long-term sustainability is critical.
The remainder of this paper is organized as follows: Theoretical Background and Hypotheses Section outlines the theoretical background and hypotheses development. Research Methodology Section details the research methodology. Data Analysis and Results Section presents the data analysis and results. Conclusion and Discussion Section provides the conclusion and discussion of key findings. Implications Section elaborates on the theoretical implications, practical and managerial implications, and limitations and directions for future research.
Theoretical Background and Hypotheses
Underpinning Theory
The theoretical foundation of this study is built on agency theory, which serves as a key underpinning framework in the fields of corporate finance and governance (Abu Afifa & Saadeh, 2023; Emeagwali & Aljuhamni, 2019; Stoelhorst & Vishwanathan, 2024). Agency theory, initially introduced by Jensen and Meckling (1976), describes the relationship between principals (e.g., shareholders) and agents (e.g., managers), highlighting the inherent conflicts that arise when agents pursue self-interested goals at the expense of the principals (Musawir, 2024). This divergence of interests creates an “agency problem,” especially when managers manipulate earnings to present a more favorable financial picture.
Such opportunistic behaviors are often facilitated by information asymmetry, where managers have greater access to internal financial data than external stakeholders (Fossung et al., 2022). In this context, mechanisms such as audit quality and corporate governance play fundamental roles in mitigating these conflicts (Kristanti et al., 2024). Audit quality serves to align the interests of the agents with the principals by ensuring the reliability of financial statements and reducing the chances of earnings manipulation (Darmawan, 2023). High-quality external audits, by providing independent verification, serve not only as control mechanisms but also as credibility-enhancing signals to investors and regulators (Ayedi et al., 2019; Momeny & Poorzamani, 2025).
Moreover, corporate governance moderates the impact of audit quality, ensuring that both monitoring and oversight are implemented effectively to mitigate managerial opportunism (Behbahaninia, 2022). Effective governance structures—such as independent audit committees and well-composed boards—provide additional checks on management behavior and enhance the efficacy of external audits (Abu Afifa et al., 2023; Raimo et al., 2021). By integrating agency theory, this study links audit quality as a driver for corporate financial performance, earnings management as a mediating factor, and corporate governance as a moderating influence that supports the effectiveness of audits in reducing financial reporting distortions.
This conceptual framing is especially relevant in emerging markets such as Jordan, where the institutional enforcement of corporate accountability remains weak, and agency conflicts are more prevalent due to concentrated ownership and limited investor protection (Abu Afifa et al., 2024; Al-Akra et al., 2009; Alharasis, 2023; Almasarwah, 2019; Alzoubi, 2016). Prior studies on audit quality and earnings management have been largely conducted in developed economies, leaving a gap in understanding how these dynamics function under less mature regulatory systems. Therefore, this study adopts agency theory not only to explain the classic principal-agent conflict but also to examine how structural mechanisms (audit and governance) interact with managerial behavior (earnings management) in shaping financial outcomes.
Strategic Adoption Approach Through Earnings Management
Earnings management (EM) is broadly defined as the deliberate manipulation of financial reporting to achieve specific managerial objectives, often related to meeting earnings benchmarks or influencing stakeholder perceptions (Berrill et al., 2021; Saleh et al., 2025). EM is considered a strategic technique wherein managers use their discretion over accounting estimates and real activities to influence reported earnings in a manner that serves internal agendas, such as securing financing, enhancing stock valuation, or masking operational underperformance (Baskaran et al., 2020; Davidson et al., 2004; Jensen, 1986). While traditionally viewed as a manipulative practice, more recent perspectives suggest that EM may also serve as a form of strategic adaptation—particularly in high-pressure environments—allowing firms to align reported performance with market expectations while responding to external constraints (Afifa et al., 2022; Gavana et al., 2017).
EM is typically operationalized through two distinct strategies: accrual-based earnings management (AEM) and real earnings management (REM). AEM involves the manipulation of accounting entries and estimates within the boundaries of generally accepted accounting principles (GAAP), such as changes in provisions for doubtful accounts, depreciation schedules, or revenue recognition timing (Afifa et al., 2021). AEM allows firms to smooth income over time without altering actual cash flows, making it an appealing option for firms operating in low-transparency settings. However, excessive reliance on AEM can mislead investors, increase information asymmetry, and reduce the credibility of financial reports (Chen & Hung, 2021; Saleh et al., 2023). Because AEM directly affects reported numbers, it is more easily detected by auditors and regulators, thereby increasing regulatory risk (Velte, 2019).
In contrast, REM refers to the manipulation of actual business operations to affect reported earnings, often through actions such as overproducing inventory to reduce cost of goods sold, delaying maintenance or advertising expenses, or accelerating sales by offering price discounts (Burlacu et al., 2024; Cohen et al., 2008). Unlike AEM, REM impacts both cash flows and future operational efficiency, potentially sacrificing long-term value for short-term financial appearance (Aljifri & Elrazaz, 2024; Fedora et al., 2024). While REM may be harder for auditors to detect, it can undermine strategic resource allocation and lead to suboptimal business decisions in the long run (Chang et al., 2018).
The decision to use AEM or REM is influenced by multiple factors including audit quality, governance oversight, market competition, and capital needs. For example, in environments with strong external monitoring, firms may shift from AEM to REM due to the lower likelihood of detection (Gavana et al., 2017; Li et al., 2020). Conversely, in contexts with weak audit enforcement—such as emerging markets—AEM might be more prevalent due to limited detection mechanisms and reduced litigation risk (Lee et al., 2019).
Grounded in agency theory, EM reflects the misalignment between managers (agents) and shareholders (principals), where managers exploit their informational advantage to pursue personal benefits or avoid negative market consequences (Chakroun & Amar, 2021; Jensen & Meckling, 1976). This conflict is intensified in low-governance environments where traditional oversight mechanisms—like audits and boards—may be less effective. Thus, EM, whether accrual-based or real, serves as a strategic behavior for managing agency costs, albeit with differing implications for long-term firm performance (Abu Afifa et al., 2023; Alqirem et al., 2020). In the context of Jordan, EM practices are particularly relevant due to weaker institutional oversight and concentrated ownership structures that amplify agency problems. This study thus adopts a strategic adaptation lens to examine EM not merely as opportunistic manipulation but as a tactical response to external and internal pressures aimed at navigating complex financial, governance, and regulatory environments (Afifa et al., 2022; Saleh et al., 2025).
Audit Quality and Corporate Financial Performance
Audit quality is defined as the joint probability that auditors will both detect and report material misstatements in financial statements (DeAngelo, 1981). This conceptualization highlights the dual dimensions of audit quality—technical competence and auditor independence—which together ensure a reliable and objective audit process (Salehi et al., 2016). High-quality audits play a vital role in enhancing the credibility of financial disclosures, thereby reducing information asymmetry and agency costs between management and shareholders (Dakhli, 2021; Jensen & Meckling, 1976). As a result, improved audit quality contributes positively to firm-level financial performance by fostering investor confidence and improving decision-making efficiency (Appuhami & Tashakor, 2017; Barakat et al., 2015; Neiroukh & Caglar, 2024).
Numerous studies support the link between audit quality and enhanced firm performance. For instance, companies audited by the “Big Four” firms are often associated with stronger financial outcomes due to greater audit expertise and resource capacity (Bacha et al., 2020; Kateb et al., 2023; Kumar, 2023; Malaquias et al., 2024). These firms are more likely to uncover reporting irregularities, thereby ensuring transparency and discouraging earnings manipulation (Kateb & Belgacem, 2024; Rahman et al., 2019; Yasmin et al., 2024). Jabbar et al. (2024) argue that high-quality audits reduce the risk of managerial opportunism, leading to more sustainable financial performance. In line with agency theory, high-quality audits serve as a disciplinary mechanism that enhances the integrity of financial disclosures and deters opportunistic behavior by managers (Afifa et al., 2021; Saidat et al., 2019; Sayyar et al., 2015). This is because external audits provide legitimacy to reported earnings and reduce agency costs, ultimately contributing to improved operational and financial efficiency (Alqirem et al., 2020; Farouk & Hassan, 2014).
Emerging literature emphasizes the importance of behavioral and contextual factors in audit effectiveness. Audit committee independence and expertise have been shown to significantly influence financial performance through enhanced oversight and risk management (Alzeban, 2019; Bazhair, 2022). In addition, Yorke et al. (2023) highlight the role of gender diversity on audit committees in improving judgment quality, while Khalil and Nehme (2021) stress the effect of cultural intelligence on reducing audit biases. These findings suggest that audit quality is not merely a function of firm size or technical capacity but also reflects the human and institutional characteristics of the audit process (Nguyen & Nguyen, 2024).
Furthermore, audit quality is increasingly viewed as integral to ESG performance and corporate sustainability (Zahid et al., 2022). Dakhli (2021) finds that firms receiving high-quality audits are more likely to benefit from improved stakeholder relations and market valuation, particularly when ESG practices are transparent and externally verified. This underscores the evolving strategic role of audits in reinforcing long-term financial health. Evidence also indicates that industry-specialist audit firms can detect complex misstatements more efficiently, thereby strengthening the effectiveness of audits (Azizkhani et al., 2018; Wijaya, 2020).
In developing economies such as Jordan, audit quality plays a critical role in building capital market trust. Recent studies (Abu Afifa et al., 2024; Aledwan et al., 2015; Dakhlallh et al., 2020; Fawzi Shubita et al., 2024; Hyarat et al., 2023) reveal that audit quality is enhanced through academic training and professional development, which in turn bolster firm performance and investor protection. Nevertheless, not all evidence is uniformly positive. Some studies find that higher audit fees, often associated with Big Four auditors, may not always translate into better performance, possibly due to weakened independence over longer audit tenures (Alali, 2011; Lin & Hwang, 2010; Okolie, 2014). Excessive familiarity between auditors and clients can reduce audit skepticism and diligence (Chi & Huang, 2005; Piot & Janin, 2007), which may eventually undermine audit effectiveness and financial performance (Ewelt-Knauer et al., 2013; Sayyar et al., 2015).
Based on agency theory, this study posits that audit quality serves as a key governance mechanism that enhances corporate financial performance by constraining managerial discretion and reinforcing accountability (Afifa et al., 2021; Sayyar et al., 2015). In line with the above arguments, this study proposes the following hypothesis:
The Mediating Mechanism of Strategic Adaptation Approach
Earnings management (EM) involves the manipulation of financial reports to mislead stakeholders regarding a company’s financial health. It can take the form of either accrual-based earnings management (AEM) or real earnings management (REM; Abu Afifa et al., 2023; Sulieman et al., 2024). AEM refers to adjustments in financial records that do not involve real economic activities, whereas REM refers to the manipulation of actual business operations, such as altering sales or discretionary spending, to influence reported earnings. As Abbas and Ayub (2019) note, EM can serve dual purposes—either as an opportunistic tool that distorts performance or a strategic mechanism used to smooth earnings, reduce volatility, and enhance valuation signals. Siregar and Utama (2008) similarly argue that EM is not uniformly negative and can improve reporting consistency in some contexts.
Audit quality plays a critical role in shaping earnings management. While high audit quality is traditionally viewed as a deterrent to opportunistic EM (Bangash et al., 2023), recent evidence suggests that firms facing strong audit scrutiny may strategically shift from accrual-based manipulation toward REM, as REM is harder to detect, less likely to be challenged by auditors, and often perceived as more economically legitimate (Cohen et al., 2008; Healy & Wahlen, 1999; Zang, 2012). From an agency theory perspective (Jensen & Meckling, 1976), quality audits constrain opportunistic managerial behaviors but may indirectly encourage managers to adopt adaptive strategies that preserve reporting credibility while still meeting performance targets. This implies that audit quality may not universally reduce all forms of EM but rather influence the choice of method.
The mediating role of earnings management is central to this study because it explains how the effect of audit quality on financial performance may be either exacerbated or mitigated by EM (Abu Afifa et al., 2023). For instance, when audit oversight is robust, accrual manipulation tends to decline, thereby improving financial statement credibility and firm performance (Abu Afifa et al., 2024; Winata & Simon, 2024). However, firms may simultaneously resort to REM as a substitute mechanism under such conditions, using real operational adjustments that are less transparent but harder to challenge by auditors (Kałdoński & Jewartowski, 2020; Saleh et al., 2023). Conversely, poor audit quality fosters both accrual and real manipulation, eroding investor trust and impairing decision-making efficiency (Afifa et al., 2021).
The distinction between AEM and REM is crucial. AEM is generally more detectable through financial records, making it more controllable via auditing (Viana et al., 2022). REM, on the other hand, is harder to regulate because it involves legitimate operational decisions such as discounting prices or delaying R&D, which can obscure true performance (Kałdoński & Jewartowski, 2020; Saleh et al., 2023). REM is particularly problematic as it often results in real economic costs that negatively affect long-term performance (Chang et al., 2018).
Empirical evidence shows that AEM is more effectively restrained through corporate governance and board oversight, whereas REM persists even in well-governed firms due to its operational complexity (Sanusi et al., 2023). Furthermore, audit firm characteristics—including auditor independence, specialization, and firm size—play an important role in curbing EM (Alsufy et al., 2020; Rusmin, 2010). Big 4 auditors and industry specialists are more likely to identify EM behaviors and impose tighter reporting discipline (Abu Afifa et al., 2023; Al-Thuneibat et al., 2011).
EM’s link to financial performance is complex. Some studies argue that it enables firms to meet benchmarks, thereby attracting investment (Abu Afifa et al., 2024; Bartov et al., 2002; Saleh et al., 2023). Others document that excessive EM degrades stock returns, increases cost of capital, and distorts firm value (Abu Afifa et al., 2023; Hutagaol-Martowidjojo et al., 2019; Mensah & Boachie, 2024). Thus, EM can function both as a mechanism of strategic adaptation and as a signal of agency conflict. Based on these insights, this study conceptualizes earnings management—both AEM and REM—as key mediators in the relationship between audit quality and corporate financial performance. Accordingly, the following hypotheses are proposed:
The Moderating Role of Corporate Governance
Corporate governance refers to the set of mechanisms, processes, and relationships used to direct and control corporate behavior, with the goal of aligning managerial actions with the interests of shareholders and other stakeholders (Soesetio, 2023). Effective governance structures mitigate agency conflicts by promoting transparency, accountability, and ethical decision-making (Stoelhorst & Vishwanathan, 2024). These mechanisms typically include board independence, audit committee oversight, CEO duality separation, and shareholder rights (Salehi et al., 2022). Corporate governance also entails leadership integrity, ownership concentration, and diversity at the board level—factors that shape strategic direction and resource stewardship (Cyprian Onyekwere et al., 2019; Siddiqui et al., 2023).
A well-established body of research suggests that corporate governance has the potential to moderate the relationship between audit quality and corporate financial performance (Mansour et al., 2022; Nguyen & Nguyen, 2024). Drawing on agency theory (Jensen & Meckling, 1976), strong governance systems limit information asymmetry and reduce managerial opportunism, thereby enhancing the effectiveness of external audits (Watts & Zimmerman, 1983). Firms with robust governance are more likely to ensure auditor independence and follow through with audit recommendations, which collectively improve reporting credibility and financial outcomes (Hichri, 2023; Senan, 2024).
In addition to traditional mechanisms, recent studies emphasize the contextual and behavioral dimensions of governance. For instance, Xu et al. (2022) argue that responsible governance—reflected through corporate social responsibility—reinforces the positive impact of audit quality on performance. Gender-diverse and culturally intelligent audit committees further enhance the monitoring role and reduce audit judgment errors (Khalil & Nehme, 2021; Yorke et al., 2023). These insights illustrate how governance not only shapes organizational control but also strengthens strategic adaptation and audit responsiveness.
The moderating effect of corporate governance is especially relevant in emerging markets such as Jordan, where institutional voids often weaken formal regulatory oversight (Alabdullah, 2018; Alkurdi & Mardini, 2020; Alodat et al., 2021). As Issaa and Siamb (2020) and Zraiq and Fadzil (2018) demonstrate, enhanced board accountability and professional training contribute to audit credibility, which is then more effectively translated into performance gains under strong governance structures. Conversely, in poorly governed firms, audit quality may have limited impact, as managers can override controls or obscure audit findings (Al-ahdal & Hashim, 2021; Alsmady, 2022).
Nonetheless, the governance–performance link is not uniformly positive. Studies such as Detthamrong et al. (2017) and Ciftci et al. (2019) note that large boards or excessive independence may dilute decision-making and reduce responsiveness. Similarly, familial ownership in certain contexts can create conflicting interests that undermine governance efficiency. Therefore, the moderating role of governance is contingent upon both structural design and contextual implementation.
In light of these arguments, corporate governance is not merely a background variable but a strategic enabler that interacts with audit quality to shape financial performance. When governance systems are strong, audit efforts are more likely to be supported, internalized, and acted upon—ultimately contributing to better financial results. On the contrary, weak governance may allow opportunistic behavior to persist, even in the presence of high-quality audits (Gerged et al., 2023). Based on this reasoning, the following hypothesis is proposed:
Conceptual Model
This study proposes a conceptual model grounded in Agency Theory to explain how audit quality (AQ) influences corporate financial performance (FP), both directly and indirectly through earnings management (EM) as a form of strategic adaptation. EM is bifurcated into accrual-based earnings management (AEM) and real earnings management (REM), each representing distinct pathways by which firms adjust reported outcomes to meet performance expectations. High audit quality is expected to deter opportunistic EM practices, thereby reinforcing reliable reporting and enhancing financial performance. However, the relationship between AQ and FP may be contingent on the strength of corporate governance (CG), which moderates this linkage by influencing the effectiveness of audit oversight and management accountability. In well-governed firms, audits are more likely to be leveraged as tools for strategic control, thus amplifying their positive impact on performance outcomes. The model integrates structural mechanisms (AQ), behavioral mediators (EM), and institutional moderators (CG) to provide a multidimensional explanation of performance formation in emerging market contexts. The conceptual framework is illustrated in Figure 1.
Research model.
Research Methodology
The Jordanian Context
The Jordanian context presents a distinctive setting to investigate the relationships between audit quality, earnings management, corporate governance, and financial performance, particularly within the service sector. As an emerging economy, Jordan combines a maturing regulatory framework with ongoing institutional reforms, making it highly relevant for testing strategic adaptation mechanisms (Alharasis et al., 2024). Jordan’s service sector dominates the national economy in terms of investment volume, number of firms, and employment, and is thus considered a vital driver of GDP growth (Gerged et al., 2023). Despite its limited natural resources, Jordan has positioned itself as a hub for financial services and innovation, supported by regulatory mandates that require public firms to comply with International Financial Reporting Standards (IFRS) and International Standards on Auditing (ISA; Almasarwah et al., 2021). Moreover, the audit profession in Jordan is overseen by the Jordanian Association of Certified Public Accountants (JACPA), which sets audit standards and ethical guidelines, reflecting a strong institutional push toward enhancing audit credibility (Abu Afifa et al., 2023).
Several unique features make Jordan an ideal context for this study: (a) its mixed legal and cultural framework, incorporating Anglo-American accounting systems within a Middle Eastern governance structure (Al-Akra et al., 2009), (b) the relatively high prevalence of family-owned businesses, which intensifies agency conflicts and heightens the need for effective governance mechanisms (Abdullatif & Al-Khadash, 2010; Afifa et al., 2022; Al-Shouha et al., 2024), and (c) a developing capital market characterized by information asymmetry, thereby amplifying the role of audit quality in ensuring transparent financial reporting (Almarayeh et al., 2020). Furthermore, recent regulatory initiatives—such as the updated Corporate Governance Code for listed firms—signal growing institutional emphasis on audit oversight, shareholder protection, and board accountability (Al-Najjar, 2010; Alodat et al., 2021). These structural and institutional dynamics provide a robust empirical setting for examining how audit quality interacts with earnings management and governance to influence firm performance. Thus, conducting this study in Jordan not only addresses a geographical gap in the literature but also contributes theoretically and practically by capturing the complexity of audit and governance processes in emerging markets.
Data Collection and Sample
This study employs a quantitative approach to examine the interrelationships among audit quality, financial performance, strategic adaptation, and corporate governance. Data were collected through a structured questionnaire survey targeting external auditors in Jordan. External auditors were selected due to their pivotal role in ensuring financial transparency and their ability to assess the credibility of financial statements and governance mechanisms (DeFond & Zhang, 2014). The sampling frame included audit partners, senior auditors, audit managers, and assistant auditors working in various auditing firms across Jordan (Alma’aitah et al., 2024; Awwad et al., 2022), thus capturing a diverse and representative cross-section of the profession.
The total population comprised 400 auditors. Following Dillman et al.’s (2014) tailored design method, survey invitations were distributed via email and professional networks such as LinkedIn. To enhance participation, a maximum of three reminders were sent at two-week intervals (Aljuhmani et al., 2021). Participants were explicitly instructed to respond only if they had professional experience in both remote and on-site auditing, which ensured relevance and depth in their responses. Ultimately, 192 completed questionnaires were obtained, yielding a response rate of 48%. Each response underwent rigorous screening to verify completeness and consistency (Enbaia et al., 2024), and no missing or unusable data were identified.
The final sample size exceeds the threshold for multiple regression analyses. According to Green (1991), a minimum of 82 responses is required when including four or more predictors—thus the sample of 192 ensures sufficient statistical power and reliability (Y. Li et al., 2023)). To test the hypothesized model, Partial Least Squares Structural Equation Modelling (PLS-SEM) was employed. This approach is well-suited to complex models with moderate sample sizes and does not require data to meet multivariate normality assumptions (Hair et al., 2019; Neiroukh, Emeagwali, et al., 2024). Therefore, the use of PLS-SEM in this study is both methodologically sound and statistically robust.
Ethical Considerations
The study was conducted in accordance with the Declaration of Helsinki and did not require ethical approval, as it relied on publicly available information and survey data collected anonymously via email and professional networks such as LinkedIn. Participants could not be directly or indirectly identified, and no sensitive personal information was gathered. Informed consent was implied through voluntary participation, and the design ensured minimal risk to respondents while offering societal benefits through insights into audit quality and governance practices.
Measurements
This study employed a structured questionnaire to systematically measure all constructs. The instrument was developed based on a comprehensive review of prior empirical research to ensure content validity and alignment with established scales. To enhance face validity, feedback from academics and audit practitioners was incorporated. A pilot test with ten external auditors was also conducted, which helped refine item wording and enhance clarity. This pre-testing strategy aligns with best practices in social science research (Alsafadi & Aljuhmani, 2023).
All questionnaire items were anchored on a 5-point Likert scale ranging from 1 (“strongly disagree” or “very unlikely”) to 5 (“strongly agree” or “very likely”). This format is well-recognized for enhancing response reliability and interpretability in accounting and behavioral studies (Dawes, 2008). Its adoption also improves comparability with prior earnings management and audit quality research. Audit quality, the independent variable, was assessed using a nine-item scale adopted from Rajgopal et al. (2021) and Neiroukh and Caglar (2024). These items captured key dimensions such as auditor independence, reporting accuracy, and effectiveness of audit procedures.
Strategic adaptation was modeled using two separate constructs of earnings management: real earnings management (REM) and accrual-based earnings management (AEM). Each was measured using scenario-based items adapted from Graham et al. (2005) and García Osma et al. (2022). For REM, respondents were asked to assess the likelihood of engaging in short-term operational decisions—such as delaying projects, reducing discretionary spending, or accelerating sales—under pressure to meet year-end financial targets. Four items captured this construct. For AEM, a three-item scale captured hypothetical use of accounting discretion, such as postponing charges or altering assumptions, within legal limits. These two constructs reflect distinct behavioral strategies and have been validated in studies on managerial decision-making under earnings pressure (Abernethy et al., 2017; Libby & Lindsay, 2010). The reliability and construct validity of all multi-item scales were confirmed through exploratory factor analysis and Cronbach’s alpha tests (see Section 4, Table 2). Furthermore, discriminant validity was supported using the Heterotrait-Monotrait Ratio (HTMT), with values ranging between 0.151 and 0.667—below the 0.85 threshold—indicating sufficient construct distinctiveness (Bedford & Speklé, 2018). Factor loadings exceeded 0.6 and eigenvalues exceeded 1, further validating the measurement model (Nitzl, 2016). Together, these rigorous design and validation procedures ensure that the measurements used in this study are both statistically sound and theoretically grounded, enabling robust testing of the hypothesized relationships.
Corporate governance was operationalized via board financial expertise using a three-item scale from Kaawaase et al. (2021), reflecting board members’ ability to influence oversight and decision-making processes (Ciftci et al., 2019; Singh et al., 2018). Financial performance, the dependent variable, was captured using a four-item subjective scale from Purnamasari and Umiyati (2024), incorporating measures such as ROA, ROE, firm growth, and Tobin’s
Data Analysis and Results
Demographic Profile
The demographic profile of the study participants is summarized in Table 1, highlighting key trends in Jordan’s auditing sector. The gender distribution showed a slight male majority (58.9%) compared to female respondents (41.1%). Most respondents were junior auditors (56.3%) with equal or less than 5 years of experience, followed by those with 6 to 10 years (28.6%), indicating a workforce dominated by early career professionals. More experienced auditors (11–15 years and over 15 years) accounted for a smaller proportion (7.8% and 7.3%, respectively). In terms of professional roles, the majority were auditors (42.2%), senior auditors (35.9%), or assistant auditors (10.9), while audit managers (7.3%) and partners (3.6%) represented a smaller share, reflecting their specialized roles and limited numbers within firms (Alma’aitah et al., 2024). Furthermore, nearly half of the respondents (49.5%) were employed by Big Four firms, with 30.2% in large local firms and 20.3% in smaller local firms, emphasizing disparities in strategic adaptation between large and small firms in audit practices (Lugli & Bertacchini, 2022). These demographic details provided a critical context for understanding the perspectives of this study.
Respondents’ Profile.
PLS-SEM Analysis
This study employed Partial Least Squares Structural Equation Modelling (PLS-SEM) using SmartPLS version 4.1.0.9 to examine the proposed research model, which includes mediation and moderation paths among audit quality, earnings management, corporate governance, and financial performance. PLS-SEM is well-suited for exploratory research involving complex models and relatively small sample sizes, as it emphasizes variance explanation over strict model fit (Hair et al., 2019). Importantly, PLS-SEM does not require multivariate normality, making it appropriate for Likert-scale survey data. Normality tests revealed minor deviations in skewness and kurtosis, but these were within acceptable limits for PLS-SEM (Hair et al., 2024; Nitzl, 2016). Furthermore, PLS-SEM inherently assumes uncorrelated measurement error terms and does not estimate covariances among them, unlike covariance-based SEM (Henseler et al., 2014; Sarstedt et al., 2016). Thus, no correlated residuals were modeled or encountered during estimation. A two-stage analysis was conducted: first, the measurement model was evaluated for reliability and validity; second, the structural model was assessed to test hypothesized relationships, including direct, indirect, and moderated effects (Hair et al., 2019; Mamash et al., 2025). Bootstrapping with 5,000 subsamples was used to estimate confidence intervals and significance levels, ensuring robustness and generalizability of the results (Streukens & Leroi-Werelds, 2016). This methodological rigor ensures that the findings are both statistically reliable and theoretically grounded.
Measurement Models Assessment
The evaluation of the measurement model is a critical step in structural equation modelling, ensuring that each construct is measured reliably and validly. This study employed PLS-SEM, which prioritizes construct reliability and validity over global model fit indices (Aljuhmani et al., 2024; Hair et al., 2024). Reliability was assessed through both composite reliability (CR) and Cronbach’s alpha, with all values exceeding the recommended threshold of .70, confirming strong internal consistency among scale items (Abuseta et al., 2025; Hair et al., 2019). As shown in Table 2, each construct satisfied this criterion.
Constructs Reliability and Validity.
Convergent validity was established using average variance extracted (AVE) and standardized factor loadings. Following Fornell and Larcker (1981), AVE values above 0.50 and loadings above 0.60 are considered acceptable. All items loaded significantly onto their respective constructs, and AVE values exceeded the threshold, supporting the convergent validity of the measurement scales (Alkish et al., 2025; Hair et al., 2019).
Discriminant validity was assessed using two complementary techniques. First, the Fornell-Larcker criterion confirmed that the square root of each construct’s AVE exceeded its correlations with other constructs (Fornell & Larcker, 1981; Nasr et al., 2022), as reported in Table 3. Second, the Heterotrait-Monotrait Ratio (HTMT) values were calculated and all remained below the 0.85 threshold, indicating sufficient distinction between constructs such as AEM, REM, AQ, CG, and FP (Bedford & Speklé, 2018; Henseler et al., 2015).
Discriminant Validity Test.
Together, these validation procedures demonstrate that the measurement model satisfies the psychometric standards necessary for robust hypothesis testing in the structural model. These results provide a solid empirical foundation for analyzing the proposed direct, indirect, and moderating effects in the next stage.
Structural Model Assessment
The assessment of the structural model is a critical phase in PLS-SEM analysis that follows the validation of the measurement model. This step evaluates the hypothesized relationships among latent constructs by examining the magnitude, direction, and statistical significance of each path coefficient (Hair et al., 2019). PLS-SEM was chosen for its robustness in handling complex research models, especially those involving mediation and moderation, and its ability to accommodate non-normal data distributions and moderate sample sizes (Nitzl, 2016). Before proceeding with the structural model estimation, preliminary checks were conducted to assess multicollinearity, data normality, and potential outliers. All indicators showed acceptable VIF values below the cutoff of 3.3, and skewness and kurtosis values indicated that data met the acceptable range for PLS-SEM assumptions (Hair et al., 2024; Neiroukh, Aljuhmani, et al., 2024).
Furthermore, PLS-SEM does not estimate covariances among measurement error terms, unlike covariance-based SEM (Sarstedt et al., 2016). This method assumes uncorrelated residuals for reflective indicators and does not require specifying correlated errors in the model, making it particularly suitable for exploratory and predictive research (Henseler et al., 2014). Accordingly, no issues of correlated residuals were encountered during model estimation using SmartPLS version 4.1.0.9.
Bootstrapping with 5,000 subsamples was used to estimate the precision of path coefficients and to generate confidence intervals (Streukens & Leroi-Werelds, 2016). As shown in Figure 2, the structural model yielded
Structural model.
Hypotheses Testing Results (Direct, Indirect, and Interaction).
Control variables were also included in the analysis to account for potential confounding effects. Job experience had a significant negative effect on financial performance (β = −.135,
Moderation Analysis
The moderation analysis assessed the extent to which corporate governance (CG) strengthens the relationship between audit quality (AQ) and financial performance (FP). Using PLS-SEM with a bootstrapping procedure of 5,000 subsamples ensured the robustness of the interaction effect estimates (Al-Geitany et al., 2023; Chin et al., 2003; Henseler & Chin, 2010). The results revealed a statistically significant moderating effect (β = .196,
Corporate governance strengthens the positive relationship between audit quality and financial performance.
Predictive Power of the Structural Model
The predictive power of the structural model was assessed using
Structural Model Predictive Power Indicators.
Conclusions and Discussion
This study highlights the critical influence of audit quality on financial performance, as evidenced by the significant positive relationship supporting H1. This finding aligns with prior literature asserting that high-quality audits reduce information asymmetry, increase the reliability of financial reporting, and foster trust among stakeholders, ultimately leading to improved financial outcomes (Al Breiki & Nobanee, 2019; DeFond & Zhang, 2014). From the lens of agency theory (Jensen & Meckling, 1976), independent audits function as governance mechanisms that constrain managerial opportunism and enhance accountability, thereby improving firm-level performance. Additionally, as argued by Nguyen and Nguyen (2024), audit quality helps firms navigate disclosure environments more strategically, enhancing long-term resilience and stakeholder engagement. Thus, audit quality serves as more than a compliance tool—it acts as a strategic resource that strengthens long-term organizational sustainability through transparency and oversight.
The results also validated the mediating role of real earnings management (REM) in the relationship between audit quality and financial performance (H2). This outcome is theoretically consistent with recent evidence that under high audit scrutiny, managers may shift from accrual-based manipulation to REM because it is less detectable, more closely tied to legitimate operational decisions, and often perceived as economically grounded (Cohen et al., 2008; Healy & Wahlen, 1999; Zang, 2012). In this sense, audit quality does not necessarily eliminate earnings management altogether but rather shapes the method managers employ, with REM serving as a strategic adaptation mechanism. Since REM operates through operational decisions such as altering production or discretionary spending, it is often perceived as more economically grounded and less detectable by auditors (Chang et al., 2018; Cohen et al., 2008; Habib et al., 2022; Healy & Wahlen, 1999). Therefore, even under high audit scrutiny, firms may leverage REM as a flexible adjustment mechanism that aligns short-term performance with broader strategic goals. This aligns with the view of Almasarwah et al. (2021), who note that real activities manipulation can be a preferred strategy in environments where external monitoring is strong. This finding reinforces the idea that not all forms of earnings management are inherently detrimental—some may serve as legitimate tools when used within ethical and regulatory boundaries.
In contrast, accrual earnings management (AEM) did not exhibit a significant mediating effect (H3), contrary to expectations. This may be due to the fundamental conflict between accrual manipulation and the monitoring role of high-quality audits, which are specifically designed to detect accounting-based distortions (Dechow et al., 1996; Kothari et al., 2016). AEM relies on subjective estimations and discretionary accruals, which are more easily identified and challenged by competent auditors. Furthermore, Healy and Wahlen (1999) assert that accrual-based earnings management is more likely to trigger reputational risk and regulatory scrutiny, reducing its utility under high audit quality conditions. Moreover, investors and stakeholders often view accrual manipulation as less acceptable, undermining its utility in achieving sustainable performance improvements (Zgarni et al., 2016). The absence of significance for H3 suggests that AEM is not a viable mechanism for improving performance when audit quality is high, likely because such environments discourage aggressive accounting practices and emphasize financial integrity.
The study also confirmed the moderating role of corporate governance in enhancing the relationship between audit quality and financial performance (H4). This finding supports the broader governance literature, which emphasizes the role of internal structures—such as board independence, audit committee effectiveness, and internal control systems—in strengthening external assurance mechanisms (Ciftci et al., 2019; Kaawaase et al., 2021). Corporate governance complements audit quality by aligning managerial behavior with stakeholder interests, thus improving the credibility and impact of financial reporting. As highlighted by Shleifer and Vishny (1997), effective governance limits opportunism by ensuring managerial actions are consistent with the firm’s financial goals. In well-governed firms, audit efforts are more likely to translate into meaningful performance gains, reflecting the interactive effect of internal and external controls in strategic adaptation (Kaawaase et al., 2021).
Taken together, these findings demonstrate that the effectiveness of audit quality in enhancing financial performance is shaped by the nature of earnings management strategies and the strength of corporate governance mechanisms. The positive role of REM, the rejection of AEM, and the reinforcing effect of governance provide valuable insight into the conditions under which audit quality translates into superior financial outcomes. These results also emphasize the need for policymakers and firms to differentiate between value-adding and value-eroding discretionary behaviors and to foster governance environments that optimize the benefits of audit functions.
Implications
Theoretical Implications
This study makes significant theoretical contributions by extending the application of agency theory and the strategic adaptation perspective within the domain of audit quality, earnings management, and financial performance. Agency theory posits that conflicts between principals and agents can result in self-serving behaviors unless appropriate monitoring mechanisms are in place (Jensen & Meckling, 1976). In this context, the finding that audit quality is positively associated with financial performance reinforces the theory’s central assumption that external audits enhance transparency, reduce information asymmetry, and align managerial actions with shareholder interests (Al-ahdal & Hashim, 2021; Aledwan et al., 2015; DeFond & Zhang, 2014; Hyarat et al., 2023). High-quality audits act as control mechanisms that constrain opportunistic behaviors and promote ethical governance, thereby strengthening firm outcomes.
This study also enriches the strategic adaptation perspective by differentiating the roles of real and accrual earnings management. The mediating role of REM demonstrates that firms may strategically adjust real activities, such as operational expenditures or production timing, to meet performance benchmarks in response to external monitoring pressures. This supports prior literature asserting that REM is often viewed as more economically grounded and less detectable than accrual-based manipulation, enabling firms to maintain financial flexibility without undermining audit scrutiny (Abu Afifa et al., 2023; Al-Shouha et al., 2024; Cohen et al., 2008). Thus, REM may serve as a legitimate, adaptive strategy within the boundaries of acceptable financial behavior (Afifa et al., 2021; Almasarwah et al., 2021; Healy & Wahlen, 1999).
In contrast, the absence of a mediating effect for AEM provides additional theoretical insight. AEM typically involves subjective accounting judgments, which are more readily identified and constrained under stringent audit environments (Dechow et al., 1996; Kałdoński & Jewartowski, 2020; Kothari et al., 2016). This finding suggests that AEM does not function effectively as a strategic tool in firms subject to high audit quality, as it may conflict with the transparency and accountability principles emphasized in agency relationships. Theoretical frameworks must therefore differentiate between adaptive earnings practices that support performance and manipulative techniques that erode credibility and long-term value (Zgarni et al., 2016).
Furthermore, this study contributes to the understanding of corporate governance theory by demonstrating that governance mechanisms—such as independent boards and effective audit committees—can strengthen the impact of audit quality on performance (Alodat et al., 2021; Ciftci et al., 2019; Fawzi Shubita et al., 2024; Kateb et al., 2023; Mansour et al., 2022; Nguyen & Nguyen, 2024; Senan, 2024). The moderating role of governance illustrates how internal oversight enhances the effectiveness of external monitoring, fostering a multi-layered governance environment that improves financial reporting and accountability. This confirms the synergistic interaction between internal controls and external assurance mechanisms in achieving governance effectiveness (Kaawaase et al., 2021; Shleifer & Vishny, 1997).
Collectively, the findings offer a nuanced extension of existing theories by showing that audit quality’s influence on firm performance is context-dependent—shaped by governance strength and the type of earnings management employed. This contributes to a more holistic understanding of how firms adapt to institutional pressures and align financial strategies with stakeholder expectations under conditions of heightened scrutiny and accountability. Importantly, the results also reveal that higher audit quality may not eliminate earnings management entirely but can redirect it from accrual-based practices toward real activities manipulation, which, although more economically grounded, carries different theoretical and practical implications for firm adaptation.
Practical and Managerial Implications
This study provides meaningful practical implications for managers, policymakers, and corporate governance stakeholders seeking to improve financial performance through audit quality and oversight mechanisms. First, the significant positive relationship between audit quality and financial performance underscores the need for organizations to invest in highly competent, independent, and reputable external auditors. High-quality audits have been shown to reduce agency problems, increase transparency, and elevate stakeholder confidence (Farouk & Hassan, 2014; Hyarat et al., 2023; Sayyar et al., 2015). Managers should adopt rigorous criteria when selecting audit firms, including their expertise in the industry, history of regulatory compliance, and ethical reputation. Doing so ensures not only financial reporting reliability but also supports strategic credibility in capital markets and with institutional investors.
Second, the study’s findings on REM reveal that, while it may serve as a strategic response to short-term financial pressures, its application must be approached with caution. Overreliance on REM can compromise long-term performance and raise concerns regarding financial manipulation (Ademola, 2025; Chang et al., 2018; García Osma et al., 2022; Kałdoński & Jewartowski, 2020). Managers should establish governance safeguards, including board-level reviews of financial adjustment strategies, to ensure REM is used judiciously and transparently. Furthermore, internal training programs can be implemented to help finance teams distinguish between acceptable performance adjustments and potentially misleading tactics.
The confirmation of the moderating role of corporate governance adds another actionable insight. The findings suggest that robust governance frameworks—such as independent boards, empowered audit committees, and stringent compliance policies—amplify the impact of audit quality on financial performance (Kaawaase et al., 2021; Nguyen & Nguyen, 2024; Senan, 2024). Senior leadership should prioritize the professional development of board members and ensure audit committee members possess the financial expertise necessary to monitor both external and internal reporting quality. These governance mechanisms should not operate in isolation but rather as part of an integrated oversight system that aligns managerial decisions with the interests of stakeholders.
In conclusion, by prioritizing audit quality, applying earnings management practices ethically, and reinforcing internal governance structures, managers can significantly improve their organizations’ financial outcomes and strategic integrity. These findings offer practical guidance for firms aiming to balance regulatory compliance, financial innovation, and long-term sustainability in today’s dynamic business environment. At the same time, managers and policymakers should remain cautious that stricter audit scrutiny may unintentionally shift earnings adjustments toward real activities manipulation, requiring vigilant governance oversight to ensure such practices do not undermine long-term financial health.
Limitations and Future Research Directions
This study offers valuable insights into how audit quality, earnings management strategies, and corporate governance collectively shape financial performance. However, several limitations must be acknowledged to guide future research. First, while the surveyed sample consisted of professional auditors from various firms, the study did not classify participants based on the industry sectors they serve. Therefore, claims about industry-specific audit behaviors cannot be made. Future research should explicitly examine how industry context moderates the relationships observed in this study, as audit quality and earnings management practices may differ substantially across sectors due to varying regulatory pressures and financial reporting environments (Cohen et al., 2008; Fawzi Shubita et al., 2024). Second, the cross-sectional design limits the ability to capture causal or evolving relationships among variables. Although this approach enables a robust snapshot of associations, it cannot track how audit quality practices or governance reforms unfold over time. Future research should adopt longitudinal designs to examine these dynamics. However, conducting longitudinal studies involving auditors introduces challenges such as auditor turnover, limited access to sequential financial data, and potential participant fatigue, which may affect response consistency and data validity (Elder & Allen, 2003; Smith, 2017; Wölfer et al., 2015). Researchers must plan accordingly by employing retention strategies and ensuring institutional support throughout data collection phases.
Third, this study operationalized CG specifically through board financial expertise, measured using three items. While this dimension is theoretically and practically important, it does not capture other governance mechanisms such as board independence, audit committee activity, or shareholder oversight (Ciftci et al., 2019; Kaawaase et al., 2021). As such, the results should be interpreted in light of this narrower conceptualization. Future research could incorporate a broader set of governance indicators to provide a more comprehensive understanding of how governance interacts with audit quality and financial performance across different contexts.
Finally, although this study focused on real and accrual earnings management as mediators, other organizational or psychological mechanisms may also shape the audit–performance relationship. Future research could examine the roles of managerial incentives, ethical leadership, or organizational culture as mediators or moderators, offering a more holistic view of how internal dynamics interact with external assurance mechanisms (Habib et al., 2022). Lastly, the study relied solely on self-reported data from auditors, which may introduce bias due to subjectivity or impression management. To enhance the credibility of future research, scholars should consider triangulating data sources by integrating archival data, financial disclosures, or third-party assessments such as audit ratings or board evaluations (DeFond & Zhang, 2014). In addition, given that this study found REM may actually increase under high audit scrutiny, future research should explore the unintended consequences of audit quality pushing firms toward real activities manipulation, and how governance mechanisms or regulatory frameworks might mitigate these risks.
Footnotes
ORCID iD
