Audit Quality and Financial Reporting Fraud: The Interaction of Standards, Governance, and Managerial Integrity

Abstract

Financial reporting fraud still has implications for the effectiveness and efficiency of world capital markets, particularly in emerging-market nations where regulatory environments are less structured. Although studies in audit quality and regulatory compliance are independent from each other in the previous academic research, we develop a new comprehensive theoretical model, which integrates the antecedents of audit quality (audit tenure, audit fee, Big 4 affiliation) and the extant IFRS adoption, governance quality, and Managerial Ethical Integrity, to assess their combined and interactive impacts on fraud detection. Based on 480 firm year
observations of listed manufacturers operating indonesia emerging economy from 2018 to 2023, this research adopts multiple regression and moderation analysis to unravel intricate interconnections. The innovation of having structural (audit mechanisms), regulatory (IFRS compliance), and behavioral (ethical leadership) variables in one model is providing a multi-dimensional view not touched upon by previous studies. The findings show that audit quality and IFRS adoption are associated with a lower fraud risk; the impact of these determinants, however, varies positively or negatively depending on the governance mechanisms and ethical leadership. This discovery undermines a prevailing belief that institutional and technical conformance are sufficient to inhibit misconduct. By demonstrating the moderating influence of managerial integrity and governance quality, this study contributes to
the theoretical understanding and provides practical implications to government, auditors and board members for creating an anti-corruptive governance system. The originality of this research is that it also adds to the expanding the horizon of audit research in terms of behavioural governance which is particularly important for ASEAN and other emerging economies.