Audit Quality and Earnings Management in France

40 Pages Posted: 2 Nov 2005

See all articles by Charles Piot

Charles Piot

Univ. Grenoble Alpes; University of Angers - Centre de Recherches Appliquées à la Gestion (CERAG)

Rémi Janin

University of Grenoble and CERAG-CNRS

Date Written: July 2005

Abstract

This paper investigates the effect of audit quality variables on abnormal accruals in the French context. The sample comprises 255 firm-years observations from SBF 120 Index companies (1999-2001). Abnormal accruals are estimated using a Jones cross-sectional Model, as well as a CFO Model (Jones Model controlling for cash flows). They are considered in signed value, as a proxy for accounting conservatism, and in absolute value, as a proxy for the overall earnings management regardless of income-increasing or -decreasing incentives. Multivariate analyses document that: (1) the presence of a Big Five auditor has no effect on the magnitude of abnormal accruals whether considered in signed or absolute value; (2) the presence of an audit committee (but not the committee's independence) is associated with lower signed abnormal accruals, suggesting more conservative accounting earnings; and (3) in contradiction with positive accounting predictions, leverage has a negative effect on signed abnormal accruals. Implications of these findings are discussed in the French setting with respect to, notably, the lower litigation risk of auditors (vs. the US litigation system), the recommendations on audit committees, the duties of corporate directors, and the traditionally significant role of accounting in the protection of debtholders' interests.

Keywords: Earnings management, accruals, audit quality, audit committee, corporate governance

JEL Classification: G34, M41, M43, M49, K22, M47

Suggested Citation

Piot, Charles and Janin, Rémi, Audit Quality and Earnings Management in France (July 2005). Available at SSRN: https://ssrn.com/abstract=830484 or http://dx.doi.org/10.2139/ssrn.830484

Charles Piot (Contact Author)

Univ. Grenoble Alpes ( email )

Grenoble Cedex 9, F-38040
France

University of Angers - Centre de Recherches Appliquées à la Gestion (CERAG)

150 rue de la Chimie, BP47
Grenoble Cedex 9, 38040
France

Rémi Janin

University of Grenoble and CERAG-CNRS ( email )

IUT2, Place de Verdun
Grenoble, 38000
France

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