The School-ties Between Top Management Executive and Audit Partner: Exploring From Earnings Management in Indonesia

Abstract

The objective of this study is to investigate the impact of school ties between top management executives, such as the Chief Executive Officer and Chief Financial Officer, and external parties, including auditors, on a company’s earnings management practices. This study uses fixed effect regression method to test the hypotheses, whether school ties between top management executives and audit partner will affect on the practical earnings management. The authors obtained sample from Indonesia Stock Exchange Commission during 2010 to 2022 and includes several causality tests to robust the empirical result from current study. Our findings suggest a noteworthy positive association between school-ties linking the Chief Executive Officer (CEO) and the Auditor with Earnings Management. However, our analysis reveals that other combinations of school ties exhibit an opposite effect. The findings of this study suggest that ties between internal and external parties within a company may be a factor that investors should carefully consider when evaluating the accuracy and reliability of financial reports. As such, it may be prudent to avoid investing in such companies. Despite prior research extensively examining the measurement of accrual-based earnings management, the literature lacks discussion regarding its association with the potential influence of ties. Thus, this study aims to fill this gap by investigating the relationship between top management school ties and earnings management.