Audit Quality and the Pricing of Discretionary Accruals

Posted: 19 Sep 2001

Multiple version iconThere are 2 versions of this paper

Date Written: August 1, 2001

Abstract

Accrual-based earnings is considered superior to cash flows. Accruals let managers communicate their private and inside information and thereby improve the ability of earnings to reflect underlying economic value. However, managers could engage in aggressive reporting of accruals that can seriously undermine the informativeness of reported earnings. Thus, high-accrual firms face greater agency costs relative low-accrual firms. Auditing plays an important role in mitigating these agency costs by constraining opportunistic management of accruals. This study examines whether there is a linkage between audit quality and pricing of discretionary accruals. The findings indicate that market attaches a higher value to the discretionary accruals audited by Big 6 auditors relative to the discretionary accruals audited by non-Big 6 auditors. Further, discretionary accruals of clients of Big 6 auditors have a greater association with future profitability than discretionary accruals of clients of non-Big 6 auditors.

JEL Classification: M41, M43, M49, G14

Suggested Citation

Krishnan, Gopal, Audit Quality and the Pricing of Discretionary Accruals (August 1, 2001). Available at SSRN: https://ssrn.com/abstract=279666

Gopal Krishnan (Contact Author)

Bentley University ( email )

175 Forest Street
Waltham, MA 02452
United States
781-891-2477 (Phone)

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