The Relationship between Aggressive Real Earnings Management and Current and Future Audit Fees

56 Pages Posted: 28 Aug 2018

See all articles by Adam J. Greiner

Adam J. Greiner

University of Denver - Daniels College of Business

Mark J. Kohlbeck

Florida Atlantic University - School of Accounting

Thomas Joseph Smith

University of South Florida

Date Written: May 24, 2016

Abstract

We examine the relationship between aggressive income-increasing real earnings management (REM) and current and future audit fees. Managers pursue REM activities to influence reported earnings and, as a consequence, alter cash flows and sacrifice firm value. We posit that the implications of REM are considered in auditors’ assessments of engagement risk related to the client’s economic condition and result in higher audit fees. We find that, with the exception of abnormal reductions in SG&A, aggressive income-increasing REM is positively associated with both current and future audit fees. Additional analyses provide evidence consistent with increased effort combined with increased risk contributing to the current pricing effect with increased business risk primarily driving the future pricing effect. We therefore provide evidence that aggressive income-increasing REM activities have a significant influence on auditor pricing behavior consistent with the audit framework associating engagement risk with audit fees.

Keywords: Audit Fees, Business Risk, Audit Risk, Aggressive Real Earnings Management

JEL Classification: G21, G34, M41

Suggested Citation

Greiner, Adam J. and Kohlbeck, Mark J. and Smith, Thomas Joseph, The Relationship between Aggressive Real Earnings Management and Current and Future Audit Fees (May 24, 2016). Auditing: A Journal of Practice & Theory, Vol. 36, No. 1, 2017. Available at SSRN: https://ssrn.com/abstract=3234326

Adam J. Greiner (Contact Author)

University of Denver - Daniels College of Business ( email )

2201 S. Gaylord St
Denver, CO 80208-2685
United States

Mark J. Kohlbeck

Florida Atlantic University - School of Accounting ( email )

777 Glades Avenue
KH 119
Boca Raton, FL 33431-0991
United States
561-297-1363 (Phone)

Thomas Joseph Smith

University of South Florida ( email )

4202 E. Fowler Avenue, BSN 3403
Tampa, FL 33620-5500
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
61
Abstract Views
763
rank
371,417
PlumX Metrics