Earnings Management and Audit Quality in Europe: Evidence from the Private Client Segment Market
Posted: 15 Dec 2005 Last revised: 11 Jan 2009
Date Written: 2008
This paper contributes to the recent literature on financial reporting quality in private (i.e. non-listed) firms (Burgstahler et al., 2006; Ball and Shivakumar, 2005) by examining whether Big 4 audit firms, as high quality auditors, provide a constraint on earnings management in private firms. Considering incentives of auditors to supply a high audit quality in private firms, we expect that Big 4 auditors have an incentive to constrain earning management only in high tax alignment countries, where financial statements are more scrutinized by tax authorities and the probability that an audit failure is detected is higher. Using data on private firms of six European countries, this study provides evidence consistent with this expectation.
Keywords: Audit quality, Earnings management, Investor protection, Private firms
JEL Classification: M41, M43, M47, M49, G38, O57
Suggested Citation: Suggested Citation