The Influence of Management’s Internal Audit Experience on Earnings Management

56 Pages Posted: 28 Oct 2020 Last revised: 14 Feb 2022

See all articles by Matthew Ege

Matthew Ege

Texas A&M University - Department of Accounting

Timothy A. Seidel

Brigham Young University

Mikhail Sterin

Texas State University

David A. Wood

Brigham Young University - School of Accountancy

Date Written: February 11, 2022

Abstract

We examine whether firms with managers that have prior internal audit experience are less likely to manage earnings. This examination is important because the internal audit function is uniquely positioned to provide experiences that could influence future managerial behavior, including limiting the potential negative repercussions of earnings management. We find that firms with managers that have internal audit experience are associated with lower real earnings management but not accruals-based earnings management. Effects are strongest when managers with internal audit experience have greater power or currently hold financial roles, or when there are a greater number of managers with internal audit experience. The results are robust to including firm fixed effects, using entropy-balancing and performance-matching approaches, using a subsample of firm-years required to have an internal audit function, using a subsample of firms for which we can measure internal audit function quality, and measuring internal audit experience at a previous employer. These results point to an important benefit of manager internal audit experience, as research suggests that real earnings management is common, difficult to detect, not always within the scope of financial reporting regulators, and detrimental to future performance.

Keywords: Internal audit, Management experience, Earnings management, Real earnings management, Accruals-based earnings management

JEL Classification: M41, M43, M49, M55, G34, G38

Suggested Citation

Ege, Matthew and Seidel, Timothy A. and Sterin, Mikhail and Wood, David A., The Influence of Management’s Internal Audit Experience on Earnings Management (February 11, 2022). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3689331 or http://dx.doi.org/10.2139/ssrn.3689331

Matthew Ege

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States

Timothy A. Seidel

Brigham Young University ( email )

Provo, UT 84602
United States

Mikhail Sterin

Texas State University ( email )

TX
United States

David A. Wood (Contact Author)

Brigham Young University - School of Accountancy ( email )

518 TNRB
Brigham Young University
Provo, UT 84602
United States
801-422-8642 (Phone)
801-422-0621 (Fax)

HOME PAGE: http://marriottschool.byu.edu/employee/employee.cfm?emp=daw44

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