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Earnings Management, Audit Quality and Legal Environment: An International Comparison

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  • Mehmet Ünsal Memis

    (Çukurova University, Faculty of Economic and Administrative Sciences,Department of Business Administration, Adana, Turkey.)

  • Emin Hüseyin Cetenak

    (Çukurova University, Faculty of Economic and Administrative Sciences, Department of Business Administration, Adana, Turkey.)

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    Abstract

    This paper investigates the relationship between earnings management-audit quality and earnings management-legal system quality by using 1507 firms’ observations from listed companies in private firms across different 8 emerging countries. Consistent with previous research, differentiation between Big 4 and non-Big 4 audit firms are used as a audit quality proxy and discretionary accruals are used to measure the earnings management. According to the results, only for Brazilian and Mexican companies, there is significant relationship between the discretionary accruals and audit quality. For the other countries there is not significant relationship. Furthermore efficiency of the legal system helps decrease earnings management incentives. Along with results, the big four auditors do not constrain the earnings management incentives in every emerging country but effective legal system does. In this analysis we used other earnings management related variables like the size of the firms, leverage, lagged ROA of the firms which have loss in the previous year and Tobin Q as control variables

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    Bibliographic Info

    Article provided by Econjournals in its journal International Journal of Economics and Financial Issues.

    Volume (Year): 2 (2012)
    Issue (Month): 4 ()
    Pages: 460-469

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    Handle: RePEc:eco:journ1:2012-04-8

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    Web page: http://www.econjournals.com

    Related research

    Keywords: Audit Quality; Earnings Management; Legal Enforcement;

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    References

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    1. Dye, Ronald A, 1993. "Auditing Standards, Legal Liability, and Auditor Wealth," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 101(5), pages 887-914, October.
    2. Leuz, Christian & Nanda, Dhananjay & Wysocki, Peter D., 2003. "Earnings management and investor protection: an international comparison," Journal of Financial Economics, Elsevier, Elsevier, vol. 69(3), pages 505-527, September.
    3. RAFAEL LaPORTA & FLORENCIO LOPEZ-de-SILANES & ANDREI SHLEIFER & ROBERT W. VISHNY, . "Legal Determinants of External Finance,"," CRSP working papers, Center for Research in Security Prices, Graduate School of Business, University of Chicago 324, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
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    8. VAN TENDELOO, Brenda & VANSTRAELEN, Ann, 2005. "Earnings management and audit quality in Europe: Evidence from the private client segment market," Working Papers 2005012, University of Antwerp, Faculty of Applied Economics.
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    11. Masahiro Enomoto & Fumihiko Kimura & Tomoyasu Yamaguchi, 2012. "Accrual-Based and Real Earnings Management: An International Comparison for Investor Protection," Discussion Paper Series, Research Institute for Economics & Business Administration, Kobe University DP2012-13, Research Institute for Economics & Business Administration, Kobe University, revised Mar 2013.
    12. Boonlert-U-Thai, Kriengkrai & Meek, Gary K. & Nabar, Sandeep, 2006. "Earnings attributes and investor-protection: International evidence," The International Journal of Accounting, Elsevier, Elsevier, vol. 41(4), pages 327-357, 012.
    13. Stijn Claessens & Simeon Djankov & Joseph P. H. Fan & Larry H. P. Lang, 2002. "Disentangling the Incentive and Entrenchment Effects of Large Shareholdings," Journal of Finance, American Finance Association, American Finance Association, vol. 57(6), pages 2741-2771, December.
    14. Jerry Sun & Guoping Liu, 2011. "Client-specific litigation risk and audit quality differentiation," Managerial Auditing Journal, Emerald Group Publishing, Emerald Group Publishing, vol. 26(4), pages 300-316, May.
    15. Bartov, Eli & Gul, Ferdinand A. & Tsui, J.S.L.Judy S. L., 2000. "Discretionary-accruals models and audit qualifications," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 30(3), pages 421-452, December.
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