The Impact of Financial Distress on Earnings Management: The Moderating Role of Audit Quality

The main objective of this study is to analyze the interrelationship between financial distress, earnings management, and audit quality of listed firms in Ghana. The study sampled 16 non-financial firms listed on the Ghana Stock Exchange from 2010 to 2022. Secondary data source was utilized in the study which were the annual reports of these listed firms. The research employed a quantitative approach, using random effect regression. The study found that financial distress had a statistically significant positive relationship with earnings management in Ghanaian firms. Audit quality exhibited a significant negative relationship with earnings management, indicating that higher audit quality can lead to lower earnings management. It was also found that audit quality did not moderate the relationship between financial distress and earnings management. To mitigate the inclination toward earnings management in times of financial distress, firms should strengthen their internal control systems and corporate governance practices. This could involve establishing stricter oversight mechanisms, such as forming an independent audit committee that regularly reviews financial reporting processes and outcomes. This study is the first study to analyze the interrelationship between financial distress, earnings management, and audit quality of listed firms in Ghana.