DIGITAL TRANSFORMATION ON EARNINGS MANAGEMENT, AND FINANCIAL PERFORMANCE: MODERATED BY THE AUDIT COMMITTEE EFFECTIVENESS

Abstract

This paper investigates the impact of digital transformation on earnings management and financial performance, including the effectiveness of audit committees in this relationship. An Indonesia Stock Exchange (IDX) of 378 companies and 3.402 observations, for the period from 2016 to 2024, was analyzed. The findings show a positive and significant impact of digital transformation on earnings management and financial performance. However, it has not yet effectively reduced earnings management practices, but it has been effective in improving financial performance. Another finding shows that the audit committee’s effectiveness significantly reduces earnings management practices and improves financial performance. Moderation analysis shows that the effectiveness of the audit committee strengthens the relationship between digital transformation and financial performance. This indicates that the effectiveness of the audit committee plays a role in digital transformation, thereby improving financial performance. This result offers a new perspective for organizations. The implementation of digital transformation requires strong internal controls to effectively prevent opportunities in earnings management practices, by the managerial opportunism that utilize discretionary accrual methods. Further research is needed to investigate funding investments and the development of application technology components, the integration of digital transformation across all divisions and departments, and the limitation of management's access to digital technology data to restrict management's ability to apply earnings management practices.