The Impact of Family Firms on Financial Reporting Quality: The Mediating Role of High-Quality Auditors

Abstract

This study empirically examines how Big4 audit firms mediate the relationship between family-controlled enterprises and their earnings management practices. Analyzing a dataset of 61 non-financial family-listed companies listed on the Indonesia Stock Exchange from 2017 through 2019 reveals that family-controlled businesses and Big4 auditors are associated with lower earnings management, resulting in improved financial reporting quality. The study also shows that family-owned enterprises are more inclined to hire a higher-quality auditing firm for their financial statement assessments. Moreover, our results suggest that Big4 auditors partially mediate the relationship between family businesses and their earnings management practices. The additional tests conducted in this study highlight the significant role of family-run firms and Big4 auditors in curbing earnings management, primarily when corporate management is prone to decrease reported earnings. Robustness tests validate the reliability of the conclusions drawn from the primary findings. Our study shows that family managers align their goals with the firm and shareholders, enhancing company financial reporting integrity. Our finding also emphasizes the crucial role of Big4 auditors in minimizing intra-family agency conflicts in family firms, promoting transparency, and aligning family managers’ interests with external stakeholders.

1. Introduction

This study investigates the mediating role of Big4 audit firms (known for high-quality auditing) in the relationship between family-run entities and their practices of managing earnings (an indicator of financial reporting quality). Earnings management is an extensively debated subject in accounting due to its impacts on financial markets and the economy. Manipulating earnings can mislead financial information, resulting in ineffective resource allocation, increased market instability, and reduced investor trust (Jackson & Pitman, 2001). Accordingly, Zhong (2018) argues that maintaining integrity in financial reporting is crucial for investment efficiency and helping firms attract investment. As a result, regulatory authorities emphasize the integrity of financial reporting, particularly concerning accounting fraud and earnings manipulation practices (Viana et al., 2022).

Family businesses play a unique and significant role in the global economy, characterized by their commitment to long-term sustainability and wealth preservation across generations (Gomez-Mejia et al., 2011). Unlike many non-family businesses that may prioritize short-term profits and rapid growth, family firms often adopt a more patient approach, focusing on building a legacy that can endure through time. This long-term perspective influences not only their business strategies but also their governance structures. Family controlled firms may involve family members in management and/or supervisory board positions to ensure that the decision-making processes align with the family’s values and interests (Bertrand & Schoar, 2006). Therefore, understanding these phenomena is essential, as they can impact not only the strategic direction of the enterprise but also the way its earnings are managed and reported (Anderson & Reeb, 2003; Andres, 2008).

The Big4 audit firms are widely recognized for their commitment to maintaining superior audit quality by heavily investing in branding and reputation. Gul et al. (2009) and Viana et al. (2022) indicate that the Big4 accounting firms allocate significant resources to staff recruitment and training, audit planning, and adopting advanced technologies. This investment enables them to deliver high-quality services that build trust among stakeholders, improving the accuracy of financial statements and, thereby, the credibility of financial reporting. As highlighted by Jensen and Meckling (1976), the role of high-quality auditors is pivotal in ensuring the reliability and credibility of financial statements. Specifically in the family-controlled business landscape, their presence is vital as an external mechanism to oversee potential biases or a lack of transparency within closely held entities. In Indonesia, as is the case in various other countries, the Big4 audit firms are often perceived to provide a higher level of audit quality due to their extensive experience, resources, and global networks.

Recent research emphasizes the significance of auditing in family-owned enterprises due to their unique characteristics (Gil et al., 2024). Family businesses are shaped by emotional connections and personal relationships (Prencipe & Bar-Yosef, 2011). They prioritize social reputation to maintain strong ties with stakeholders (Anderson & Reeb, 2003) and often emphasize long-term sustainability for future generations (Gomez-Mejia et al., 2011). These unique attributes affect their decision-making and auditing needs. For example, the friction between majority and minority shareholders, often called Type II agency issues, occurs more frequently within family-run enterprises (Salvato & Moores, 2010). Consequently, family firms may face increased fraud risks, requiring more rigorous auditing processes and highly qualified auditors (Khan et al., 2015). However, A. Ali et al. (2007) claim that family firms frequently experience fewer Type I agency conflicts due to the alignment of ownership and control structures, reducing the demand for extensive auditing processes (Ho & Kang, 2013).

In summary, the academic literature has indicated a direct relationship between (i) family-controlled firms and financial reporting quality, (ii) high-quality auditors and financial reporting quality, and (iii) family firms and high-quality auditors. As a result, the overall relationship between family-owned businesses and financial reporting quality may be indirect through the presence of a high-quality auditor. This study explores the mediating roles of high-quality auditors in the link between family firms and financial reporting quality, thus aiming to answer the research question of whether the relationship between family firms and financial reporting quality is indirect through the existence of a high-quality auditor.

This research is crucial due to the scarcity of studies examining the connection between family businesses and their earnings management strategies in developing nations, especially Indonesia (Prencipe & Bar-Yosef, 2011). As an emerging economy, Indonesia has several unique institutional settings. First, according to Joni et al. (2020), family business groups dominate the landscape of Indonesia’s publicly listed companies, with approximately 95% being under family ownership. These family-owned enterprises are significant contributors to job creation and are vital to the advancement of the Indonesian economy (PriceWaterhouseCoopers, 2018). Given their pervasive influence, the quality of financial reporting emanating from these organizations is essential for the overall health and stability of the Indonesian financial system. Thus, it is vital to comprehend the dynamics between family businesses and their earnings management strategies. Second, the audit landscape in Indonesia has a historical context marked by skepticism towards audit quality, particularly highlighted by the failures of several companies and banks during the Asian Crisis of 1997–1998. This situation creates various challenges, notably the ongoing scrutiny of audit practices, which has led to considerable apprehension about the reliability and integrity of financial reporting. Third, research findings suggest that many firms in Indonesia maintain political ties (Gomez & Jomo, 1997; Gul, 2006). Such firms are believed to face increased agency costs, primarily due to the greater inherent risks associated with insider exploitation, which affects their earnings management practices (Braam et al., 2015).

The study’s findings have important implications for agency theory, suggesting that minority shareholders may be at risk of expropriation by dominant family members. Our study reports that family shareholders align their interests with those of the overall firm. This alignment can mitigate type II agency problems, fostering initiatives beneficial to the organization and its stakeholders. Additionally, the results are practically significant for various stakeholders. Family business owners and managers should recognize the value of hiring high-quality auditors, which extends beyond regulatory compliance. High-quality financial reporting through comprehensive audits can improve a family firm’s reputation, facilitate access to capital markets, and support long-term sustainability. Regulatory authorities in Indonesia should continue to strengthen and enforce accounting and auditing standards, mainly focusing on enhancing auditor independence, particularly within family-owned businesses. Regulators must consider evaluating and potentially amending policies that either incentivize or require the engagement of high-quality auditors for various types or sizes of family enterprises. For the auditing profession, maintaining ethical standards and professional skepticism is essential in auditing family-controlled firms. Auditors must understand the unique governance structures and inherent risks of family firms.

This paper is organized into several sections, as outlined below. The following section includes a literature review along with the research hypotheses. The third section elaborates on the sample, data, and methodology employed in the study. The fourth section discusses the results, tests, and analyses performed. The final section provides a conclusion to the study.

2. Literature Review and Hypotheses Development

This study adopts the precepts of agency theory to explore the mediating role of high-quality auditors in the link between family firms and their earnings management practices. Jensen and Meckling (1976) identify two primary agency relationships: agency problem type I (the agent–principal relationship) and agency problem type II (the interaction of majority–minority shareholders). In publicly traded companies, conflicts arise between managers (agents) and owners (principals) due to the separation of ownership and control, often leading to misleading financial reporting (Wang, 2006). In contrast, as in many developing countries, Indonesia exhibits concentrated family ownership, where a few shareholders usually control a significant amount of equity. This phenomenon creates a unique agency conflict, as family owners may exploit their control to appropriate profits from minority owners, known as principal-to-principal conflict or agency problem type II (Fan & Wong, 2002; Salvato & Moores, 2010). Joni et al. (2020) and Anderson and Reeb (2003) argue that family-controlled businesses in Indonesia might face fewer agency issues. The concept of socioemotional wealth, as outlined by Gomez-Mejia et al. (2007), indicates that family businesses prioritize goals beyond financial gain, such as maintaining family heritage and reputation, which can align the interests of controlling shareholders with those of minority shareholders. This alignment may decrease the motivation to partake in opportunistic actions that could negatively affect minority stakeholders. Moreover, the tight-knit characteristics of Indonesian family enterprises frequently cultivate a strong level of trust and enduring relationships, serving as an informal governance system. A study by Young et al. (2008) shows that social capital and relational governance significantly alleviate agency conflicts in emerging economies like Indonesia. Additionally, the fear of damaging the family’s standing in the community can be a powerful deterrent against behaviors that could harm minority shareholders, thus lowering the likelihood of type II agency conflicts (La Porta et al., 1999).

Nonetheless, the concentrated ownership characteristic of Indonesian family firms could give rise to a type II agency problem (Claessens et al., 2000; Claessens et al., 2002; Boshnak, 2023). In this context, with their reputation for higher audit quality, Big4 auditors are expected to mitigate potential agency conflicts. Their presence can signal greater financial reporting reliability, thereby reducing information asymmetry and constraining opportunistic earnings management. A study by Francis and Yu (2009) reveals that Big4 auditors generally act to limit earnings management; however, their effectiveness can be shaped by firm-specific governance mechanisms. Additionally, research by Prencipe et al. (2008) suggests that the reputation and expertise of Big4 audit firms can signal a higher quality of financial reporting, which is particularly valuable for family firms where external oversight may be less effective. The need for high-quality auditing has also been analyzed through the lens of the family business theory (Zehri, 2025). Family business theory emphasizes that owners often face difficulty harmonizing their business’s objectives with their family members’ divergent goals. Conflicts can emerge when the priorities of the business and the family do not align. In such cases, high-quality audit services can promote a more cohesive system and assist family-owned businesses in ensuring the sustainability of their operations.

2.1. Family Firms and Financial Reporting Quality

Joni et al. (2020) highlight that the agency problem in Indonesia differs from that in other developing nations due to the close link between family wealth and business success. The concentrated ownership characteristic of Indonesian family firms mitigates the typical instances of managerial expropriation. Anderson and Reeb (2003) argue that families serve as more effective monitors of managers than other large shareholders; consequently, firms under family control may experience fewer agency issues. Demsetz and Lehn (1985) propose that family businesses can mitigate problems related to managerial expropriation by appointing family members to senior management roles, which facilitates better oversight and governance. Additionally, Andres (2008) notes that families tend to invest their capital, incentivizing them to monitor management closely, which reduces opportunistic behavior and manages reported earnings. Numerous studies indicate that the unique characteristics of family-owned businesses, such as their long-term orientation, deep operational knowledge, accountability to future generations, and cohesive governance structures, contribute to a more conservative approach to earnings management, leading to a higher financial reporting quality (Davids et al., 1997; Wang, 2006; Ferramosca & Ghio, 2018; Salehi et al., 2019; Ghaleb et al., 2020). Therefore, our first hypothesis is as follows:

H₁. 

There is a negative association between family firms and earnings management. 

2.2. High-Quality Auditors and Financial Reporting Quality

Audit quality is the market’s perception of an auditor’s likelihood to identify and report a significant misstatement in financial statements (DeAngelo, 1981). Following the literature (Craswell & Taylor, 1992; Rover et al., 2016; Rajgopal et al., 2021), this study uses the Big4 audit firms as a benchmark for audit quality. Jensen and Meckling (1976) argue that these auditors play a central role in meticulously examining financial statements and are responsible for disclosing any detected inconsistencies in earnings. Earlier investigations (Gul et al., 2009; Bliss et al., 2011) indicate that Big4 auditors tend to report discrepancies and irregularities, exhibiting an unwillingness to accept questionable accounting practices. Many studies support the negative relationship between Big4 audit firms and the level of earnings management.

Rusmin (2010) explores the link between earnings management practices and auditor quality within the context of Singaporean firms. The study aims to determine whether the choice of auditor, specifically the distinction between Big4 and non-Big4 accounting firms, significantly impacts how companies manage their reported earnings. The results show a negative association between Big4 auditors and various indicators of earnings management, indicating that companies using Big4 services tend to have lower levels of earnings management than those using non-Big4 auditors. This finding implies that the engagement of reputable auditing firms could be crucial in enhancing the transparency and integrity of these companies’ financial reporting.

Mokoteli and Iatridis (2017) conduct a rigorous investigation into the relationship between the Big4 accounting firms as auditors and the financial reporting practices of publicly listed companies in South Africa. Specifically, their study focused on two key aspects of financial reporting quality: the extent of earnings management and the level of earnings conservatism. Their findings provide compelling evidence suggesting a significant influence of auditor choice on these practices. The study revealed that companies audited by Big4 auditors demonstrate a lower propensity to manipulate earnings. This result implies that these companies are less likely to use accounting discretion to artificially inflate or smooth reported earnings to meet specific targets or expectations. Furthermore, Mokoteli and Iatridis (2017) find that companies audited by Big4 audit firms exhibit a higher degree of earnings conservatism, implying that these companies tend to recognize bad news (losses) more readily than good news (profits), leading to a more cautious and potentially more reliable representation of their financial reporting.

Chia et al. (2007) examined the impacts of auditor selection on earnings manipulation among service-oriented Singaporean listed companies during the Asian Financial Crisis. A key finding of their study is the confirmation that these Singaporean-listed service firms, on average, engaged in income-decreasing earnings management during the crisis period. This result suggests that managers facing economic hardship and uncertainty utilized accounting discretion to report lower earnings. Potential motivations for this behavior could include creating a “big bath” effect, where current losses are exaggerated to improve future performance comparisons, or signaling financial conservatism during economic distress. Crucially, Chia et al. (2007) found a significant moderating effect of auditor choice on these practices. Their analysis revealed that only companies audited by Big4 audit firms exhibited a significantly lower degree of income-decreasing earnings management than those audited by non-Big4 auditors. This finding implies that the presence of a Big4 auditor acts as an effective mechanism in curbing opportunistic earnings manipulation even during a period of significant economic pressure. Accordingly, our second hypothesis is as follows:

H₂. 

There is a negative association between Big4 auditors and earnings management. 

2.3. Family Firms and High-Quality Auditors

The specific attributes of family enterprises may manifest in their application of auditing as a means to manage and mitigate the risks of interfamily disputes that can arise from complex relationships among family members (Corten et al., 2017). According to Demsetz and Lehn (1985), family-owned firms can alleviate the challenges associated with managerial expropriation by placing family members in senior management roles. The strong oversight that family directors exercise over their financial activities leads to a decreased demand for audit quality in family-owned companies. This argument is supported by several studies revealing that family-controlled firms are likelier to engage lower-quality auditors (C. Ali & Lesage, 2014; Nelson & Mohamed-Rusdi, 2015; Darmadi, 2016). Research also indicates that, from the viewpoint of auditors, external auditors generally put in less effort and offer lower audit fees for engagements with family firms in comparison to non-family firms (Ghosh & Tang, 2015; Abudy et al., 2024; Zehri, 2025). Furthermore, family-owned businesses are generally unwilling to incur high auditing fees (Zehri, 2025), often prioritizing short-term profits over long-term objectives (Charbel et al., 2013). Consequently, these firms are hesitant to engage auditors of high quality (Fasoulas et al., 2024).

However, many studies indicate that family-owned entities prefer to engage reputable auditors to help alleviate inter-family issues (C.-L. Chen et al., 2007; Corten et al., 2017). Niskanen et al. (2010) claim that family-owned enterprises frequently pursue the enhancement of their reputation by hiring a more prestigious external auditor. This strategic decision arises from the understanding that engaging a reputable auditor can significantly enhance the credibility of the company’s financial statements. Family owned businesses strive to foster trust among the public, business partners, and stakeholders by selecting a reputable auditing firm. Husnin et al. (2016) find that family-owned enterprises prefer hiring higher-quality auditors. Choosing a reputable auditor serves as an effective means of bolstering governance without compromising family ownership and control. Feito-Ruiz et al. (2023) reveal that family-owned enterprises characterized by a more significant portion of long-term debt within their capital structure exhibit a higher propensity to engage the services of Big4 auditors. Additionally, M. J. Ali and Ng (2009) state that family-controlled firms prefer to use the services of higher-quality auditors because they can effectively reduce earnings management practices in companies. In summary, engaging high-quality auditors, especially those with a strong reputation, can signal a family firm’s commitment to transparency and accuracy, which is particularly important given the potential for perceptions of bias due to the close relationship between ownership and management. This study proposes a positive relationship between family ownership and high-quality auditors; thus, the third hypothesis is as follows:

H₃. 

There is a positive association between family firms and Big4 auditors. 

2.4. Mediating Effect of Board Independence on Earnings Management

Our H₁ states that family-controlled firms negatively affect earnings management. H₃ suggests that family firms are more likely to appoint Big4 audit firms. Big4 auditors relate to lower levels of earnings management (H₂). These relationships indicate that the association between family firms and earnings management may be indirect through the presence of Big4 auditors. Therefore, the following hypothesis is proposed:

H₄. 

The relationship between family firms and earnings management is indirect through the presence of Big4 auditors. 

3. Data and Methodology

3.1. Data Collection

This study examines non-financial family-owned firms listed on the Indonesia Stock Exchange (IDX) for the fiscal years 2017 to 2019. Selecting this particular timeframe is crucial, as it allows for an analysis of the companies’ financial performance and management strategies in a relatively stable economic setting, free from the disruptions caused by the COVID-19 pandemic. The dataset employed for this study was carefully compiled before the pandemic emerged in Indonesia on 2 March 2020. This decision ensures that the findings accurately represent the companies’ operations and strategies in a pre-pandemic environment, providing a clearer understanding of their earnings management practices and, thus, financial reporting quality. The COVID-19 pandemic has considerably impacted economic operations and has adversely affected many Indonesian businesses, potentially accelerating their earnings management practices. This assertion is validated by research from Yan et al. (2022) and Dang and Khanh Dung (2024), which reveals that the COVID-19 pandemic has exacerbated earnings management practices, highlighted by a notable increase in accrual-based and real earnings management practices.

The study identifies family businesses as outlined in an article published in Globe Asia (2019). Following this identification, the study examined the websites of each recognized company and found that 91 firms consistently published their annual reports from 2017 to 2019. In any case, 29 entities categorized as financial firms (banks, insurance, and multi-finance) were eliminated. Firms in this sector are subject to different regulatory requirements that could unduly affect abnormal accruals. Thus, the sample size is reduced to 62 corporations (186 firm years). We excluded one firm for its unique and extreme attributes or lack of comprehensive information for assessing the studied variables. Consequently, the final dataset comprises 61 firms or 183 firm years (see

Table 1. Sample selection process and sample classification.

Panel B: Sample selection process
Description		Firms	Observation
Total family firms		91	273
Less: financial firms		(29)	(87)
Less: missing observations		(1)	(3)
Final sample		61	183
Panel B: Sample by industry
Sector	IDX Classification	n	%
1	Agriculture	9	4.92
2	Mining	18	9.84
3	Basic Materials and Industrials	30	16.39
4	Miscellaneous	12	6.56
5	Consumer Goods	33	18.03
6	Property and Real Estate	51	27.87
7	Infrastructure, Transportation, and Logistics	9	4.92
9	Trade, Services, and Investment	21	11.47
	Total sample	183	100.00

Note: This study excludes industry sector number 8 for finance firms.

).

Panel B of Table 1 indicates that the largest sample size is found in the Property and Real Estate industry (51 firm years), which accounts for 27.87% of the sample. The Consumer Goods sector comprises the second largest group, with 33 observations, or 18.03% of the sample. Conversely, companies in the Agriculture and Infrastructure, Transportation, and Logistics groups constitute the smallest group, with each industry contributing only 4.92% to the total sample size.

3.2. Dependent Variable

This study employs discretionary accruals (DAcc), derived from the modified Jones (1991) model, to signify the level of earnings management. DAcc reflects the portion of total accruals (TAcc) attributed to management’s choices and judgments, thereby providing insight into the potential manipulation of reported earnings. Aligning with existing research in the field, such as the findings of Jackson and Pitman (2001) and Viana et al. (2022), this study examines the absolute value of DAcc over its respective signs. Concentrating on absolute values enables a more precise assessment of the level of managing earnings, irrespective of whether it results in inflated or deflated earnings. To accurately derive the value of DAcc, TAcc must first be computed based on the following formula:

Tacc_xz = (∆Cass_xz − ∆Cash_xz) − (∆Clia_xz − ∆Ltd_xz − ∆Itp_xz) − DpAm_xz

Note: TAcc_xz = the firm’s x total accruals in year z; ∆Cass_xz = the growth in current assets for firm x from year z − 1 to year z; ∆Cash_xz = the growth in cash balance for firm x from year z − 1 to year z; ∆CLia_xz = the growth in current liabilities for firm x from year z − 1 to year z; ∆Ltd_xz = the growth in long-term debt included in current liabilities for firm x from year z − 1 to year z; ∆ITp_xz = the growth in income tax payable for firm x from year z − 1 to year z; and DpAm_xz = depreciation and amortization expense for firm x in year z.

The DAcc are identified as the residuals from the modified estimation method proposed by Jones (1991), as outlined below:

TAcc_xy,z/TAss_xy,z−1 = α_i,t [1/TAss_xy,z−1] + β_1ixz [(∆Sales_xy,z − ∆AR_xy,z)/TAss_xy,z−1] + β_2i,t [PPE_xy,z/TAss_xy,z−1] + ε_ikt

Note: TAcc_xy,z = the firm’s x total accruals in industry y at year z; TAss_xy,z−1 = lagged total assets for firm x in industry y; ∆Sales_xy,z = the growth in net sales for firm x in industry y from year z − 1 to year z; ∆AR_xy,z = the growth in account receivables for firm x in industry y from year z − 1 to year z; PPE_xy,z = gross property, plant, and equipment for firm x in industry y at year z; α_i, β_1i, β_2i = industry specific estimated coefficients; and ε_ikt = the error term.

3.3. Independent and Mediating Variables

This study utilizes family-controlled firms as a predictor for earnings management while considering Big4 auditors as a mediating variable. Following Anderson and Reeb (2003), this study identifies family businesses by assessing the proportion of equity owned by family members and their participation in executive or supervisory positions. A score of one is assigned if the company employs a Big4 auditor, and a score of zero if it does not (Gul et al., 2009; Viana et al., 2022; Zehri, 2025).

3.4. Control Variables

The study accounts for several factors that could affect earnings management behaviors. The regression analysis assessed various corporate governance aspects, including the number of board members, the representation of women on the board, the proportion of independent members, the frequency of board meetings, and the number of members on the audit committee. These factors aim to enhance efficiency and accountability in managing resources. The literature frequently correlates effective corporate governance with the reliability of financial reporting (Martinez-Ferrero et al., 2020). The study also employs the Altman Z-score and return on assets to address the possible cumulative effects of a firm’s risk and financial performance. The relationship between a company’s risk profile and financial performance can affect the opportunities available to corporate management and their motivations to participate in managing reported earnings (Kothari et al., 2005; Wan-Hussin & Bamahros, 2013). Firm age serves as an additional variable that may affect earnings management behavior. Firms with a more extended history exhibit more robust corporate governance practices and have experienced more reputational risks, leading to improved earnings quality (Gul et al., 2009; Choi et al., 2018).

Table 2. Description of variables.

Title	Description	Source
Dependent variable
FRQ	The absolute value of discretionary accruals.	Jones (1991) Lemma et al. (2020)
Independent and mediating variables
FAM	Percentage of equity owned by family members.	Anderson and Reeb (2003)
AQ	One if an auditing firm is affiliated with a Big4 firm and zero in all other cases.	Gul et al. (2009) Viana et al. (2022) Zehri (2025)
Control variables
BSize	Total supervisory board members.	Martinez-Ferrero et al. (2020) Ramon-Llorens et al. (2020) Zehri (2025)
BFem	Proportion of female supervisory board members.	Patelli and Prencipe (2007) García-Meca and Sánchez-Ballesta (2010)
BInd	The proportion of independent board members in the supervisory board.	Patelli and Prencipe (2007) García-Meca and Sánchez-Ballesta (2010)
BMeet	Annual supervisory board meeting frequency.	Martinez-Ferrero et al. (2020) Ramon-Llorens et al. (2020)
ACom	Total audit committee members.	Collier (1993) Al-Shaer and Salama (2015)
Altman	One if the Altman Z-score exceeds 2.99 and zero in all other cases.	Altman (1993) Pramono et al. (2022)
ROA	Net income divided by total assets.	Kothari et al. (2005) Frankel et al. (2002)
Age	Natural logarithm of the number of years since the company’s establishment.	Kim et al. (2012) Tran and Adomako (2020)

provides a detailed description of the variables.

3.5. Empirical Model Equations

This current study adapts the works of Baron and Kenny (1986) and the Fritz and MacKinnon (2007) approach in explaining the mediating models that are expressed functionally and econometrically as follows:

Path (1) FRQ_i = a_i + α_i1FAM_it + α_i2−9CONTROL_it + YearFE_it + IndustryFE_it + ε_i

Path (2) FRQ_i = a_i + α_i1AQ_it + α_i2−9CONTROL_it + YearFE_it + IndustryFE_it + ε_i

Path (3) AQ_i = a_i + α_i1FAM_it + α_i2−9CONTROL_it + YearFE_it + IndustryFE_it + ε_i

Path (4) FRQ_i = a_i + α_i1FAM_it + α_i2AQ_it + α_i3−10CONTROL_it + YearFE_it + IndustryFE_it + ε_i

Baron and Kenny (1986) propose a model of mediation that includes three key relationships: Y = X, Y = M, and M = X. In this model, Y signifies the dependent variable, the financial reporting quality (FRQ), while X represents the independent variable, the family firm (FAM). The mediator, M, corresponds to audit quality (AQ). These equations are to confirm the presence of zero-order relationships among the variables. As Fritz and MacKinnon (2007) noted, researchers typically determine that mediation is unlikely if one or more of the relationships in question are insignificant. Conversely, if the relationships are statistically significant, the analysis continues with Path 4, Y = X + M. In this context, mediation is supported if the influence of M continues to be significant after controlling for X. Should X lose its significance when M is accounted for, this finding would indicate full mediation. However, if both X and M are statistically significant, it suggests the presence of partial mediation.

4. Findings and Discussions

4.1. Descriptive Statistics

Table 3. Description of dataset.

Continuous Variables	Min	Max	Med	Mean	SD
DAcc	−0.20	0.29	0.02	0.02	0.08
FAM	19.69	92.40	60.00	62.39	17.05
BSize	2.00	11.00	5.00	4.85	1.80
BFem	0.00	66.67	0.00	11.66	17.41
BInd	20.00	100.00	40.00	41.64	9.94
BMeet	2.00	31.00	10.00	10.17	3.95
ACom	2.00	5.00	3.00	3.06	0.32
ROA	−20.90	45.56	5.33	5.22	6.82
Age	4.92	68.33	35.50	35.11	13.20
Categorical Variables				n	%
Big4 audit firms				90	49.18
NonBig4 audit firms				93	50.82
Strong financial firms				79	43.17
Weak financial firms				104	56.83

provides a statistical overview of the analyzed variables. The average DAcc is 0.02% of total assets, varying from −20% to 29%. This range indicates a diversity in financial reporting practices and suggests the likelihood of earnings management. The proportion of firm shares held by family members is, on average, 62.39%, but varies significantly from 19.69% to 92.40%. This high level of family ownership may influence corporate governance dynamics, decision-making processes, and overall firm performance, as family members often have a vested interest in the business’s long-term success. The supervisory boards vary in size from two to eleven members, averaging five, which may balance effective oversight with diverse perspectives. However, only 11.66% of board members are female, highlighting a significant gender disparity in leadership roles and raising concerns about diversity and its impact on decision-making. Independent members on the supervisory boards make up 41.64%, exceeding the 33.33% requirement of Regulation No. 33 of 2014 (POJK 33/2014) issued by the Indonesian Financial Services Authority.

This regulation also stipulates that the supervisory board must convene at a minimum frequency once every two months. This requirement ensures the board remains actively engaged in overseeing the company’s operations and strategic direction. Table 3 indicates that, on average, the companies conduct board meetings ten times yearly, varying from two to thirty-one meetings annually. On average, audit committees comprise three members. This figure aligns with the POJK 55/2015, which requires this minimum effective oversight. The relatively low average return on assets (5.22%) suggests that family-owned firms experienced significant financial difficulties during the years analyzed. The average age of these businesses is 35.11 years, with a median age of 35.50 years. Furthermore, approximately 49.18% of the sampled firms engage in the services of Big4 auditors, indicating that these auditors play a prominent role in providing audit services within Indonesia’s capital market. Additionally, firms with a strong financial condition constitute 43.17% of the sample.

4.2. Correlations

Table 4. Spearman correlation matrix.

	DAcc	FAM	AQ	BSize	BFem	BInd	BMeet	ACom	Altman	ROA
FAM	−0.296 *
AQ	−0.267 *	0.223 *
BSize	−0.048	−0.272 *	0.292 *
BFem	0.199 *	−0.145 **	−0.128	0.076
BInd	0.039	0.019	−0.114	0.008	0.131
BMeet	0.129	−0.034	0.075	0.104	0.194 **	−0.043
ACom	−0.115	0.055	0.129	0.017	−0.152 **	0.005	−0.219 *
Altman	−0.321 *	0.297 *	0.180 **	0.155 **	−0.077	−0.064	0.027	0.298 *
ROA	−0122	0.164 **	0.291 *	0.119	−0.164 **	−0.003	−0.031	0.244 *	0.586 *
Age	−0.095	−0.038	0.064	0.095	−0.154 **	0.015	0.169 **	−0.159 **	0.026	−0.022

Note: * p < 1%, ** p < 5%.

exhibits the Spearman correlation matrix. The findings show a strong negative correlation between FAM and DAcc as well as AQ and DAcc. Conversely, there is a positive association between FAM and AQ. Each of these correlations is statistically significant at p < 0.01. The correlation results support the study’s hypotheses. A low correlation coefficient between the independent and mediating variables suggests that multicollinearity is not a concern. Finally, an analysis of the relationships among variables shows the strongest correlation between ROA and Altman, with a coefficient of 0.586 (p < 0.01). This result is below the 0.80 threshold (Cooper & Schindler, 2003), indicating no multicollinearity concerns.

4.3. Multivariate Regression Results

Table 5. Main regression results.

Variables	Path 1 (DV = FRQ)		Path 2 (DV = FRQ)		Path 3 (DV = AQ)
	Beta	t-Stat	Beta	t-Stat	Beta	t-Stat
Constant		2.781 *		2.620 *		2.818 *
FAM	−0.066	−3.044 *			0.236	1.988 **
AQ			−0.037	−2.816 *
BSize	−0.004	−1.133	0.002	0.617	0.055	2.585 *
BFem	0.088	2.541 *	0.078	2.221 **	−0.370	−1.821 ***
BInd	0.040	0.695	0.018	0.309	−0.387	−1.160
BMeet	0.002	1.386	0.002	1.208	0.006	0.680
ACom	−0.084	−1.332	−0.056	−0.890	0.317	0.861
Altman	−0.031	−2.084 **	−0.040	−2.820 *	0.056	0.649
ROA	0.002	2.010 **	0.002	2.239 **	0.012	2.110 **
Age	−0.001	−1.358	−0.001	−1.064	0.001	0.451
Year FE	Yes		Yes		Yes
Industry FE	Yes		Yes		Yes
Summary
Adjusted R2	0.226		0.220		0.257
F-statistic	3.945 *		3.845 *		4.502 *
Observations	183		183		183

Note: * p < 1%, ** p < 5%, and *** p < 10%.

shows the regression outcomes for the direct relationship outlined in hypotheses H₁ to H₃. The regression model estimates in Paths 1 to 3 are statistically significant, with an F-statistic below 0.01. Moreover, there is no indication of the multicollinearity affecting the model estimations, as all variance inflation factor (VIF) values are under 10 (not included for a concise).

All regression analysis results are statistically significant and consistent with the expected direction, confirming hypotheses H₁ to H₃. Path 1 indicates that FAM significantly negatively impacts FRQ (β = −0.066, p < 0.01). This result implies that family-owned enterprises are less inclined to participate in managing earnings figures, leading to a higher quality of financial reporting. The finding supports existing literature, particularly from Ferramosca and Ghio (2018), Salehi et al. (2019), and Ghaleb et al. (2020), showing that family enterprises report higher earnings quality compared to their counterparts. This finding has important implications for agency theory, suggesting that the interests of family managers are closely aligned with those of the corporation and its shareholders. This alignment leads family owners and managers to take actions that benefit the organization and its stakeholders. Anderson and Reeb (2003) assert that founding families are dedicated to the company’s long-term prosperity, and this dedication significantly influences the enhancement of financial reporting practices. This emotional bond influences their decision-making, leading family members to prioritize the organization’s well-being and legacy. As a result, they adopt a conservative approach to earnings management to maintain the integrity of financial reporting (Davids et al., 1997). In a similar vein, Wang (2006) asserts that founding families are motivated to disclose high-quality earnings to safeguard their reputation and maintain sustainability. By prioritizing transparent and accurate financial reporting, family firms can enhance credibility with investors and improve long-term performance.

The statistical analyses presented in Path 2 reveal that AQ is negative and significantly related to FRQ, thus supporting H₂. Big4 auditors provide superior audit quality, enabling them to constrain the extent of earnings management. The findings align with earlier studies conducted by Rusmin (2010), Chia et al. (2007), and Mokoteli and Iatridis (2017). These studies collectively demonstrate that the engagement of Big4 auditors is linked to a significant reduction in earnings management practices. Rusmin (2010) reveals that companies audited by Big4 firms exhibited lower discretionary accruals, a standard measure of earnings manipulation. Chia et al. (2007) assert that during the Asian Financial Crisis, Singaporean publicly listed firms participated in earnings management strategies that lowered reported earnings. Notably, only the companies audited by Big4 accounting firms exhibited a significant decline in these practices. Additionally, Mokoteli and Iatridis (2017) reinforced that Big4 auditors play a vital role in enhancing the integrity of financial reporting.

For H₃, family-controlled firms are likelier to engage reputable audit firms (β = 0.236, p < 0.05). The positive and statistically significant link between family firms and audit quality is in line with earlier findings (M. J. Ali & Ng, 2009; Niskanen et al., 2010; Husnin et al., 2016), indicating that family-run enterprises tend to prioritize high audit quality standards, potentially due to their desire to improve good governance, maintain a strong reputation, ensure transparency, and build trust with stakeholders. This finding also highlights that high-quality auditors can help reduce agency conflicts among family members (Corten et al., 2017). In many family businesses, differing interests among family members often lead to tensions, particularly in financial management. Skilled auditors provide valuable insights and best practices, promoting transparency and the alignment of interests. Their impartiality also aids in dispute resolution, fostering more harmonious family dynamics.

As reported in Table 5, the coefficients of FAM and AQ outlined in Paths 1 through 3 are statistically significant. These results indicate the presence of a mediating variable (Fritz & MacKinnon, 2007). In other words, there is evidence for the mediation role of AQ. Thus, this study further explores the mediating impact of audit quality on the association between family firms and financial reporting quality by including regression results for Path 4, represented as FRQ = FAM + AQ. The findings are detailed in

Table 6. Regression outcomes for FRQ = FAM + AQ.

Variables	Path 4 (DV = FRQ)
	Beta	t-Stat	Sig.	VIF
Constant		3.174	0.002
FAM	−0.076	−3.600	0.000	1.596
AQ	−0.044	−3.406	0.001	1.494
BSize	−0.002	−0.472	0.637	1.530
BFem	0.072	2.116	0.036	1.247
BInd	0.023	0.407	0.685	1.081
BMeet	0.002	1.609	0.110	1.270
ACom	−0.070	−1.143	0.255	1.369
Altman	−0.028	−1.976	0.050	1.782
ROA	0.003	2.600	0.010	1.548
Age	−0.001	−1.281	0.202	1.167
Year FE	Yes
Industry FE	Yes
Summary
Adjusted R2	0.273
F-statistic	4.590 *
Observations	183

Note: * p < 1%.

.

The regression model in Table 6 is statistically significant, with an F-statistic of less than 0.01. The maximum VIF reported is 1.782, confirming multicollinearity is not an issue. Table 6 shows that the coefficients on FAM and AQ are significant and negatively related to FRQ (β = −0.076, p < 0.01 and β = −0.044, p < 0.01, respectively). The findings reveal that the model exhibits a degree of partial mediation, which implies that the mediator variable (AQ) plays a significant role in the link between the independent (FAM) and dependent variables (FRQ) but does not fully account for the effect. This finding suggests that some additional influences or mechanisms also contribute to the observed outcomes, emphasizing the multifaceted nature of the studied relationships. The result indicates that other factors also contribute to the relationship between the variables, highlighting the complexity of the interactions within the model.

Regarding the control variables, BFem, Altman, and ROA are significant in explaining earnings management behavior. Specifically, firms with stronger financial health, as indicated by higher Altman Z-scores, exhibit a lower propensity to manage earnings. Interestingly, the findings suggest that companies with greater female representation on the supervisory board and substantial profits are more inclined to engage in earnings management.

4.4. Additional Analyses

This study performs various extra tests to assess the reliability of the primary findings. First, previous research (e.g., Frankel et al., 2002; Gul et al., 2003) typically categorizes pooled samples according to income incentives, as these characteristics are often perceived to influence management’s opportunistic behavior. Specifically, they have identified that the motivations behind earnings management can lead to different managerial actions, which can affect the financial reporting process. Thus, this study divides the overall sample into income-increasing and income-decreasing categories. The classification is based on each sample’s actual sign of discretionary accruals. Positive discretionary accruals signal an intention to inflate earnings (income-increasing earnings management), while negative accruals indicate a strategy to lower reported earnings (income-decreasing earnings management). The regression results for the two group samples are presented in Panels A and B of

Table 7. Income increasing (decreasing) and the performance-adjusted model.

Variables	Panel A—Income Decreasing		Panel B—Income Increasing		Panel C—Performance Adjusted Model
	Beta	t-Stat	Beta	t-Stat	Beta	t-Stat
Constant		3.001 *		1.286		2.098 **
FAM	−0.082	−3.527 *	−0.004	−0.195	−0.093	−1.961 **
AQ	−0.033	−2.337 **	−0.004	−0.279	−0.057	−1.949 **
BSize	0.001	−0.165	−0.001	−0.287	−0.022	−2.689 *
BFem	−0030	−0.740	0.068	2.019 **	−0.014	−0.180
BInd	0.021	0.367	0.006	0.105	0.037	0.299
BMeet	0.002	1.023	0.001	0.047	−0.002	−0.703
ACom	−0.134	−2.148 **	−0.054	−0.823	−0.068	−0.494
Altman	0.029	1.982 **	−0.018	−1.026	0.065	2.033 **
ROA	0.001	0.956	0.002	1.104	0.008	−0.079
Age	−0.010	−0.206	−0.002	−0.105	−0.002	−0.154
Year FE	Yes		Yes		Yes
Industry FE	Yes		Yes		Yes
Summary
Adjusted R2	0.190		0.115		0.108
F-statistic	2.113 *		1.820 **		2.157 *
Observations	91		92		183

Note: * p < 1%, ** p < 5%.

.

Second, while the modified Jones technique is well-regarded for its ability to identify earnings management, it has not been without its critics. Bernard and Skinner (1996) claim that the modified estimates of Jones (1991) can be biased due to measurement errors, potentially leading to incorrect conclusions about earnings management. These errors may cause estimated discretionary accruals to include non-discretionary components, especially during extreme financial performance (Dechow et al., 1995). Thus, as Kothari et al. (2005) proposed, this study incorporates return on assets (ROA) as a control for firms’ financial performance into the modified Jones model. Panel C of Table 7 reports the regression results using this methodology.

Table 7 shows that the coefficients for FAM and AQ are consistently negative in both sub-samples; however, they are statistically significant (p < 0.01 and p < 0.05, respectively) in the income-decreasing category (see Panel A). The findings suggest that family-owned businesses and Big4 auditors play a vital role in limiting the extent of earnings management, especially when companies are inclined to report lower accounting earnings. Panel C of Table 7 reports the robustness test that utilizes the performance-adjusted approach outlined by Kothari et al. (2005). The results show qualitative similarities to the primary regression analysis presented in Table 6. The FAM and AQ coefficients demonstrate statistical significance (p < 0.05) and align with the expected direction. Consequently, these findings further reinforce the conclusions derived from the primary findings in Table 6.

Third, this study uses auditor industry specialization as an alternative indicator for audit quality. Auditor industry specialization is unobservable, so researchers rely on proxies for appropriate estimates. Gramling and Stone (2001) and Krishnan (2003) assess auditor industry specialization by evaluating an auditor’s market share within the industry. Using market share to measure industry specialization is based on the assumption that industry expertise is built by repetition in similar settings. A large volume of business in an industry suggests a level of expertise in that sector. Prior studies, especially those examining datasets lacking audit fee information, have relied on total sales or assets to estimate an auditor’s market share (Kwon, 1996; Krishnan, 2003). This study defines an auditor industry market share as the portion of clients’ total sales audited by an accounting firm in a particular industry relative to the total sales audited by all accounting firms in that specific industry. Following K. Y. Chen et al. (2005) and Jenkins et al. (2006), our study applies a 20% market share threshold across all industries to denote an industry specialist.

Table 8. Auditor specialization.

Variables	Path 1 (DV = FRQ)		Path 2 (DV = FRQ)		Path 3 (DV = AQ)		Path 4 (DV = FRQ)
	Beta	t-Stat	Beta	t-Stat	Beta	t-Stat	Beta	t-Stat
Constant		2.781 *		2.493 *		2.799 *		3.027 *
FAM	−0.066	−3.044 *			0.156	1.948 **	−0.071	−3.364 *
AQ			−0.033	−2.468 **			−0.037	−2.850 *
BSize	−0.004	−1.133	0.002	0.473	0.054	2.495 *	−0.002	−0.591
BFem	0.088	2.541 **	0.088	2.489 *	−0.137	−0.663	0.083	2.445 **
BInd	0.040	0.695	0.016	0.283	−0.499	−1.469	−0.021	0.381
BMeet	0.002	1.386	0.002	1.217	0.010	1.055	0.003	1.645 ***
ACom	−0.084	−1.332	−0.055	−0.861	0.432	1.152	−0.068	−1.099
Altman	−0.031	−2.084 **	−0.041	−2.867 *	0.018	0.208	−0.030	−2.083 **
ROA	0.002	2.010 **	0.002	2.215 **	0.014	2.300 **	0.002	2.525 *
Age	−0.001	−1.358	−0.001	−1.080	0.001	0.446	−0.001	−1.288
Year FE	Yes		Yes		Yes		Yes
Industry FE	Yes		Yes		Yes		Yes
Summary
Adjusted R2	0.226		0.211		0.228		0.258
F-statistic	3.945 *		3.706 *		3.986 *		4.327 *
Observations	183		183		183		183

Note: * p < 1%, ** p < 5%, and *** p < 10%.

displays the regression results using auditor industry specialization as a proxy for audit quality.

The primary regression analysis (refer to Table 5 and Table 6) and the results detailed in Table 8 are generally comparable. However, a notable exception arises in Path 2 of Table 8, where the p-value for audit quality (AQ) is demonstrably higher (p < 0.05) than that reported in Path 2 of Table 5 (p < 0.01). Furthermore, in contrast to its statistical insignificance in the primary results (Table 5 and Table 6), the coefficient for board meeting frequency (Bmeet) in Path 4 of Table 8 is positive and statistically significant at the p < 0.10 level.

Finally, we utilized two methods to alleviate potential endogeneity in our model and address self-selection bias: two-stage least squares and lagged independent variables. We adopt the Heckman two-stage least squares (2SLS) method to mitigate biases from simultaneous equations and correlated omitted variables (Larcker & Rusticus, 2010). The first stage of the 2SLS involves identifying and utilizing Z instruments (exogenous variables) that only impact earnings management through our independent variables (family ownership and audit quality). However, identifying a perfect exogenous Z instrument in the corporate governance literature is challenging (Brown et al., 2011). Thus, we used three-year averages of specific governance and firm characteristics as instrumental variables for family ownership and audit quality (Krishnan & Visvanathan, 2008). Greene (1999) suggests that these averaged values are less likely to be endogenous to the current earnings management. From this first step of our 2SLS analysis, we obtain the predicted values for family ownership and audit quality. Furthermore, in the second stage of 2SLS analysis, we re-estimate our original regressions using the predicted values against earnings management. The results, presented in

Table 9. Endogeneity test: two-stage least squares regression.

Variables	Path 1 (DV = FRQ)		Path 2 (DV = FRQ)		Path 3 (DV = AQ)		Path 4 (DV = FRQ)
	Beta	t-Stat	Beta	t-Stat	Beta	t-Stat	Beta	t-Stat
Constant		2.681 *		2.896 *		2.304 **		3.098 *
FAM	−0.063	−2.897 *			0.231	2.101 **	−0.073	−3.408 *
AQ			−0.036	−2.686 **			−0.043	−2.228 *
BSize	−0.002	0.241	0.004	0.511	0.021	0.510	0.001	0.119
BFem	0.037	0.738	0.030	0.601	−0.007	−0.625	0.036	0.753
BInd	−0.009	−0.134	−0.016	−0.244	0.055	0.141	−0.007	−0.102
BMeet	0.004	1.784 ***	0.004	1.868 ***	0.001	0.120	0.004	1.866 ***
ACom	−0.026	−0.344	−0.015	−0.195	−0.198	−0.453	−0.034	−0.469
Altman	−0.029	−1.743 ***	−0.033	−1.975 **	0.097	1.991 **	−0.025	−2.010 **
ROA	0.004	2.304 **	0.004	2.499 **	0.004	0.036	0.004	2.380 **
Age	−0.001	−1.071	−0.001	−1.017	−0.001	−0.165	−0.001	−1.288
Year FE	Yes		Yes		Yes		Yes
Industry FE	Yes		Yes		Yes		Yes
Summary
Adjusted R2	0.226		0.221		0.270		0.269
F-statistic	3.660 *		3.579 *		4.368 *		4.185 *
Observations	183		183		183		183

Note: * p < 1%, ** p < 5%, and *** p < 10%.

, are generally consistent with our main findings (Table 5 and Table 6). A key divergence from the primary analysis, as presented in Path 2 of Table 9, is the diminished statistical significance of audit quality (AQ), evidenced by a higher p-value (p < 0.05) compared to that reported in Path 2 of Table 5 (p < 0.01). Furthermore, contrary to the main findings, the coefficients for female board members (BFem) in Table 9 are no longer statistically significant, while the coefficients for board meeting frequency (Bmeet) are positive and significant at the p < 0.10 level.

Following Wan-Hussin et al. (2021), we re-examined our primary analysis by regressing the lagged independent variables (family ownership and audit quality) on the dependent variable (financial reporting quality).

Table 10. Endogeneity test: lagged independent variables.

Variables	Path 1 (DV = FRQ)		Path 2 (DV = FRQ)		Path 3 (DV = AQ)		Path 4 (DV = FRQ)
	Beta	t-Stat	Beta	t-Stat	Beta	t-Stat	Beta	t-Stat
Constant		2.812 *		2.589 *		2.781 *		3.329 *
Lag_FAM	−067	−3.128 *			0.269	1.948 **	−0.081	−3.864 *
Lag_AQ			−0.042	−3.229 *			−0.050	−3.949 *
BSize	−0.003	−0.974	0.003	0.712	0.056	2.666 *	−0.001	−0.190
BFem	0.089	2.547 *	0.076	2.160 **	−0.395	−1.922 ***	0.069	2.043 **
BInd	0.046	0.809	0.014	0.246	−0.401	−1.189	0.026	0.476
BMeet	0.002	1.265	0.002	1.224	0.005	0.582	0.002	1.498
ACom	−0.074	−1.186	−0.053	−0.846	0.382	1.032	−0.055	−0.917
Altman	−0.032	−2.176 **	−0.042	−2.926 *	0.025	0.285	−0.031	−2.183 **
ROA	0.002	1.960 **	0.002	2.325 **	0.012	2.133 **	0.003	2.666 *
Age	−0.001	−1.273	−0.001	−1.130	0.0011	0.201	−0.001	−1.266
Year FE	Yes		Yes		Yes		Yes
Industry FE	Yes		Yes		Yes		Yes
Summary
Adjusted R2	0.228		0.231		0.243		0.291
F-statistic	3.984 *		4.033 *		4.242 *		4.931 *
Observations	183		183		183		183

Note: * p < 1%, ** p < 5%, and *** p < 10%.

indicates that the significant relationships remained consistent and in the same direction, suggesting that the likelihood of reverse causality is alleviated.

5. Conclusions

Family firms encompass the largest and most important sector of the Indonesian economy. Therefore, the quality of their financial reporting is critically important for the overall stability and continued growth of the nation’s economic landscape. While family firms can possess unique strengths, they also face potential complexities and challenges in achieving high-quality financial reporting, often stemming from inherent agency issues and information asymmetry. This context underscores the crucial mediating role played by high-quality auditors. By providing independent and credible oversight, ensuring accuracy and reliability, and fostering transparency and accountability, these auditors bridge the gap between family firms and dependable financial reporting, enhancing trust and confidence among all stakeholders. Consequently, research that focuses on this critical relationship continues to be significant.

This study reports that family enterprises are less prone to manage earnings figures. Our results support earlier research, which shows that family businesses exhibit higher earnings quality than non-family entities. This study further supports previous findings indicating that Big4 auditors provide superior audit quality, effectively limiting earnings management activities. Moreover, the study reveals that companies under family control prefer to engage Big4 audit firms. Our final analyses suggest that Big4 auditors partially mediate the link between family businesses and their approaches to earnings management. The additional tests conducted in this study highlight the significant role of family-owned firms and Big4 auditors in reducing the likelihood of earnings management practices, mainly when companies are likely to report diminished accounting earnings. The robustness assessments validate the reliability of the conclusions drawn from the preliminary results.

These findings have important implications for agency theory, which traditionally posits that minority shareholders may face expropriation by the controlling family. In this context, this study suggests that the interests of family shareholders align closely with those of the overall firm. One explanation could be that the strong family ties and long-term orientation prevalent in Indonesian family firms can foster an alignment of interests between controlling and minority shareholders, potentially reducing type II agency problems. This alignment motivates them to undertake initiatives that benefit the organization and its stakeholders, frequently enhancing the integrity of financial reporting. This study highlights the role of Big4 auditors in mitigating intra-family agency conflicts that may arise within family-owned enterprises. Our findings are also consistent with family business theory, which underscores the importance of high-quality auditors in addressing family owners’ difficulties in reconciling business objectives with the divergent goals of family members. The expertise and reputation of these auditing firms contribute significantly to promoting transparency in financial reporting.

The insights derived from the analysis have several important implications for various stakeholders. Family firm owners and managers must recognize the inherent value of engaging high-quality auditors that extends beyond mere regulatory compliance. High-quality financial reporting, assured by rigorous audits, can significantly enhance a family firm’s reputation, improve its access to capital markets, and contribute to its long-term sustainability. Regulatory authorities in Indonesia must continue to strengthen and diligently enforce accounting and auditing standards throughout the nation. A critical area of focus should be the enhancement of auditor independence, especially within family-owned businesses, which are prevalent in the country. Furthermore, it is essential to evaluate and potentially revise policies that either encourage or mandate the engagement of high-quality auditors for certain types or sizes of family enterprises. Such measures could improve financial transparency and provide better investor protection, fostering a more trustworthy and robust financial environment. For the auditing profession, it is essential to maintain the highest ethical standards and exercise robust professional skepticism when undertaking audits of family firms. Auditors must understand the unique governance dynamics and potential inherent risks in family-owned businesses operating in the Indonesian context. Providing specialized training and guidance to auditors on the specific challenges and best practices for auditing family firms in emerging markets like Indonesia would further enhance the quality and effectiveness of their work.

This study is subject to certain limitations. Firstly, it exclusively examines family-controlled enterprises, and future research should incorporate non-family businesses to identify any potential discrepancies in the findings. Secondly, family ownership can take various forms, including family-run businesses and those managed by external professionals (Odudu et al., 2019). Future investigations could delve into this aspect of family ownership to enhance understanding of its influence on the quality of financial reporting. Lastly, our research utilizes the Baron and Kenny (1986) methodology to assess the possible mediating effect of audit quality on the relationship between family-controlled firms and their earnings management practices. Future studies may consider employing alternative methods, such as the Bootstrapping approach.