THE EFFECT OF CORPORATE GOVERNANCE MECHANISMS ON EARNINGS QUALITY, WITH COMPANY CHARACTERISTICS AND AUDIT QUALITY AS MEDIATING VARIABLES

Abstract

This study examines the direct and indirect effects of corporate governance mechanisms on earnings quality, as well as the mediating roles of firm characteristics and audit quality in this relationship. Drawing on three complementary theoretical frameworks Agency Theory, Contingency Theory, and Signalling Theory the analysis focuses on 25 mining firms listed on the Indonesia Stock Exchange over the period 2020–2024, yielding 125 firm-year observations. Earnings quality is measured comprehensively across four dimensions: persistence, predictability, variability, and smoothness. The results show that corporate governance has a significant negative direct effect on earnings quality, indicating that formal compliance with governance regulations often remains symbolic rather than substantive in addressing industry-specific reporting discretion. However, corporate governance positively and significantly influences both firm characteristics and audit quality; these are the strongest pathways in the model. Firm characteristics further mediate the link between governance and earnings quality, as stronger governance improves reporting reliability indirectly by enhancing operational scale, funding stability, and resource capacity. In contrast, audit quality does not significantly mediate the relationship, nor does it exert a direct effect on earnings quality, suggesting that engaging high-reputation auditors alone cannot resolve inherent limitations in verifying technical estimates such as mineral reserves and exploration costs. These findings provide new context-specific insights for emerging-market extractive industries, highlighting that governance effectiveness depends on aligning formal structures with substantive oversight capacity and industry-specific accounting challenges.