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Auditor reporting and earnings management: some additional evidence

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  • Kathleen Herbohn
  • Vanitha Ragunathan

Abstract

This paper investigates the reasons that lead to modification of auditors’ opinions. We revisit the conclusions of prior US‐based research on whether a modification highlights likely earnings management activities. Extending this research, we consider an alternate explanation that managers adjust accruals to report earnings that better predict future firm performance, which has the side‐effect of placing them in conflict with their auditors. Our study sample comprises all firms listed on the Australian Stock Exchange over the period 1999–2003. Consistent with prior research, there is no evidence of earnings management leading to an audit opinion modification. However, we do show that firms receiving inherent uncertainty modifications (other than going concern) have greater persistence of earnings (accruals) relative to other firms. This is consistent with the proposition that managers have made policy choices in reporting current earnings, with which their auditors disagree, that will likely result in a greater ability to forecast the firm's future earnings.

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  • Kathleen Herbohn & Vanitha Ragunathan, 2008. "Auditor reporting and earnings management: some additional evidence," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 48(4), pages 575-601, December.
    • Handle: RePEc:bla:acctfi:v:48:y:2008:i:4:p:575-601
    DOI: 10.1111/j.1467-629X.2007.00256.x
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    1. Maria Tsipouridou & Charalambos Spathis, 2014. "Audit opinion and earnings management: Evidence from Greece," Accounting Forum, Taylor & Francis Journals, vol. 38(1), pages 38-54, March.
    2. Filipović Ivica & Šušak Toni & Lijić Andrea, 2021. "The Effect of Auditor Rotation on the Relationship between Financial Manipulation and Auditor’s Opinion," Business Systems Research, Sciendo, vol. 12(1), pages 96-108, May.
    3. Martina K. Linnenluecke & Jacqueline Birt & Xiaoyan Chen & Xin Ling & Tom Smith, 2017. "Accounting Research in Abacus, A&F, AAR, and AJM from 2008–2015: A Review and Research Agenda," Abacus, Accounting Foundation, University of Sydney, vol. 53(2), pages 159-179, June.
    4. Murya Habbash & Salim Alghamdi, 2017. "Audit quality and earnings management in less developed economies: the case of Saudi Arabia," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 21(2), pages 351-373, June.
    5. Chia-Ling Chao & Shwu-Min Horng, 2013. "Asset write-offs discretion and accruals management in Taiwan: the role of corporate governance," Review of Quantitative Finance and Accounting, Springer, vol. 40(1), pages 41-74, January.
    6. Pelucio-Grecco, Marta Cristina & Geron, Cecília Moraes Santostaso & Grecco, Gerson Begas & Lima, João Paulo Cavalcante, 2014. "The effect of IFRS on earnings management in Brazilian non-financial public companies," Emerging Markets Review, Elsevier, vol. 21(C), pages 42-66.
    7. Reguera Alvarado, Nuria & Laffarga Briones, Joaquina & de Fuentes Ruiz, Pilar, 2015. "Modelos de gestión de resultados: un estudio transnacional," Revista de Contabilidad - Spanish Accounting Review, Elsevier, vol. 18(1), pages 11-19.
    8. Mark Wilson & Liang Wui Wang, 2010. "Earnings management following chief executive officer changes: the effect of contemporaneous chairperson and chief financial officer appointments," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 50(2), pages 447-480, June.
    9. Akhgar M. Omid, 2015. "Qualified Audit Opinion, Accounting Earnings Management and Real Earnings Management: Evidence from Iran," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 5(1), pages 46-57, January.
    10. Hu, May & Muhammad, Abdul & Yang, Jingjing, 2022. "Ownership concentration, modified audit opinion, and auditor switch: New evidence and method," The North American Journal of Economics and Finance, Elsevier, vol. 61(C).
    11. Elaheh Moazedi & Ehsan khansalar, 2016. "Earnings Management and Audit Opinion," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 8(4), pages 113-122, April.
    12. Karen Benson & Peter M Clarkson & Tom Smith & Irene Tutticci, 2015. "A review of accounting research in the Asia Pacific region," Australian Journal of Management, Australian School of Business, vol. 40(1), pages 36-88, February.
    13. Piñeiro Sánchez Carlos & Llano Monelos Pablo De & Rodríguez López Manuel, 2013. "A parsimonious model to forecast financial distress, based on audit evidence," Contaduría y Administración, Accounting and Management, vol. 58(4), pages 151-173, octubre-d.
    14. Mark Wilson, 2011. "Earnings Management in Australian Corporations," Australian Accounting Review, CPA Australia, vol. 21(3), pages 205-221, September.
    15. Sanoran, Kanyarat (Lek), 2018. "Auditors’ going concern reporting accuracy during and after the global financial crisis," Journal of Contemporary Accounting and Economics, Elsevier, vol. 14(2), pages 164-178.
    16. Elizabeth Carson & Neil Fargher & Yuyu Zhang, 2016. "Trends in Auditor Reporting in Australia: A Synthesis and Opportunities for Research," Australian Accounting Review, CPA Australia, vol. 26(3), pages 226-242, September.
    17. Stuart, Iris & Shin, Yong-Chul & Cram, Donald P. & Karan, Vijay, 2013. "Review of choice-based, matched, and other stratified sample studies in auditing research," Journal of Accounting Literature, Elsevier, vol. 32(1), pages 88-113.
    18. Mohammed M. Yassin & Dea’a Al-Deen Al-Sraheen & Khaldoon Ahmad Al Daoud & Mohammad Alhadab & Farouq Altahtamouni, 2024. "Variable Considerations in ASC 606, Earnings Management and Business Continuity during Crisis," IJFS, MDPI, vol. 12(1), pages 1-17, January.
    19. Giuseppe Iuliano & Gaetano Matonti, 2015. "Do big 4 audit companies detect earnings management and report it in the audit opinion? Empirical evidence from italian non-listed firms," ESPERIENZE D'IMPRESA, FrancoAngeli Editore, vol. 2015(2), pages 5-43.

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