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
10 Pages Posted: 10 Jul 2013 Last revised: 15 Sep 2013
Date Written: May 28, 2013
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: Suggested Citation