Company growth, free cash flow, tax avoidance, and earnings management: Examining the role of the audit committee

Abstract

Earnings management remains a key concern in financial reporting quality, particularly in emerging markets where regulatory enforcement may be weaker. The novelty of this study lies in the integration of several variables, namely firm growth, free cash flow, and tax avoidance, into a single model to examine their impact on earnings management. Furthermore, this study incorporates corporate governance, specifically the role of the audit committee as a moderating variable. This research investigates the influence of company growth, free cash flow, and tax avoidance on earnings management, while also examining the moderating role of the audit committee. The study uses a sample of 274 manufacturing firms listed on the Indonesia Stock Exchange (IDX) in 2023, selected through purposive sampling. Data from financial reports were analyzed using multiple linear regression and moderated regression analysis. The findings indicate that company growth enhances earnings management, whereas free cash flow exerts a negative influence. Furthermore, the audit committee mitigates the positive relationship between tax avoidance and earnings management. This research highlights the importance of having independent and skilled audit committees to enhance supervision and ensure adherence to regulations. Firms should also design performance-based compensation carefully to align managerial incentives with shareholder interests.