The Effect of the Private Securities Litigation Reform Act of 1995 on Accounting Discretion of Client Managers of Big 6 and Non-Big 6 Auditors

2003 ◽  
Vol 22 (1) ◽  
pp. 93-108 ◽  
Author(s):  
Ho Young Lee ◽  
Vivek Mande
Keyword(s):  
Earnings Management ◽  
Potential Benefit ◽  
Audit Quality ◽  
Discretionary Accruals ◽  
Securities Litigation ◽  
Investor Confidence ◽  
Joint And Several Liability ◽  
Before And After ◽  
Deep Pockets

This study examines how the Private Securities Litigation Reform Act of 1995 (PSLRA) affects auditors' incentives to curtail earnings management by client managers. The most significant reform of PSLRA was the elimination of joint and several liability under which auditors and other parties could be named to lawsuits because of ‘deep pockets’ rather than culpability. While the elimination of joint and several liability provides significant relief to auditors from litigation, opponents of PSLRA argue that it discourages meritorious lawsuits and lowers audit quality, reducing investor confidence in markets. The potential benefit would be greatest for Big 6 firms, who have the highest exposure (largest clients) and significant resources to pay damages. In this paper we argue that if PSLRA induces decreases in audit quality, then we should expect increases in the prevalence of accruals after this Act. To investigate this issue we examine the discretionary accruals of a sample of 2,600 companies three years before and after the act. Our results support this hypothesis. Specifically, we find that after PSLRA income-increasing discretionary accruals rise for auditees of Big 6 firms but not for auditees of non-Big 6 firms.

The moderating role of audit quality on the relationship between auditor reporting and earnings management: empirical evidence from Tunisia

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Fakhfakh Imen ◽  
Jarboui Anis
Keyword(s):  
Earnings Management ◽  
Audit Quality ◽  
Stock Exchange ◽  
Generalized Least Squares ◽  
Content Type ◽  
Audit Opinion ◽  
Before And After ◽  
Audit Opinions ◽  
Auditor Reporting ◽  
The Relationship

PurposeThe purpose of this study is to examine the interrelationship between modified audit opinions and earnings management as measured by discretionary accruals and develop a thorough understanding regarding the moderating effect of audit quality on this relation.Design/methodology/approachThis study uses a sample of Tunisian listed firms on the Tunis Stock Exchange during 2006–2013. Four models are developed and tested by using panel logistic and Feasible Generalized Least Squares (FGLS) regressions.FindingsThe results show that earnings management increases the likelihood of receiving a modified audit opinions. Then firms receiving modified audit opinions manage earnings more than those receiving clean opinions. It is also discovered that audit quality moderates the relationship between audit opinion and earnings management.Practical implicationsThis paper contributes to the literature of both audit and management studies and represents the first effort to examine the relation between audit opinion and earnings management, with audit quality as a moderating variable.Originality/valueThis study extends existing research on earnings management and audit opinion. Thus, this study has the potential to help stakeholders, board of directors, regulators and auditors, who are related with enhancing the supervision of firms and reducing the opportunities given to managers, to engage in earnings management. It constitutes an addition to previous knowledge about audit opinion in the Tunisian context before and after revolution.

Effect of Firm Characteristics and Corporate Governance Practices on Earnings Management: Evidence from Publicly Listed Property Sector Firms in the Philippines

2020 ◽  
pp. 097226292095342
Author(s):  
Cynthia P. Cudia ◽  
Aeson L. Dela Cruz ◽  
Madeleine B. Estabillo
Keyword(s):  
Corporate Governance ◽  
Earnings Management ◽  
Firm Size ◽  
Audit Quality ◽  
Discretionary Accruals ◽  
Cash Flows ◽  
The Philippines ◽  
Firm Characteristics ◽  
Ceo Duality ◽  
Governance Practices

Two types of earnings management (EM), opportunistic and efficient motive, were presented in the literature. This article aimed to investigate the type of EM employed by publicly listed property sector firms in the Philippines. Furthermore, the study also examined the effect of firm characteristics and corporate governance practices on firm’s level of EM using discretionary accruals. In conducting this study, panel data econometric technique, particularly the ordinary least squares was used to determine which among the firm-specific characteristics (profitability, leverage, cash flows from operations and firm size) or corporate governance mechanisms (CEO duality, board size, board independence and audit quality) significantly influence publicly listed property sector firms’ EM activities using discretionary accruals. Results show that these firms employ efficient type of EM. Also, cash flows from operations, firm size and CEO duality are statistically significant predictors of EM for property firms. Except for cash flows from operations, these results contradict with prior studies when the same model was subjected for industrial firms. Such similarities and differences from previous studies warrant for further analysis on the peculiarities and intrinsic characteristics of the industrial and property sector in the Philippines. Such will point to certain policy frameworks in enabling EM to be harnessed in satisfying the firms’ bottom lines.

scholarly journals KUALITAS AUDIT SEBAGAI PEMODERASI PENGARUH MANAJEMEN LABA TERHADAP NILAI PERUSAHAAN

2020 ◽  
Vol 3 (2) ◽  
pp. 174-190
Author(s):  
I Putu Edi Darmawan
Keyword(s):  
Earnings Management ◽  
Firm Value ◽  
Audit Quality ◽  
Stock Exchange ◽  
Sampling Technique ◽  
Discretionary Accruals ◽  
Real Earnings Management ◽  
Manufacturing Companies ◽  
Negative Effect ◽  
The Impact

This study aims to test and analyze the impact of accrual earnings management and real earnings management on firm value empirically. Also, audit quality's role on the effect of accrual earnings management and total earnings management on firm value. The analytical method used is Moderated Regression Analysis (MRA). This research's population is manufacturing companies listed on the Indonesia Stock Exchange during the period 2013 to 2017. The sampling technique used is purposive sampling. This study found that accrual earnings management, which is proxied by discretionary accruals, positively affects firm value. Real earnings management has a negative effect on firm value. Audit quality cannot weaken the effect of accrual earnings management on firm value. However, audit quality weakens the effect of real earnings management on firm value.

Business group affiliation, earnings management and audit quality: evidence from Bangladesh

2017 ◽  
Vol 32 (4/5) ◽  
pp. 427-444 ◽  
Author(s):  
Mohammad Badrul Muttakin ◽  
Arifur Khan ◽  
Dessalegn Getie Mihret
Keyword(s):  
Earnings Management ◽  
Audit Quality ◽  
Earnings Quality ◽  
Investor Protection ◽  
Discretionary Accruals ◽  
Business Group ◽  
Group Affiliation ◽  
Content Type ◽  
Controlling Shareholders ◽  
Business Group Affiliation

Purpose This study aims to investigate the moderating role of audit quality on the association between business group affiliation of firms and earnings management in the South Asian emerging economy of Bangladesh. Design/methodology/approach A usable sample of 917 firm-year observations was drawn from companies listed on the Dhaka Stock Exchange from 2005 to 2013. Data were collected from the annual reports of sample companies. Earnings management was measured using the absolute value of discretionary accruals, and two proxies were used to measure audit quality: auditor size and industry specialisation. Findings Results showed that the level of discretionary accruals is positively associated with business group affiliation status, and higher audit quality reduces this association. This suggests that in environments without strong investor protection, complex ownership structures create opportunities for controlling shareholders to expropriate minority shareholders. The controlling shareholders could then mask this practice through earnings management. The findings also show that in environments lacking strong investor protection, audit quality can help improve earnings quality for group-affiliated firms. Practical implications The results suggest that financial statement users need to consider audit quality for a reasonable evaluation of the earnings quality of business groups. The study also informs regulators by illuminating audit quality as a key area of focus in any effort directed at enhancing stock market efficiency through improved earnings quality in environments where business group affiliation is prevalent. Originality/value This study documents empirical evidence on the moderating effect of audit quality on the positive association between business group affiliation and earnings management.

scholarly journals PERILAKU EARNINGS MANAGEMENT DI SEKITAR PERUBAHAN TARIF PAJAK TAHUN 2008

2016 ◽  
Vol 1 (1) ◽  
Author(s):  
Suyanto Suyanto
Keyword(s):  
Earnings Management ◽  
Income Tax ◽  
Stock Exchange ◽  
Discretionary Accruals ◽  
Earning Management ◽  
Fiscal Year ◽  
Tax Rates ◽  
Tax Rate ◽  
Before And After ◽  
Tax Changes

This study aims to test the level of earning management before and after the income tax rate reduction for 2008 fiscal year. The samples were 21 banking companies listed in Indonesia Stock Exchange, which has provides loans to SMEs. The analysis using paired samplest-test to test these differences of earning management before and after the income tax rates changes. The results showed that earning management in the high tax rate was higher than in the lower tax rate. This shows that management has responded the income tax rates changes to take the opportunity. Keywords: discretionary accruals, earnings management, corporate income tax changes.

scholarly journals Does audit firm size contribute to audit quality? Evidence from two emerging markets

2014 ◽  
Vol 11 (2) ◽  
pp. 108-119 ◽  
Author(s):  
Chen-Chin Wang ◽  
Fan-Hua Kung ◽  
Kai-Hsun Lin
Keyword(s):  
Emerging Markets ◽  
Earnings Management ◽  
Information Asymmetry ◽  
Audit Quality ◽  
Discretionary Accruals ◽  
Audit Firm ◽  
Bid Ask Spread ◽  
Audit Firms ◽  
Quality Evidence

This study investigated whether the Big N audit firms in emerging markets can provide audits of high quality and mitigate information risk, by comparing the audit quality of Big N audit firms in Taiwan with those in China. The two countries share a similar cultural background and engage in frequent economic exchange; however, they have different legal systems and institutional environments. This study followed previous research in the use of bid-ask spread and discretionary accruals as proxy variables for information asymmetry and audit quality. Our results indicate that politico-economic differences between Taiwan and China influence the effectiveness of independent auditors when it comes to the mitigation of information asymmetry. Big N audit firms in Taiwan helped to mitigate information asymmetry and provided audit services of higher quality, whereas Big N firms in China were better able to constrain earnings management. Our results indicate that market concentration and market share have a stronger influence on reputation incentive and audit quality than does the size of an audit firm.

scholarly journals Earnings Management Behavior in Malaysia: The Role of Ownership Structure and External Auditing

2020 ◽  
Vol 19 (3) ◽  
pp. 185-221
Author(s):  
Nor Irdawati Mahyuddin ◽  
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Audit Quality ◽  
Reporting Quality ◽  
Discretionary Accruals ◽  
Real Earnings Management ◽  
Financial Reporting Quality ◽  
External Control ◽  
Listed Firms

"This paper aims to empirically investigate firms’ earnings management (EM) behaviour, representing an issue in the realm of corporate financial reporting. Specifically, it explores the strategic roles of two common governance elements of ownership (managerial, institutional and family) and external audit in shaping the firms’ EM behaviour based on the two common EM attributes of Discretionary Accruals (DA) and Real Activities EM (REM). The analyses based on 227 survived Malaysian listed firms throughout the sixteen-year period from 2001 to 2016 (3,632 firm-year observations) indicate a dynamic EM behaviour depending on the presence of different ownership structures. Whilst a high percentage of family and institutional ownership mitigates DA, it however does not hold true for REM. Further, this paper also shows that the external control mechanism of audit quality is not significant in mitigating both EM attributes. The empirical results suggest that firms facing different challenges would affect the firms’ financial reporting behaviours in their choice of EM. The paper adds to the growing body of empirical knowledge dealing with the determinants of DA and REM from the lens of an emerging economy like Malaysia. KEYWORDS: Earnings management, discretionary accruals, real earnings management, accrual earnings management, financial reporting quality."

scholarly journals The impact of industry specialist audit firms on pricing of discretionary accruals and earnings management: Australian evidence

2012 ◽  
Vol 9 (2) ◽  
pp. 158-177
Author(s):  
Harjinder Singh ◽  
May Sze Khoo
Keyword(s):  
Earnings Management ◽  
Audit Quality ◽  
Negative Relationship ◽  
Discretionary Accruals ◽  
Audit Committees ◽  
Firm Level ◽  
Audit Firms ◽  
The Impact ◽  
Industry Specialist

This paper examines the relationship between the capital market pricing of Australian publicly listed firms and earnings management (proxied by discretionary accruals) during a three-year pooled time-frame of 2008 to 2010. More importantly, the role of industry specialist audit firms on market returns and earnings management relationship is investigated. Main results indicate a significant negative relationship between firm returns and earnings management. However, there is no significance in the role of industry specialist audit firms on the firm returns and earnings management linkage. On the other hand, sensitivity tests indicate that industry specialist audit firms play in significant monitoring role for audit committees with less than fifty percent of their members classified as independent. One major contribution is for regulators (aiming to improve audit quality) to strengthen key firm-level corporate governance mechanisms. Specifically, by placing the consequences from this paper into perspective, there may be a greater likelihood of increased audit quality by altering audit committee’s structure, composition and authority levels.

scholarly journals Impact Of Adopting IAS-IFRS On The Handling Of Accounting Data: The Case Of France

2014 ◽  
Vol 30 (4) ◽  
pp. 1239 ◽  
Author(s):  
Emna Boumediene ◽  
Salem Lotfi Boumediene ◽  
Olfa Nafti
Keyword(s):  
Earnings Management ◽  
Accounting Information ◽  
Discretionary Accruals ◽  
Accounting Data ◽  
Advantages And Disadvantages ◽  
Study Results ◽  
Accounting Numbers ◽  
Before And After ◽  
Relationship Of ◽  
The Impact

<p>In this article we look at the possible relation between the IAS-IFRS, which promotes a present value, and earnings management enhanced by the application of these standards. The aim of this paper is to analyse the impact of the adoption of IAS-IFRS standards on the earnings manipulation used by managers to manipulate their earnings and other accounting information in order to keep the same image in front of investors and shareholders.</p> <p>We are expanding, to the French context, the problem of information content of the discretionary component of accounting income in connection with the application of IAS-IFRS since 2005.</p> <p>On the basis of a sample of 96 firms-year observations, selected from France, that adopted the IAS-IFRS since 2005, we studied the relationship of association between accounting variables the impact of the use of IAS-IFRS on discretionary accruals. In other words, we tried to analyse the advantages and disadvantages of the adoption of IAS-IFRS.</p> <p>The study results show that the manipulation of accounting information existed both before and after the adoption of IAS-IFRS. However, the application of IAS-IFRS accounting standards in France had less motivated managers to manipulate the accounting numbers to increase earnings. Infact, the degree of earnings management is higher before the adoption of IAS-IFRS (the manipulations were 22.06% of discretionary accruals after adoption of IAS-IFRS and 31.28% before).</p>

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