Earnings management and audit quality in Europe: Evidence from the private client segment market
AbstractThis paper examines audit quality in private firms across different European countries. Prior research (e.g. Becker et al., 1998; Francis et al., 1999) has shown that audit quality provides a constraint on earnings management for public firms. We investigate whether audit quality differentiation also holds in private firms, constituting the majority of the EU economy and the EU market for audit services. This is an empirical question given that opposing arguments for (and against) the existence of a Big 4 audit quality difference between public and private firms can be given. Moreover, we question whether this audit quality difference, if any, is influenced by institutional factors. Using data on private firms of six European countries, this study provides evidence that, after controlling for self-selection, audit quality differentiation between Big 4 and non-Big 4 audit firms also exists in the private client segment market. However, we do not find support for an audit quality difference between second-tier and small audit firms. Consistent with prior research, we find that private companies domiciled in countries with a stronger investor protection engage less in earnings management. In addition, our results suggest that audit quality and investor protection are substitutes in constraining earnings management in private firms, in the sense that the Big 4 audit quality effect attenuates when investor protection is stronger.
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Bibliographic InfoPaper provided by University of Antwerp, Faculty of Applied Economics in its series Working Papers with number 2005012.
Length: 15 pages
Date of creation: May 2005
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Web page: https://www.uantwerp.be/en/faculties/applied-economic-sciences/
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- Brenda Van Tendeloo & Ann Vanstraelen, 2008. "Earnings Management and Audit Quality in Europe: Evidence from the Private Client Segment Market," European Accounting Review, Taylor & Francis Journals, vol. 17(3), pages 447-469.
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- Mahmoud Moeinadin & Jamal Barzagari Khaneghah & Jamal Tabatabaei Mazraehno, 2013. "Investigating the Effect of Audit Quality on Over-investment Using Measures of Auditor Specialty and Audit Tenure for Listed Companies in Tehran Stock Exchange," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 3(4), pages 229-244, October.
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30322, University Library of Munich, Germany.
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- VAN TENDELOO, Brenda, 2007. "Audit quality and tax-induced earnings management in UK private firms," Working Papers 2007004, University of Antwerp, Faculty of Applied Economics.
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- Hope, Ole-Kristian & Langli, John Christian & Thomas, Wayne B., 2012. "Agency conflicts and auditing in private firms," Accounting, Organizations and Society, Elsevier, vol. 37(7), pages 500-517.
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