Assessing Financial Reporting Quality through MSCORE Model: Economic Policy Uncertainty, Corporate Governance, and the Moderating Role of Audit Quality

Abstract

Building financial confidence between businesses and their stakeholders depends on the accuracy and applicability of financial reporting. When making decisions about investments, financing, dividends, and working capital management, financial statements play a crucial role. Maintaining the financial statements' transparency is critical since users require high-quality financial information to make wise judgments in their decision making. However, the high level of economic policy uncertainty may compromise financial reporting. In contrast, the strong corporate governance mechanism plays a vital role in enhancing the financial reporting quality. This study investigated the impact of economic policy uncertainty (EPU) as macroeconomic variable on financial reporting quality and analyzes effect of corporate governance on as microeconomic variable on financial reporting quality. The study filled in the literature gap, by examining how audit quality moderate the economic policy uncertainty and corporate governance systems with financial reporting quality. The non-financial companies listed on the Pakistan Stock Exchange (PSX) between 2013 and 2024 are tapped to collect the data used in the study. To compute the financial reporting quality the earnings manipulation in the financial reports was detected using the M-Score model. This model is best tools which makes use of both specific and total accruals in the detection of earnings management. The results found that high economic policy uncertainty negatively impact the quality of financial reporting. Conversely, corporate governance mechanism is found to have a positive relationship with financial reporting quality. Nevertheless, the earnings manipulation is mitigated by the strong corporate governance mechanism and improves the quality of finance reporting. The results also revealed that the induction of audit quality like of Big4 auditors mitigate the relationship of EPU and financial reporting quality. Moreover, the audit quality combine with the corporate governance mechanism gives a combo to enhance the financial reporting quality. This research useful in confirming the accuracy of financial reporting for the regulators. This study demonstrated that companies with high levels of economic policy uncertainty need to concentrate on providing openness in their financial statements. Additionally, in order to improve the integrity of financial reporting and lessen earnings management, businesses must implement an efficient corporate governance framework. This study is fruitful for the firms in appointing the quality auditors for auditing their financial statements. Moreover, this study provide confidence to the auditors to encourage them in building and developing more professional competencies.