Environmental, Social, and Governance (ESG) Performance and Earnings Management: The Role of Audit Quality

Abstract

Earnings management practices triggered by information asymmetry remain an important issue that can reduce the quality of corporate financial reporting. To enhance transparency, increasing attention has been directed toward Environmental, Social, and Governance (ESG) Performance and Audit Quality as monitoring mechanisms. This study aims to examine the effect of ESG Performance on accrual-based Earnings Management and to investigate the role of Audit Quality as a moderating variable. The sample consists of 238 observations of non-financial companies listed on the Indonesia Stock Exchange (IDX) during the 2020-2024 period. Earnings Management is measured using discretionary accruals (Modified Jones Model), while Audit Quality is proxied by Big 4 audit firm affiliation. The analysis employs Moderated Regression Analysis (MRA). The results show that ESG Performance has a significant negative effect on Earnings Management, indicating that the better a company's ESG performance, the lower its Earnings Management practices. However, Audit Quality does not significantly moderate this relationship. These findings indicate that ESG serves as an effective transparency mechanism in reducing opportunistic managerial behavior, regardless of Big 4 audit firm affiliation.

Keywords:  Earnings Management, ESG, Audit Quality.