STAP International Journal of Accounting and Business Intelligence

ISSN: 3105-3726

Governance, Incentives, and Earnings Integrity: A Moderation Analysis from the Palestinian Market

by 

Ahmad Hardan

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Published: 2026/02/28

Abstract

This study investigates the impact of board compensation and board incentives on earnings quality among firms operating in Palestine, while examining the moderating role of external audit quality. Motivated by agency theory, the study explores whether compensation structures and incentive systems influence directors’ reporting behavior and their potential involvement in earnings management, income smoothing, and variations in earnings persistence. A quantitative descriptive–analytical approach was employed, using secondary data extracted from annual reports, governance disclosures, and audit information of Palestinian firms. Earnings quality was measured through three dimensions: earnings management (using the Modified Jones Model), earnings persistence (through autoregressive modeling), and income smoothing (via variability analysis). External audit quality was assessed based on auditor independence, reputation, and compliance with professional standards. The empirical findings reveal that both board compensation and board incentives have significant positive effects on earnings manipulation, indicating that current compensation mechanisms may unintentionally encourage short-term reporting behavior. Moreover, the study provides strong evidence that external audit quality moderates these relationships, significantly weakening the impact of compensation and incentives on earnings management. These results confirm the central role of external auditors in enhancing financial statement credibility and mitigating opportunistic behavior. The findings contribute to the corporate governance literature by offering empirical evidence from a developing and structurally constrained market such as Palestine and highlight the need for firms, regulators, and policymakers to strengthen governance frameworks, redesign compensation systems, and enhance audit oversight to improve financial reporting quality.

Keywords

Board compensationBoard incentivesEarnings qualityEarnings managementAudit qualityCorporate governancePalestine.

Governance, Incentives, and Earnings Integrity: A Moderation Analysis from the Palestinian Market is licensed under CC BY 4.0CCBY

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