Is Enhanced Audit Quality Associated with Greater Real Earnings Management?

46 Pages Posted: 4 Aug 2011 Last revised: 18 Feb 2013

See all articles by Wuchun Chi

Wuchun Chi

National Chengchi University (NCCU) - Department of Accounting

Ling Lei Lisic

Virginia Polytechnic Institute & State University - Pamplin College of Business

Mikhail Pevzner

University of Baltimore - Merrick School of Business

Date Written: November 2010

Abstract

We examine whether firms resort to real earnings management when their ability to manage accruals is constrained by higher quality auditors. In settings involving strong upward earnings management incentives, i.e., for firms that meet or just beat earnings benchmarks and firms that issue seasoned equities, we find that city-level auditor industry expertise and audit fees are associated with higher levels of real earnings management. We find similar, albeit weaker, results for the Big N auditors. Our paper suggests an unintended consequence of higher quality auditors constraining accrual earnings management, namely, firms resorting to potentially even more costly real earnings management. We also find that longer auditor tenure is associated with greater real earnings management, which could suggest merits of mandating audit firm rotation.

Keywords: real earnings management, audit quality, industry expertise, auditor tenure, audit fees

JEL Classification: M40, M41

Suggested Citation

Chi, Wuchun and Lisic, Ling Lei and Pevzner, Mikhail, Is Enhanced Audit Quality Associated with Greater Real Earnings Management? (November 2010). Accounting Horizons, Vol. 25, Issue 2, pp. 315–335, 2011. Available at SSRN: https://ssrn.com/abstract=1904481

Wuchun Chi

National Chengchi University (NCCU) - Department of Accounting ( email )

No. 64, Sec 2
Chih-Nan Road
Wenshan 116, Taipei
Taiwan
886-2-29393091-81031 (Phone)
886-2-29387113 (Fax)

HOME PAGE: http://www3.nccu.edu.tw/~wchi/

Ling Lei Lisic (Contact Author)

Virginia Polytechnic Institute & State University - Pamplin College of Business ( email )

1016 Pamplin Hall
Blacksburg, VA 24061
United States

Mikhail Pevzner

University of Baltimore - Merrick School of Business ( email )

1420 N. Charles St.
Baltimore, MD 21201-5779
United States

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