Real Earnings Management: Do the Experience and Gender of Big4 Auditors Matters?

2021 ◽  
Vol 6 (3) ◽  
pp. 155-166
Author(s):  
Abdul Halim Chew Abdullah ◽  
Norman Mohd Saleh
Keyword(s):  
Quality Control ◽  
Earnings Management ◽  
Business Environment ◽  
Individual Characteristics ◽  
Moral Judgments ◽  
Real Earnings Management ◽  
Audit Firms ◽  
Prior Literature ◽  
And Gender ◽  
Stringent Quality

Objective - This study examines whether the experience and gender of auditors in Big4 firm in relationship of deterring Real Earnings Management (REM).Different from the majority of previous studies, this study focuses on auditors in Big4 audit firms and real earnings management within Malaysian business environment. Big4 audit firms are associated with high quality audit because of the reputation to uphold, thus adopted stringent quality control and assurance approach, systems and procedures. Once adopted, the effect of individual characteristics may become less important. Thus, it is questionable whether individual characteristics such as auditor experience and gender could still have an influence on the outcomes of an audit, in this case, REM, when the audit firms are Big 4 (assuming very stringent quality control procedures are adopted). Methodology/Technique –This study substantiates prior literature and conducted tests only on companies audited by Big4 audit firms. We also find that auditor experiences confirms to Agency Theory where REM reduces when the experience increases. Data was obtained from the Companies Commission of Malaysia (SSM), DataStream and Bursa Malaysia. Findings - The result confirms prior literature that auditor experience is still an important factor that can limit REM, even in companies audited by the Big4 firms. The results however reveal that Big4 female auditors do not have any significant effect in reducing REM. Novelty -Although female auditors are claimed by Gender Socialization Theory, to have better moral judgments than male auditors, the result shows both genders are equal, at least in limiting REM. Type of Paper: Empirical. JEL Classification: M40; M41; M42 Keywords: Big4 Auditors; Auditor Experience; Real Earnings Management; Auditor Gender; Bursa Malaysia

Signaling Versus Free Cash Flow Theory: What Does Earnings Management Reveal About Dividend Initiation?

2017 ◽  
Vol 34 (2) ◽  
pp. 284-308 ◽  
Author(s):  
Deborah Drummond Smith ◽  
Anita K. Pennathur
Keyword(s):  
Earnings Management ◽  
Cash Flow ◽  
Stock Price ◽  
Flow Theory ◽  
Free Cash Flow ◽  
Real Earnings Management ◽  
Accrual Quality ◽  
Dividend Payout ◽  
Stock Price Reaction ◽  
Prior Literature

We examine earnings manipulation via discretionary accruals and real earnings management prior to the release of cash reserves back to shareholders. Previous research indicates that firms manage earnings upward when they increase dividends, creating a coordinated signal to the market. We study earnings management surrounding dividend initiation to determine whether management is manipulating earnings downward to avoid the discipline imposed by dividends in the years ahead or whether they are signaling to the market. We suggest that the aim of earnings management is not to reduce earnings but that earnings are more likely managed to preserve financial flexibility, create earnings reserves, and postpone shareholders’ expectations for initiating recurring dividends. Rather than signaling with upward earnings management, we find that dividend initiating firms manage earnings downward, consistent with the free cash flow theory. Our results explain findings in prior literature for the surprisingly stable earnings performance and accrual quality in the period just after dividend initiation. Furthermore, the market day stock price reaction is inversely related to earnings management, contradicting the purpose of signaling. We provide evidence that the managerial inertia for initiating dividends represents unique agency concerns compared with an increase in existing dividend payout and to the extent that downward real earnings management does not reverse, we identify a cost to shareholders for the quasi contract of recurring dividend payout.

scholarly journals Auditor report and earnings management: Evidence from FTSE 350 companies in the UK

2016 ◽  
Vol 6 (4) ◽  
pp. 334-344 ◽  
Author(s):  
Mohammad Alhadab
Keyword(s):  
Earnings Management ◽  
Discretionary Accruals ◽  
Real Earnings Management ◽  
Audit Report ◽  
Audit Firms ◽  
The Uk ◽  
Different Characteristics ◽  
The Relationship

This paper examines the relationship between audit report and real-based and accrual-based earnings management based on a UK sample. Prior research has mostly focused on US data and examined the relationship between auditor report (qualified vs. non-qualified) and earnings management (proxied by discretionary accruals), and found evidence that qualified audit report is positively associated with the level of discretionary accruals. Despite the importance of the role of audit firms to constrain the use of earnings management, there is no research to date has examined the relationship between auditor reports and real earnings management activities based on UK sample. This paper therefore fills this gap in the literature by providing the first evidence for UK FTSE 350 companies that auditor report is positively associated with real and accrual earnings management. The paper also provide evidence that firms received qualified audit report share different characteristics as compared to firms received un-qualified audit report.

The impact of audit committee on real earnings management: Evidence from Netherlands

2020 ◽  
Vol 4 (1) ◽  
pp. 33-46 ◽  
Author(s):  
Sana Masmoudi Mardessi ◽  
Yosra Makni Fourati
Keyword(s):  
Corporate Governance ◽  
Earnings Management ◽  
Audit Committee ◽  
Stock Exchange ◽  
Gender Diversity ◽  
Real Earnings Management ◽  
Financial Expertise ◽  
Relevant Topic ◽  
And Gender ◽  
The Impact

This paper aims to examine the effect of the characteristics of an audit committee on real earnings management in the Dutch context. Our sample is composed of 80 non-financial companies listed on the Amsterdam Stock Exchange during the period between 2010 and 2017. Four proxies are used to measure audit committee characteristics, namely, audit committee independence, financial expertise, gender diversity, and audit committee meetings. To test our hypotheses, we use a regression model to identify the influence of a set of audit committee characteristics on real earnings management after controlling for firm audit committee size, leverage, size, loss, growth and board size. Our analyses provide evidence that audit committee independence and gender diversity constrain real earnings management. Our findings also suggest that audit committee financial expertise reduces to some extent the likelihood of engaging in real earnings management. To the best of our knowledge, the Dutch context is not yet explored especially following the issue of the long-awaited new Dutch Corporate Governance Code in 2016 which has been updated for a long period in 2008. Therefore, corporate governance is a relevant topic in the Netherlands. This study contributes geographically to the Audit Committee and earnings management literature that examines another possible method, specifically, real earnings management.

Did Japanese-SOX have an impact on earnings management and earnings quality?

2015 ◽  
Vol 30 (4/5) ◽  
pp. 482-510 ◽  
Author(s):  
Masumi Nakashima ◽  
David A. Ziebart
Keyword(s):  
Corporate Governance ◽  
Earnings Management ◽  
Reporting System ◽  
Earnings Quality ◽  
Business Environment ◽  
Real Earnings Management ◽  
Material Weakness ◽  
Content Type ◽  
Accruals Management

Purpose – The purpose of this paper is to investigate whether Japanese Sarbanes – Oxley Act (J-SOX) impacted earnings management and earnings quality of public firms in Japan. Design/methodology/approach – This archival study compares earnings management and earnings quality of firms that disclose at least one material weakness with a sample matched on size and industry without a material weakness. Findings – The authors investigate whether the differences in regulations, corporate governance and regulatory environment acceptance influence earnings management and earnings management of Japanese listed firms, relative to findings in the USA. They found the Japanese results to be slightly different from the results found in previous USA studies. First, the time-series observations suggest that while accruals management and real earnings management remained unchanged for control firms, accruals management and real earnings management increased for material weaknesses disclosing firms following J-SOX. The regression analyses suggest that accruals management for both the groups is significant in the pre-and post-J-SOX periods, but that real earnings management declined for both the groups post-J-SOX. Second, while, both accruals quality and accuracy of cash flow predictions improved in the post-J-SOX period. Research limitations/implications – The sample of Japanese firms disclosing a material weakness is small because the number of firms that disclose internal control deficiencies is decreasing in Japan. The authors have no evidence that their results are not generalizable to a larger sample and leave this for future research. Practical implications – The authors provide evidence that J-SOX, which does not have a direct reporting system, does not constrain earnings management. Their results drive the regulator to reconsider whether the reporting system works in the Japanese business environment. Additionally, their results show that J-SOX has no effect on earnings management; thus, regulators need to reconsider the governance function of directors and internal auditors. This paper communicates to the world how J-SOX works in Japan through changes in earnings quality and management post J-SOX and the root problems. Originality/value – This paper is the first (of which the authors are aware) to examine whether J-SOX impacted both earnings management and earnings quality in Japan. This paper discusses how the differences in regulations and corporate governance as well as the differences between USA-SOX and J-SOX may explain the results observed in Japan. This paper provides results regarding whether J-SOX improved earnings quality.

Business Environment Uncertainty and Real Earnings Management

2018 ◽  
Vol 25 (6) ◽  
pp. 77-101
Author(s):  
Sungjoon Huh ◽  
◽  
Jiyeon Lee ◽  
Jiwon Hyeon ◽  
Youn-Sik Choi
Keyword(s):  
Earnings Management ◽  
Business Environment ◽  
Real Earnings Management

scholarly journals Investigating The Impact Of Historical Costing On Real Earnings Management: An Empirical Study

2014 ◽  
Vol 13 (2) ◽  
pp. 387 ◽  
Author(s):  
Mohamed H. Abdel-Azim ◽  
Awad E. A. Ibrahim
Keyword(s):  
Earnings Management ◽  
Stock Exchange ◽  
Fair Value ◽  
Business Environment ◽  
Capital Gains ◽  
Income Smoothing ◽  
Real Earnings Management ◽  
Financial Firms ◽  
Debt Contract ◽  
The Impact

The current study examines the relationship between Historical Cost Accounting (HCA) and real earnings management. Accounting literature argues that HCA provides a chance for manipulation. HCA creates large unrealized capital gains/losses that are recognized in income statements only when managers decide to sell such assets. This may induce managers to manipulate earnings. Moreover, managers are able to decide which assets to sell and during which period. Therefore, managers can exploit HCA in real earnings management by interfering in the structuring of asset sale transactions. The current study aims to contribute to the ongoing debate over dropping HCA and replacing it with Fair Value Accounting (FVA). Using a sample of the 71 most actively traded non-financial firms listed on the Egyptian Stock Exchange during 20042010, multiple regression analysis is employed to test two main hypotheses: the income-smoothing hypothesis and the debt/equity hypothesis. The results provide evidence that managers in the Egyptian business environment exploit HCA in real earnings management to some extent. Managers with negative earnings changes tend to use HCA to smooth earnings, while managers with earnings changes do not. Moreover, there is no evidence for managers use of HCA to avoid violating debt contract terms based on accounting numbers.

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 impact of executive compensation and audit quality on accrual-based and real-based earnings management: Evidence from Jordan

2018 ◽  
Vol 15 ◽  
pp. 209-219
Author(s):  
Mohammad M. Alhadab
Keyword(s):  
Earnings Management ◽  
Executive Compensation ◽  
Audit Quality ◽  
Real Earnings Management ◽  
Prior Literature ◽  
Reported Earnings ◽  
The Impact ◽  
New Evidence ◽  
The Relationship

This study investigates the relationship between executive compensation, audit quality, and accrual and real earnings management in Jordan. While prior literature focuses on examining the impact of audit quality on accrual earnings management in Jordan, this study contributes to the literature by investigating the impact of executive compensation on real earnings management activities in Jordan. Further, this study contributes to the literature by investigating the impact of audit quality on real earnings management. By examining a Jordanian sample of 445 firm-year observations over the period from 2000 to 2011, this study presents new evidence that executive compensation is positively associated with accrual earnings management, suggesting that managers engage in accrual earnings management to increase reported earnings and, therefore, increase their pay-performance compensation. Further, the results show that managers who engaged in a higher level of real earnings management (via sales-based manipulation) received a lower level of compensation, suggesting that managers in Jordan are punished for the use of real activities. In terms of audit quality, the results show no evidence that audit quality is associated with accrual and real earnings management in Jordan. This study uses the corrected model of Jones (1991) as suggested by Dechow et al. (1995) is to estimate normal accruals, while the models of Roychowdhury (2006) are used to estimate real earnings management activities.

scholarly journals Audit quality indicators: perceptions of junior-level auditors

2016 ◽  
Vol 31 (8/9) ◽  
pp. 949-980 ◽  
Author(s):  
Veena L. Brown ◽  
Jodi L. Gissel ◽  
Daniel Gordon Neely
Keyword(s):  
Quality Indicators ◽  
Audit Quality ◽  
Three Dimensions ◽  
Future Research ◽  
Audit Process ◽  
Content Type ◽  
Audit Firms ◽  
Public Company ◽  
Prior Literature ◽  
And Gender

Purpose In an effort to develop an audit quality (AQ) framework specific to the US audit market, the Public Company Accounting Oversight Board (PCAOB) recently issued a concept release proposing 28 audit quality indicators (AQIs) along three dimensions: audit professionals, audit process and audit results. Using AQIs initially proposed by the PCAOB, as well as AQIs suggested by prior literature, the authors solicit perceptions from junior-level (senior and staff) auditors to investigate the current state of practice along many of the AQIs relating to audit professionals and audit process. Design/methodology/approach In the study, 78 junior-level auditors responded to the survey. Findings An analysis of the responses suggests auditors engage in activities and audit firms promote conditions that at times improve, and at other times, reduce audit quality. The authors find that individual auditors’ perceptions differ across experience level, gender and audit firm size for certain AQIs. Practical implications The study is useful to the PCAOB because it provides insights to help assess the value of potential AQIs in differentiating AQ. The study is also useful to other regulators because it describes audit staff and seniors’ perceptions of apparent firm and auditor compliance with accounting and auditing standards. Practitioners should find this information useful in helping to identify possible root causes of audit deficiencies, a challenge put forth to firms by the PCAOB. Originality/value This study provides academia with evidence on AQ from practicing auditors, which informs existing and future research along. The study complements existing work by showing how individual auditor characteristics (experience and gender) at the junior levels may impact AQ in practice

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