The Effect of Audit Quality on Earnings Management
The Effect of Audit Quality on Earnings Management

Author: Connie L. Becker

Publisher:

Published: 1997

Total Pages:

ISBN-13:

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This study examines the relation between audit quality and earnings management. Consistent with prior research, we treat audit quality as a dichotomous variable and assume that Big Six auditors are of higher quality than non-Big Six auditors. Earnings management is captured by discretionary accruals that are estimated using a cross-sectional version of the Jones (1991) model. Prior literature suggests that auditors are more likely to object to management's accounting choices that increase earnings (as opposed to decrease earnings) and that auditors are more likely to be sued when they are associated with financial statements that overstate earnings (as compared to understate earnings). Therefore, we hypothesize that clients of non-Big Six auditors report discretionary accruals that increase income relatively more than the discretionary accruals reported by clients of Big Six auditors. This hypothesis is supported by evidence from a sample of 10, 379 Big Six and 2, 179 non-Big Six firm-years. Specifically, clients of non-Big Six auditors report discretionary accruals that are, on average, 1.5 to 2.1 percent of total assets higher than the discretionary accruals reported by clients of Big Six auditors. Also, consistent with earnings management, we find that the mean and median of the absolute value of discretionary accruals are greater for firms with non-Big Six auditors. This also indicates that lower audit quality is associated with more quot;accounting flexibility.quot.

Effects of Audit Quality on Earnings Management and Cost of Equity Capital
Effects of Audit Quality on Earnings Management and Cost of Equity Capital

Author: Hanwen Chen

Publisher:

Published: 2011

Total Pages: 0

ISBN-13:

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We examine the effects of audit quality on earnings management and cost of equity capital for two groups of Chinese firms: state-owned enterprises (SOEs) and non-state-owned enterprises (NSOEs). The differences in the nature of the ownership, agency relations and bankruptcy risks lead SOEs to have weaker incentives than NSOEs to engage in earnings management. As a result, the effect of audit quality in reducing earnings management will be greater for NSOEs than for SOEs. In addition, investors' pricing of information risk as reflected in the cost of equity capital will be more pronounced for NSOEs than for SOEs with high and low audit quality. We find empirical evidence consistent with these hypotheses. Our findings indicate that (1) while high-quality auditors play a governance role in China, that role is limited to a subset of firms, and (2) even under the same legal jurisdiction, the effects of audit quality (in the form of lower earnings management and cost of equity capital) vary across firms with different ownership structures. Our study extends prior research by focusing on the economic consequences of SOEs' and NSOEs' auditor choices and underscores the importance of controlling for ownership type when conducting audit research.

Aggregate Audit Adjustments and Discretionary Accruals
Aggregate Audit Adjustments and Discretionary Accruals

Author: Yung-Ming Hsieh

Publisher:

Published: 2008

Total Pages: 29

ISBN-13:

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This study uses a new measure, aggregate audit adjustment (AAA), of audit quality to reexamine the relation between audit quality and earnings management. The AAA is defined as the difference between pre-audited earning and post-audited earning, which represents an objective measure of the auditors' ability at detecting errors and irregularities in the pre-audited financial statements, and then credibly making necessary adjustments. We predict that there is a negative effect of aggregate audit adjustment on earnings management (measured by discretionary accruals). The empirical result indicates that even in the case of controlling the auditor type (Big 5 vs. Non-Big 5), this relation still holds. This means that higher quality auditors can not only report a lower degree of discretionary accruals but also adjust a larger amount/magnitude of errors (or perhaps unwarranted accruals) included in their client's pre-audited earnings. This finding complements and reinforces the findings of prior research, in particular those provided in Becker et al. (1998).

Earnings Management
Earnings Management

Author: Joshua Ronen

Publisher: Springer Science & Business Media

Published: 2008-08-06

Total Pages: 587

ISBN-13: 0387257713

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This book is a study of earnings management, aimed at scholars and professionals in accounting, finance, economics, and law. The authors address research questions including: Why are earnings so important that firms feel compelled to manipulate them? What set of circumstances will induce earnings management? How will the interaction among management, boards of directors, investors, employees, suppliers, customers and regulators affect earnings management? How to design empirical research addressing earnings management? What are the limitations and strengths of current empirical models?

Audit Quality and Earnings Management in France
Audit Quality and Earnings Management in France

Author: Charles Piot

Publisher:

Published: 2015

Total Pages: 40

ISBN-13:

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This paper investigates the effect of audit quality variables on abnormal accruals in the French context. The sample comprises 255 firm-years observations from SBF 120 Index companies (1999-2001). Abnormal accruals are estimated using a Jones cross-sectional Model, as well as a CFO Model (Jones Model controlling for cash flows). They are considered in signed value, as a proxy for accounting conservatism, and in absolute value, as a proxy for the overall earnings management regardless of income-increasing or -decreasing incentives. Multivariate analyses document that: (1) the presence of a Big Five auditor has no effect on the magnitude of abnormal accruals whether considered in signed or absolute value; (2) the presence of an audit committee (but not the committee's independence) is associated with lower signed abnormal accruals, suggesting more conservative accounting earnings; and (3) in contradiction with positive accounting predictions, leverage has a negative effect on signed abnormal accruals. Implications of these findings are discussed in the French setting with respect to, notably, the lower litigation risk of auditors (vs. the US litigation system), the recommendations on audit committees, the duties of corporate directors, and the traditionally significant role of accounting in the protection of debtholders' interests.

Understanding Accounting Academic Research
Understanding Accounting Academic Research

Author: Stephen R. Moehrle

Publisher: Emerald Group Publishing

Published: 2013-06-25

Total Pages: 298

ISBN-13: 1781907641

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Accounting scandals such as Enron and WorldCom ushered in several regulatory overhauls including Sarbanes-Oxley. This monograph summarizes and synthesize a decade of academic research to develop an evolving dominant explanation around these myriad changes.