Effect of Auditor Opinion on Discretionary Accruals Behavior of Distressed Firms: Empirical Evidences from Iran

African Journal of Business Management, Vol. 7(20), pp. 1956-1965, May 2013

50+20 Research Paper

10 Pages Posted: 10 Jul 2013 Last revised: 15 Sep 2013

See all articles by Hossein Etemadi

Hossein Etemadi

Tarbiat Modares University, Management & Economics Faculties

Hassan Farajzadeh Dehkordi

School of Economic Sciences; Tarbiat Modares University

Kourosh Amirkhani

Securities and Exchange Organization

Date Written: May 28, 2013

Abstract

The present study attempts to determine the discretionary accruals behavior (as a proxy for earnings management) of Iranian failing firms (defined here as pre-bankruptcy firms) in years prior to bankruptcy, and factors that lead to this behavior as well. For this purpose, we selected a sample composed of 68 bankrupt firms and 68 non-bankrupt firms (matched in terms of firms’ industry and size) and examined the magnitude of discretionary accruals in a period of 5 years prior to bankruptcy for each firm. The results showed that: first, during the distressed period, failing firms are more engaged in earnings management than non-failing firms are; secondly, failing firms utilize decreasing earnings management - distressed firms use accruals to understate income figures; and most importantly, in failing firms, evidences showed a significant relationship between decreasing earnings management and auditor opinion. These results suggest that under the pressure of audit opinion, distressed firms are compelled to employ conservatism procedures in earnings reporting.

Keywords: Auditor opinion, bankruptcy, discretionary accruals, distressed firms, earnings management

JEL Classification: G32, M41

Suggested Citation

Etemadi, Hossein and Dehkordi, Hassan Farajzadeh and Amirkhani, Kourosh, Effect of Auditor Opinion on Discretionary Accruals Behavior of Distressed Firms: Empirical Evidences from Iran (May 28, 2013). African Journal of Business Management, Vol. 7(20), pp. 1956-1965, May 2013; 50+20 Research Paper. Available at SSRN: https://ssrn.com/abstract=2290622

Hossein Etemadi (Contact Author)

Tarbiat Modares University, Management & Economics Faculties ( email )

TMU Humanities Faculty
Tehran, Tehran 134565
Iran

Hassan Farajzadeh Dehkordi

School of Economic Sciences ( email )

Tehran
Iran

Tarbiat Modares University ( email )

Jalal Ale Ahmad Highway
Tehran, Tehran 14115-111
Iran

Kourosh Amirkhani

Securities and Exchange Organization ( email )

15 Mollasadra Avenue
Vanak Square
Tehran
Iran

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