The Interplay between Related Party Transactions and Earnings Management: The Role of Audit Quality

Journal of International Accounting, Auditing and Taxation, Vol. 32, pp.47-60

45 Pages Posted: 2 Mar 2018 Last revised: 3 Oct 2018

See all articles by Moataz El-Helaly

Moataz El-Helaly

Olayan School of Business, The American University of Beirut

Ifigenia Georgiou

Aston University - Aston Business School

Alan Lowe

School of Accounting; Aston University - Aston Business School - Finance and Accounting Group

Date Written: February 22, 2018

Abstract

Related party transactions (RPTs) are considered a potential tool for shareholders’ wealth expropriation, as they offer opportunities to transfer wealth between the firm and related parties. While considerable evidence has been reported on the negative consequences of RPTs (declines in shareholder wealth, lowered accounting quality and an increased likelihood of financial fraud), studies examining how RPTs may be used in earnings management are relatively rare. Therefore, we aim to provide evidence on how RPTs and earnings management are related. Consequently, we investigate whether RPTs are associated with real or accrual earnings management or used as a third alternative to manage reported earnings. Our study employs a sample of firms listed on the Athens Stock Exchange during the period between 2009 and 2014. Our results confirm that, on average, real earnings management and RPTs appear to be used as substitutes. However, additional tests show that this substitution is not significant if the firm is audited by one of the Big 4 auditors. Contrarily, we do not find any significant association between accrual earnings management and RPTs. Our evidence adds to understanding around the interplay between RPTs and earnings management and how audit quality can affect the relationships investigated.

Keywords: Related Party Transaction, Earnings Management, Greece

JEL Classification: M41, M42, M48, K20

Suggested Citation

El-Helaly, Moataz and Georgiou, Ifigenia and Lowe, Alan, The Interplay between Related Party Transactions and Earnings Management: The Role of Audit Quality (February 22, 2018). Journal of International Accounting, Auditing and Taxation, Vol. 32, pp.47-60. Available at SSRN: https://ssrn.com/abstract=3128124

Moataz El-Helaly (Contact Author)

Olayan School of Business, The American University of Beirut ( email )

Riad El Solh
Beirut
Lebanon

Ifigenia Georgiou

Aston University - Aston Business School ( email )

Aston Triangle
Birmingham, B47ET
United Kingdom

Alan Lowe

School of Accounting ( email )

124 La Trobe Street
Melbourne, 3000
Australia

Aston University - Aston Business School - Finance and Accounting Group ( email )

Aston Triangle
Birmingham, B47ET
United Kingdom

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