The Relation between Auditors' Fees for Nonaudit Services and Earnings Management

2002 ◽  
Vol 77 (s-1) ◽  
pp. 71-105 ◽  
Author(s):  
Richard M. Frankel ◽  
Marilyn F. Johnson ◽  
Karen K. Nelson
Keyword(s):  
Earnings Management ◽  
Audit Fees ◽  
Discretionary Accruals ◽  
Negative Association ◽  
Present Evidence ◽  
Negatively Associated ◽  
Management Indicators ◽  
Earnings Surprises ◽  
Using Data ◽  
Auditor Fees

This paper examines whether auditor fees are associated with earnings management and the market reaction to the disclosure of auditor fees. Using data collected from proxy statements, we present evidence that nonaudit fees are positively associated with small earnings surprises and the magnitude of discretionary accruals, while audit fees are negatively associated with these earnings management indicators. We also find evidence of a negative association between nonaudit fees and share values on the date the fees were disclosed, although the effect is small in economic terms.

Earnings Management, Litigation Risk, and Asymmetric Audit Fee Responses

2006 ◽  
Vol 25 (1) ◽  
pp. 85-98 ◽  
Author(s):  
Lawrence J. Abbott ◽  
Susan Parker ◽  
Gary F. Peters
Keyword(s):  
Earnings Management ◽  
High Growth ◽  
Audit Fees ◽  
Discretionary Accruals ◽  
Litigation Risk ◽  
Audit Fee ◽  
Growth Firms ◽  
Price Earnings Ratio ◽  
Year 2000 ◽  
Conservative Bias

This study examines the association between audit fees and earnings management, using publicly available fee data. We hypothesize that, due to asymmetric litigation effects, audit fees decrease (increase) with a client's risk of income-decreasing (increasing) earnings management risk. We also hypothesize that the positive relation between income-increasing earnings management risk and audit fees is heightened for clients that are high-growth firms. We test our hypotheses with a sample of 429 public, non-regulated, Big 5 audited companies, using fee data for the year 2000. We find that downward earnings management risk, as estimated by negative (i.e., income-decreasing) discretionary accruals, is associated with lower audit fees. We also document that upward earnings management risk, as estimated by positive discretionary accruals, is associated with higher audit fees and that the interaction of this risk with an industry-adjusted price-earnings ratio has an incrementally significant, positive effect on fees. We interpret our findings as consistent with a conservative bias on the part of auditors. The conservative bias arises from asymmetric litigation risk in which income-increasing discretionary accruals exhibit greater expected litigation costs than income-decreasing discretionary accruals (Simunic and Stein 1996; Palmrose and Scholz 2004; Palmrose et al. 2004; Richardson et al. 2002; Heninger 2001).

scholarly journals RELATIONSHIP BETWEEN AUDITORS' FEES AND EARNINGS MANAGEMENT

2017 ◽  
Vol 57 (2) ◽  
pp. 148-157 ◽  
Author(s):  
ANTONIO LOPO MARTINEZ ◽  
ARQUIMEDES DE JESUS MORAES
Keyword(s):  
Earnings Management ◽  
Research Question ◽  
Audit Fees ◽  
Perception Of Risk ◽  
Audit Firms ◽  
Using Data ◽  
The Relationship

ABSTRACT This study investigates the relationship between audit fees and earnings management in the Brazilian market. In response to the research question, we used a sample of 300 firms listed on the BM&FBovespa for which it was possible to identify the amount paid to the auditors, using data gathered from the Economatica® database and the website of the Brazilian Securities Commission (Comissão Brasileira de Valores Mobiliários [CVM]). We analyzed the regressions with the aim of supporting or refuting the hypothesis that audit firms that charge less for their service tend to be more relaxed regarding earnings management by their client companies. The results support this hypothesis. The main contribution of this study is the possibility of stating that more aggressive earnings management occurs predominantly among firms that pay less than expected for audit services. This study evidences the perception of risk by audit firms and how this is reflected in the audit fees charged.

scholarly journals Do Abnormally High Audit Fees Impair Audit Quality?

2010 ◽  
Vol 29 (2) ◽  
pp. 115-140 ◽  
Author(s):  
Jong-Hag Choi ◽  
Jeong-Bon Kim ◽  
Yoonseok Zang
Keyword(s):  
Financial Reporting ◽  
Normal Level ◽  
Audit Quality ◽  
Audit Fees ◽  
Discretionary Accruals ◽  
Negatively Associated ◽  
Audit Fee ◽  
The Difference

SUMMARY: This study examines whether and how audit quality proxied by the magnitude of absolute discretionary accruals is associated with abnormal audit fees, that is, the difference between actual audit fee and the expected, normal level of audit fee. The results of various regressions reveal that the association between the two is asymmetric, depending on the sign of the abnormal audit fee. For observations with negative abnormal audit fees, there is no significant association between audit quality and abnormal audit fee. In contrast, abnormal audit fees are negatively associated with audit quality for observations with positive abnormal audit fees. Our findings suggest that auditors’ incentives to deter biased financial reporting differ systematically, depending on whether their clients pay more than or less than the normal level of audit fee. Our results are robust to a variety of sensitivity checks.

scholarly journals Association of dietary patterns and body phenotypes in Brazilian adolescents

2021 ◽  
Author(s):  
Ana Elisa Madalena Rinaldi ◽  
Wolney LIsboa Conde ◽  
Carla Cristina Enes
Keyword(s):  
Physical Activity ◽  
Energy Expenditure ◽  
Dietary Patterns ◽  
Cross Sectional Study ◽  
Negative Association ◽  
Food Groups ◽  
Cross Sectional ◽  
Negatively Associated ◽  
Using Data ◽  
Fresh Foods

Objective: To investigate the association between dietary patterns and physical activity and body phenotypes in Brazilian adolescents. Methods: Cross-sectional study using data from a school-based study with 1,022 Brazilian adolescents aged 10 to 19 years. Body phenotypes (BP) and dietary patterns (DP) were defined using principal components analysis. BP was defined using anthropometric, body composition, biochemical, and sexual maturation, and DP from 19 food groups categorized from a food frequency questionnaire containing 58 food items. We performed a scatter plot to describe the relationship between energy expenditure assessed by MET and BP scores. The association between DP and BP, adjusted by sex, age and socioeconomic status, was assessed by linear regression model. Results: We identified five BP (BP1adiposity, BP2puberty, BP3biochemical, BP4muscular, BP5lipids_biochemical) and five DP (DP1ultraprocessed_foods, DP2fresh_foods, DP3bread_rice_beans, DP4culinary_preparation, DP5cakes_rice_beans). There are higher scores of BP_adiposity for obese adolescents, but energy expenditure was similar for obese and non-obese. Physical activity was positively associated with body mass index, BP_adiposity and BP_puberty. We observed negative association between DP_ultraprocessed and BMI, and a positive between DP_fresh_foods. DP_fresh_foods was positively associated with BP_adiposity; DP_ultraprocessed and DP_culinary_preparation were negatively associated with this BP. BP_biochemical was negatively associated with DP_fresh_foods. Conclusion: We identified negative association between DP mainly composed by ultraprocessed foods and fresh foods and BPadiposity. These associations need to be more explored, especially in adolescents, because both DP and BP were defined using multivariate analysis.

scholarly journals Comprehensive Income Reporting and Earnings Management

2017 ◽  
Vol 1 (01) ◽  
pp. 12
Author(s):  
Runita Arum Kanti
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Interaction Effect ◽  
Design Methodology ◽  
Discretionary Accruals ◽  
Reporting Standards ◽  
Negatively Associated ◽  
Financial Reporting Standards ◽  
Comprehensive Income ◽  
Income Reporting

<p>Purpose. This paper aims to identify the association between comprehensive income reporting and earnings management. More specifically, this study examines whether the implementation of comprehensive income reporting regulations, namely SFAS 130 and ASU 2011-05 is associated with a decrease in earnings management.<br />Design/ methodology. Data for all variables is retrieved from Compustat Global for a nine-year sample of 7962 US firms reporting under International Financial Reporting Standards (IFRS) that provide all the necessary data to conduct the study. The Modified Jones Model is used as a proxy to measure earnings management. Comprehensive income figures are retrieved from Compustat. Recalculated (as-if) numbers are used for firm years prior to the implementation of SFAS 130. While as-reported amounts are used for the years where SFAS 130 has been implemented and also the years during the implementation of ASU 2011-05.<br />Findings. Comprehensive income is found to be significantly negatively associated with earnings management through discretionary accruals. Furthermore, the interaction effects indicate that, after the implementation of SFAS 130 and ASU 2011-05, comprehensive income becomesmore negatively associated with discretionary accruals.<br />Relevance. Other than contributing to the growing literature regarding the usefulness of comprehensive income reporting, this research has implications for the FASB in assessing whether they achieved the target of better comprehensive income reporting.</p><p><br />Key words: Comprehensive Income, Earnings management, Interaction effect, Reporting Regulations, SFAS 130, ASU 2011-05.</p>

Does Increased Audit Partner Tenure Reduce Audit Quality?

2008 ◽  
Vol 23 (4) ◽  
pp. 553-572 ◽  
Author(s):  
David L. Manry ◽  
Theodore J. Mock ◽  
Jerry L. Turner
Keyword(s):  
Audit Quality ◽  
Discretionary Accruals ◽  
Financial Statement ◽  
Risk Level ◽  
Negatively Associated ◽  
Audit Firm ◽  
Sarbanes Oxley ◽  
Audit Firms ◽  
Using Data ◽  
International Audit

The Sarbanes-Oxley Act of 2002 requires the lead audit or coordinating partner and the reviewing partner to rotate off the audit every five years so the engagement can be viewed “with fresh and skeptical eyes.” Using data obtained from actual audits by multiple U.S. offices of three large international audit firms, we examine whether there is a relationship between evidence of reduced audit quality, measured by estimated discretionary accruals, and audit partner tenure with a specific client. We find that estimated discretionary accruals are significantly and negatively associated with the lead audit partner's tenure with a specific client. Thus, audit quality appears to increase with increased partner tenure. After controlling for client size and engagement risk, we find audit partner tenure significantly and negatively associated with estimated discretionary accruals only for small clients with partner tenure of greater than seven years, regardless of risk level. We also find that tenure is not significantly associated with estimated discretionary accruals for large clients. This suggests that as partner tenure increases, auditors of small client firms become less willing to accept more aggressive financial statement assertions by managers, and that partner tenure does not affect audit quality for large clients or for shorter-tenure smaller clients. Our results relating to audit partner tenure are consistent with the conclusions about audit firm tenure by Geiger and Raghunandan (2002); Johnson, Khurana, and Reynolds (2002);Myers, Myers, and Omer (2003); and Nagy (2005) and extend their findings by focusing on individual audit partners rather than on audit firms.

scholarly journals The role of auditors in detecting creative accounting: Singaporean and Australian evidence

2011 ◽  
Vol 8 (3) ◽  
pp. 124-144
Author(s):  
Rusmin Rusmin
Keyword(s):  
Earnings Management ◽  
Empirical Evidence ◽  
Discretionary Accruals ◽  
Auditor Independence ◽  
Negative Association ◽  
Creative Accounting ◽  
Auditor Quality ◽  
Auditor Specialization ◽  
Non Audit Services

This study examines the association between the magnitude of earnings management and two characteristics of auditor value - auditor independence and auditor quality. As earnings management, auditor independence and auditor quality are unobservable the study uses absolute discretionary accruals, the ratio of non-audit to total fees and auditor industry specialisation as respective proxies. This study finds no empirical evidence that non-audit services are associated with firms’ discretionary accruals. This result suggests that the provision of non-audit services by the incumbent auditor does not compromise independence. This study presents evidence of a negative association between auditor specialization and the earnings management indicator. This finding infers that the magnitude of earnings management amongst firms engaging the services of a specialist is significantly lower than firms purchasing audit services from a non-specialist auditor

Owner Managers, Family Business, and Earnings Management Preceding Management Buyouts

2021 ◽  
pp. 46-65
Author(s):  
Lokman Tutuncu
Keyword(s):  
Earnings Management ◽  
Family Business ◽  
Family Firms ◽  
Discretionary Accruals ◽  
Family Ownership ◽  
Negatively Associated ◽  
Concentrated Ownership ◽  
The Future ◽  
Management Buyouts ◽  
One Year

This study investigates earnings management prior to management buyouts in a sample of 269 UK private family and non-family firms. It hypothesizes that concentrated ownership in private non-family firms provides sufficient wealth incentives and power to owner/managers to manage earnings upwards before the acquisition, while family owners use management buyouts as a succession tool in the absence of a suitable family successor out of concern for the future of family business. The results are consistent with this prediction. Owner/managers in non-family firms tend to overstate earnings preceding the buyout while family ownership is negatively associated with discretionary accruals one year before the buyout transaction.

Abnormal audit fees and accrual and real earnings management: evidence from UK

2018 ◽  
Vol 16 (3) ◽  
pp. 395-416 ◽  
Author(s):  
Mohammad Alhadab
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Audit Quality ◽  
Audit Fees ◽  
Real Earnings Management ◽  
Direct Impact ◽  
Content Type ◽  
Negatively Associated ◽  
Audit Firms ◽  
The Uk

Purpose This paper aims to examine the relationship between abnormal audit fees and accrual-based and real-based earnings management by using a sample of 1,055 UK firm-year observations from 2006 to 2015. Design/methodology/approach Linear regression was used to test the hypothetical relation between abnormal audit fees and accrual and real earnings management. Following prior research, several proxies have been used to measure abnormal audit fees, accrual earnings management and real earnings management. Findings Abnormal audit fees were negatively associated with real earnings management. A higher level of abnormal audit fees was the major driver of enhanced audit quality, in turn reducing managers’ flexibility to use real earnings management and to manipulate reported earnings. Abnormal audit fees were found to be negatively associated with abnormal discretionary expenses, abnormal production costs and the aggregated measure of real earnings management. Practical implications This paper outlines the importance of considering any abnormal audit fees paid to audit firms. It is expected that the abnormal audit fees might compromise auditor independence and lead to a higher level of earnings management. However, the findings of this paper provide a new insight to many interested parties, e.g. regulators, audit firms, investors and creditors, that abnormal audit fees are associated with higher audit quality and higher financial reporting quality in the UK. Regulators in the meanwhile should reform the audit market by, e.g. revising the types of non-audit services that are provided for the same client, setting a cap on the maximum fees that can charged by auditors and monitoring earnings management practices. Audit firms should take into consideration that any charged abnormal level of audit fees may have a direct impact on audit quality. Originality/value This is the first study to examine the impact of abnormal audit fees on accruals and real earnings management after major regulatory changes that took place in the UK. These major changes are the adoption of the International Financial Reporting Standards in 2005 and the new legislation concerning the ethical standards issued by the UK Audit Practice Board in 2004. These two major changes are expected to have a direct impact on both earnings management and audit fees, notably for the largest public listed firms. This study also focuses on one of the very developed and attractive stock markets in the world, the UK FTSE 350 stock index, that incorporates that largest 350 public firms.

scholarly journals The Differential Choice Of Chaebol In Earnings Management

2015 ◽  
Vol 31 (5) ◽  
pp. 1909 ◽  
Author(s):  
Youngeun Hong ◽  
Taewoo Kim ◽  
Jongkook Park
Keyword(s):  
Earnings Management ◽  
Cash Flow ◽  
Positive Relationship ◽  
Negative Association ◽  
Real Earnings Management ◽  
Negatively Associated ◽  
Real Activities Manipulation

This study examines the methods of the differential choice of Korean chaebol in earnings management. Consistent with our prediction, we find a negative association between chaebols ownership and accrual-based earnings management, whereas there is no clear difference between chaebols ownership and real-based earnings management. Furthermore, we find evidence that chaebols exhibit a strongly positive relationship with overproduction-based real activities manipulation, indicating that chaebols prefer overproduction as a method of real earnings management. From additional analyses, we also find that abnormal cash flow from operations is negatively associated with suspect chaebol firm-years that just met zero.

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