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Do auditors react to real earnings management?

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  • Pacheco-Paredes, Angel Arturo
  • Wheatley, Clark M.

Abstract

Prior research has documented an association between audit effort and real earnings management [REM]. Specifically, audit report lags have been shown to be positively associated with REM. We investigate the auditor and firm characteristics underlying this association. Our results indicate that overall, REM is associated with longer abnormal audit report lags [ARLs]. We find, however, that this association is driven largely by non-accelerated filers. This result holds for both suspect firms (those firms just meeting earnings benchmarks) and non-suspect firms, for specialist as well as non-specialist auditors, and for profit as well as loss firms. Together our results indicate that when auditors are not constrained by the time pressure of accelerated filing, encountering REM is associated with greater audit effort. Our results may indicate, however, that with respect to accelerated filers, abnormal ARLs may be an imperfect proxy for additional effort. These results have implications for both future research and for the impact of accelerated filing deadlines on audit quality.

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  • Pacheco-Paredes, Angel Arturo & Wheatley, Clark M., 2021. "Do auditors react to real earnings management?," Advances in accounting, Elsevier, vol. 55(C).
    • Handle: RePEc:eee:advacc:v:55:y:2021:i:c:s0882611021000535
    DOI: 10.1016/j.adiac.2021.100565
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    1. Knowles, Robin L & Pacheco Paredes, Angel Arturo, 2023. "International culture and audit deficiencies: Evidence from inspection reports of non-US companies listed in the US," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 51(C).

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