The impact of voluntary joint audits on earnings management: a perspective from the emerging market of Kuwait

Purpose This study investigates the effect of voluntary joint audits on earnings management in Kuwait, an emerging economy, using both accrual-based and real earnings management measures. Design/methodology/approach We analyze a sample of 102 non-financial firms listed on the Kuwait Stock Exchange from 2016 to 2024, covering the period of voluntary joint audit adoption. Discretionary accrual-based earnings management is measured using McNichols's (2002) modification of the Dechow and Dichev (2002) model, which assesses accrual quality through their relation to cash flows. Real earnings management is measured using Roychowdhury's (2006) model, capturing manipulation through sales acceleration, overproduction, and reduced discretionary expenses. The joint audit variable equals 1 when a firm is audited by two independent audit firms and 0 otherwise. Ordinary least squares (OLS) regression is used to examine the association between voluntary joint audits and the two earnings management measures. Findings Voluntary joint audits are positively and significantly associated with both discretionary accruals and real earnings management, suggesting that they may not mitigate earnings management and may instead be associated with higher levels of earnings management in this context. Robustness checks, including alternative standard error specifications, endogeneity analyses (e.g. entropy balancing, Heckman selection models, and temporal specifications), and additional sensitivity tests, indicate that the results are consistent across specifications. However, the relatively small number of firm-year observations (ranging from 261 to 315) may limit the generalizability of the findings. Research limitations/implications The relatively small number of firm-year observations may limit generalisability. The findings suggest that joint audit effectiveness is contingent on institutional context, with implications for regulators considering their adoption in similar emerging markets. Practical implications The findings have important implications for regulators and policymakers considering the implementation of voluntary joint audits. Our results suggest that joint audits do not curb earnings management. Therefore, policymakers should carefully weigh their potential drawbacks before adopting them. This study provides empirical evidence to support informed decision-making regarding audit regulation in emerging markets. Originality/value This study contributes to the limited literature on voluntary joint audits and earnings management in emerging markets. It extends prior research by examining both accrual-based and real earnings management over a 9-year period. The findings contribute to ongoing debates about the effectiveness of joint audits and challenge the assumption that they necessarily enhance financial reporting quality.