The effect of political connections and earnings management on fraudulent financial reporting

Abstract

As the concern on fraud scope in several countries keeps growing, this study examines the impact of political connections and earnings management (EM) on fraudulent financial reporting (FFR). Prior studies have shown that political connections among corporate board members and earnings management influence fraudulent financial reporting, positive and negative, depending on the style of regimes. To examine the impacts of political connections and earnings management on fraudulent financial reporting, I propose a multilevel panel data linear model with a data set of listed Indonesian companies covering the period of 2012-2021. This study documents that firms with political connections and earnings management simultaneously engage in fraudulent financial reporting accidents. This study adds existing audit research by having an interaction effect between political connections and earnings management, investigates the trade-off between real and accrual-based earnings management, and contributes to the literature on the role of public monitoring and governance by analyzing the role of political connections. The implication of this study is beneficial for policy-makers to develop stricter regulations, for accounting organizations to guide the audit processes and a call for further research for scholars.