Abstract:
The reliability of financial reporting is vital for market credibility and stakeholder trust. However, earnings management poses a significant challenge to financial transparency, particularly in developing economies like North Macedonia, where corporate governance is lax, igniting agency conflicts and stakeholder misalignment. This study gauges the impact of earnings management drivers when short-term performance is prioritized over long-term sustainability. Testing a sample of non-financial entities traded on the Macedonian Stock Exchange over a period of four years, we establish that audit quality and bankruptcy risk enhance the performance of accruals-based earnings management prediction models. Notably, multinational audit firms do not employ equal conservatism in developing markets to restrain earnings management. Moreover, heightened external scrutiny prompts firms with high leverage to resort to earnings management to meet financial objectives. These robust findings are invaluable for regulators, practitioners, and scholars in understanding earnings management dynamics concerning bankruptcy risk and the role of auditors, thereby promoting accountability and transparency.
Keywords: earnings management, bankruptcy risk, audit quality, firm size, financial performance
