Unveiling the Nexus Between Audit Quality and Financial Performance: A Strategic Adaptation Approach Through Earnings Management and Corporate Governance

This study explores the relationship between audit quality and financial performance using a strategic adaptation approach that incorporates the roles of earnings management and corporate governance. Drawing on agency theory, the study examines how audit quality influences financial outcomes, with earnings management functioning as a mediating mechanism and corporate governance as a moderating factor. Data were collected from a sample of 192 audit professionals in Jordan using a structured questionnaire and analyzed through Partial Least Squares Structural Equation Modeling (PLS-SEM). The findings indicate that audit quality significantly enhances financial performance by improving transparency and credibility in financial reporting. Real Earnings Management (REM) positively mediates this relationship, suggesting its use as a strategic and operationally grounded response under audit scrutiny. In contrast, Accrual-based Earnings Management (AEM) does not exhibit a significant mediating effect, highlighting its limited viability in environments characterized by strong audit oversight and regulatory expectations. Furthermore, corporate governance strengthens the audit quality–performance link, demonstrating the interactive value of internal control systems and external audit mechanisms. These results underscore the importance of high-quality audits and robust governance frameworks in achieving financial integrity and performance excellence. This study extends agency theory by embedding earnings management and governance dynamics into the audit-performance relationship. It also offers new theoretical insights by contextualizing REM as a tool of strategic adaptation, rather than pure opportunism. The findings have practical relevance for policymakers and practitioners aiming to enhance audit effectiveness and financial accountability.