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Does audit quality matter more for firms with high investment opportunities?

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  • Lai, Kam-Wah
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    Abstract

    This paper examines the association of firms with high investment opportunities with high quality audits (proxied by Big 5 auditors) and whether that association results in a lower likelihood of earnings management. Firms with high investment opportunities may demand high quality audits for curbing earnings management. This is because they have more flexibility in the provision of discretionary accruals that arises from the attendant operating uncertainty which creates particular monitoring problems. Big 5 auditors will provide high quality audits that will constrain earnings management for firms with high investment opportunities because the risk of losing (and hence the likelihood of maintaining) auditor independence is higher. Results show the following. First, firms with high investment opportunities are more likely to hire Big 5 auditors than firms with low investment opportunities. Second, firms with high investment opportunities are more likely to have more discretionary accruals but this relationship is weaker when they have Big 5 auditors. These results are robust to various sensitivity tests.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Accounting and Public Policy.

    Volume (Year): 28 (2009)
    Issue (Month): 1 ()
    Pages: 33-50

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    Handle: RePEc:eee:jappol:v:28:y:2009:i:1:p:33-50

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    Web page: http://www.elsevier.com/locate/jaccpubpol

    Related research

    Keywords: Investment opportunities Audit quality Discretionary accruals Bonding device;

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    Cited by:
    1. Ball, Ray & Jayaraman, Sudarshan & Shivakumar, Lakshmanan, 2012. "Audited financial reporting and voluntary disclosure as complements: A test of the Confirmation Hypothesis," Journal of Accounting and Economics, Elsevier, vol. 53(1), pages 136-166.
    2. Stergios Leventis & Panagiotis Dimitropoulos, 2012. "The role of corporate governance in earnings management: experience from US banks," Journal of Applied Accounting Research, Emerald Group Publishing, vol. 13(2), pages 161-177.
    3. Lai, Kam-Wah, 2011. "The cost of debt when all-equity firms raise sfinance: The role of investment opportunities, audit quality and debt maturity," Journal of Banking & Finance, Elsevier, vol. 35(8), pages 1931-1940, August.
    4. Lai, Kam-Wah, 2013. "Audit Reporting of Big 4 Versus Non-Big 4 Auditors: The Case of Ex-Andersen Clients," The International Journal of Accounting, Elsevier, vol. 48(4), pages 495-524.

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