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Vol 41 No 1 (2026): January

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Submitted
Oct 2, 2025
Accepted
Dec 18, 2025
Published
Jan 28, 2026
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Guardians or Bystanders? Auditors’ Role in Curbing Earnings Management during Financial Distress in Indonesia

https://doi.org/10.22146/jieb.v41i1.25030
Arika Artiningsih
arika.artiningsih@ugm.ac.id
Department of Accounting, Faculty of Economics and Business, Universitas Gadjah Mada, Yogyakarta, Indonesia
https://orcid.org/0000-0002-2321-5915
Firdaus Kurniawan
Department of Accounting, Faculty of Economics and Business, Universitas Gadjah Mada, Yogyakarta, Indonesia
https://orcid.org/0000-0003-0829-726X
Albertus Henri Listyanto Nugroho
Department of Accounting, Faculty of Business, Universitas Kristen Duta Wacana
https://orcid.org/0000-0002-2298-734X

Corresponding Author(s) : Arika Artiningsih

arika.artiningsih@ugm.ac.id

Journal of Indonesian Economy and Business, Vol 41 No 1 (2026): January

Abstract

Introduction/Main Objectives: This study aims to investigate the role of auditors in mitigating earnings management when firms experience financial distress, focusing on the effectiveness of Big 4 auditors in maintaining reporting quality in Indonesia. Background Problems: Firms under financial distress often manipulate earnings to preserve legitimacy and maintain investor confidence. In emerging markets such as Indonesia, weak institutional enforcement and client pressures raise questions about whether auditors can effectively constrain such opportunistic behavior. Novelty: By applying prospect theory to explain managerial risk-taking under financial distress and role theory to examine how structural capacity influences auditors’ monitoring effectiveness, the study provides new insights into the conditional effectiveness of Big 4 auditors in an emerging market setting. Research Methods: The study uses 5,008 firm-year observations of non-financial companies listed on the Indonesia Stock Exchange (IDX) from 2010 to 2024. Earnings management is measured using the modified Jones model (Kothari et al., 2005), financial distress is proxied by Altman’s Z-score, and auditor quality is captured with a Big 4 dummy. Robustness tests and additional analyses are employed for validation. Findings/Results: Results show financial distress is positively associated with earnings management, consistent with prospect theory. Big 4 auditors are associated with lower levels of earnings management overall, but their moderating effect under distress is not significant. Additional analyses reveal that Big 4 auditors are more effective in reinforcing reporting discipline across broader financial conditions than in severe distress scenarios. Conclusion: Auditor effectiveness in Indonesia is highly contextual. While Big 4 auditors improve reporting quality in general, their ability to curb opportunistic behavior in distressed firms remains limited under a weak institutional environment. This study contributes to the accounting literature by extending prospect and role theory applications in auditing, and offers policy implications for strengthening auditor capacity and institutional enforcement in emerging markets.

Keywords

Financial distress earnings manipulation fraud risk audit quality fraud detection
Artiningsih, A., Kurniawan, F., & Nugroho, A. H. L. (2026). Guardians or Bystanders? Auditors’ Role in Curbing Earnings Management during Financial Distress in Indonesia. Journal of Indonesian Economy and Business, 41(1), 139 -. https://doi.org/10.22146/jieb.v41i1.25030
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Author Biographies

Arika Artiningsih, Department of Accounting, Faculty of Economics and Business, Universitas Gadjah Mada, Yogyakarta, Indonesia

Arika Artiningsih is a lecturer and researcher in the Department of Accounting, Faculty of Economics and Business, Universitas Gadjah Mada (UGM), Indonesia, where she has been a faculty member since 2017. She earned her bachelor’s degree in Accounting from Universitas Gadjah Mada and her master’s degree in Accounting, Financial Crime, and Governance from Macquarie University, Australia. She subsequently completed her Ph.D. in Accounting and Corporate Governance at Macquarie University. Her research interests focus on auditing, forensic accounting, and financial crime. She has actively collaborated with scholars from diverse disciplines in a range of interdisciplinary research projects. She currently serves as an Associate Editor of the Journal of Indonesian Economy and Business. To avoid any conflict of interest, she had no involvement in the editorial handling or decision-making process for this manuscript. The peer-review process and final editorial decision were managed independently by another editor, and she did not have access to reviewer identities or evaluation reports beyond those routinely provided to authors under standard journal procedures.

Firdaus Kurniawan, Department of Accounting, Faculty of Economics and Business, Universitas Gadjah Mada, Yogyakarta, Indonesia

Firdaus Kurniawan is a fellow researcher at the Department of Accounting, Faculty of Economics and Business, Universitas Gadjah Mada, Indonesia since 2018. He earned his bachelor’s degree in accounting at the Faculty of Economics and Business, Universitas Gadjah Mada, Indonesia. He did his master’s degree in Master of Science in Accounting at Faculty of Economics and Business, Universitas Gadjah Mada, Indonesia. His research interests lie in the areas of corporate finance, sustainability, accounting and auditing. He has actively collaborated with researchers from diverse disciplinary backgrounds on a range of academic and applied research projects.

Albertus Henri Listyanto Nugroho, Department of Accounting, Faculty of Business, Universitas Kristen Duta Wacana

Albertus Henri Listyanto Nugroho is a lecturer and researcher at the Department of Accounting, Faculty of Business, Universitas Kristen Duta Wacana (UKDW), Indonesia where he has been a faculty member since 2022. He earned his bachelor’s degree in accounting at the Faculty of Economic, Universitas Sanata Dharma, Indonesia. He did his master’s degree in Master of Science in Accounting at Faculty of Economics and Business, Universitas Gadjah Mada, Indonesia. His research interests lie in the areas of corporate finance, accounting and auditing. He has collaborated actively with other researchers from various fields in many research projects.

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