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Auditing, integral approach to quarterly reporting, and cosmetic earnings management

Author

Listed:
  • Liming Guan
  • Daoping He
  • David Yang

Abstract

Purpose - This study examines the effect of auditing and the integral approach to interim reporting on cosmetic earnings management, referred by Kinnunen and Koskela as earnings manipulative behavior to report earnings numbers to achieve key cognitive reference points represented byN×10k. Design/methodology/approach - Using Benford's Law, the analysis employs 182,278 positive quarterly earnings observations and 103,470 negative quarterly observations for all publicly listed US companies from 1993 to 2003. Findings - The empirical results show that firms tended to engage in cosmetic earnings management in each of the four fiscal quarters. More importantly, it was found that the degree of cosmetic earnings management is significantly less severe in the fourth fiscal quarter, which is the only quarter audited, than any of the previous quarters. This result suggests that the auditor plays an important role in reducing the cosmetic earnings manipulative behavior. Originality/value - The findings of the study add more evidence to the ongoing debate about the effectiveness of auditing in preventing earnings management.

Suggested Citation

  • Liming Guan & Daoping He & David Yang, 2006. "Auditing, integral approach to quarterly reporting, and cosmetic earnings management," Managerial Auditing Journal, Emerald Group Publishing Limited, vol. 21(6), pages 569-581, July.
    • Handle: RePEc:eme:majpps:02686900610674861
    DOI: 10.1108/02686900610674861
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    Cited by:

    1. Kanellos S. Toudas & Jinxiu Zhu, 2023. "The Effect of Religion in European Financial Statement Disclosures: A Real Earnings’ Management Case," JRFM, MDPI, vol. 16(11), pages 1-24, October.

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