The Impact of Audit Quality on the Relationship between Free Cash Flows and Financial Reporting Quality

Document Type : Original Article

Authors

1 Associate Professor of Accounting, Shahid Chamran University of Ahvaz

2 PhD Student of Accounting, Shahid Chamran University of Ahvaz

3 PhD Student of Accounting, Science and Research Branch, Islamic Azad University

4 M.A. in Management, Shahr-e-Qods Branch, Ialamic Azad University, Tehran

Abstract

According to agency theory, auditing plays an important role in leading opportunistic behaviors of managers. In this research, we examined the audit quality including size of audit enterprise and how they influence the relationship between free cash flow and the quality of financial reporting. Therefore, Tehran Stock Exchange data were extracted for the period of 1386 to 1392 and the hypotheses were tested with a regression model. The results show that there is a significant negative relationship between the quality of auditing, free cash flow and the quality of financial reporting. Also, the result showed that the relationship between free cash flow and the quality of financial reporting is more meaningful and negative when CPA firm size increases. Managers willing to invest free cash flows in projects with personal gain did not follow the foreseen procedures and even ignored negative net present value projects. Total investment of some activities may have a positive ROI, but ROI is less than the cost of capital.

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