Auditor quality and earnings management: Singaporean evidence
Purpose – The purpose of this paper is to examine the association between the magnitude of earnings management and auditor quality. It focuses on earnings management in response to mounting pressure amongst investors, policy makers and corporate governance reformists for mechanisms to curb excessive opportunistic behavior amongst corporate management. Auditor quality is the main focus of this study analysis as this factor is considered to be a key determinant of earnings management. Design/methodology/approach – The cross-sectional modified Jones model is used to measure discretionary accruals (the proxy for earnings management). Following prior studies (Pearson and Trompeter, Craswell et al., Hogan and Jeter, DeFond et al., Ferguson and Stokes), the author uses audit firm industry specialization to proxy auditor quality. Findings – The paper presents evidence of a negative association between auditor quality and the earnings management indicator. This finding infers that the magnitude of earnings management amongst firms engaging the services of a specialist is significantly lower than firms purchasing audit services from a non-specialist auditor. In addition, this study also reveals that the magnitude of earnings management is significantly lower amongst companies engaging a Big 4 specialist audit firm relative to companies using the audit services of a Non-Big 4 specialist. Originality/value – Insights drawn from this study may be of assistance to policy makers as they consider the costs and benefits associated with varying levels of audit market concentration. The findings provide stronger support for allowing the audit market to operate in a basic laissez-faire manner without any overbearing interference by policy makers. Given industry specialization is likely to play an increasingly important role in audit value in the future, policy makers and reformists play an important role in encouraging firms to use the services of, especially, Big 4 specialist auditors.
Volume (Year): 25 (2010)
Issue (Month): 7 (July)
|Contact details of provider:|| Web page: http://www.emeraldinsight.com|
|Order Information:|| Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK|
Web: http://emeraldgrouppublishing.com/products/journals/journals.htm?id=maj Email:
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Press, Eric G. & Weintrop, Joseph B., 1990. "Accounting-based constraints in public and private debt agreements : Their association with leverage and impact on accounting choice," Journal of Accounting and Economics, Elsevier, vol. 12(1-3), pages 65-95, January.
- Healy, Paul M. & Palepu, Krishna G., 1990. "Effectiveness of accounting-based dividend covenants," Journal of Accounting and Economics, Elsevier, vol. 12(1-3), pages 97-123, January.
- Bhattacharya, Utpal & Daouk, Hazem & Welker, Michael, 2003. "The World Price of Earnings Opacity," Working Papers 127185, Cornell University, Department of Applied Economics and Management.
- Vincent E. Owhoso, 2002. "Error Detection by Industry-Specialized Teams during Sequential Audit Review," Journal of Accounting Research, Wiley Blackwell, vol. 40(3), pages 883-900, 06.
- Sweeney, Amy Patricia, 1994. "Debt-covenant violations and managers' accounting responses," Journal of Accounting and Economics, Elsevier, vol. 17(3), pages 281-308, May.
- Mak, Y.T. & Kusnadi, Yuanto, 2005. "Size really matters: Further evidence on the negative relationship between board size and firm value," Pacific-Basin Finance Journal, Elsevier, vol. 13(3), pages 301-318, June.
- Ryan Davidson & Jenny Goodwin-Stewart & Pamela Kent, 2005. "Internal governance structures and earnings management," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 45(2), pages 241-267.
- Rusmin & J-L.W. Mitchell Van Der Zahn & Greg Tower & Alistair M. Brown, 2006. "Auditor independence, auditor specialisation and earnings management: further evidence from Singapore," International Journal of Accounting, Auditing and Performance Evaluation, Inderscience Enterprises Ltd, vol. 3(2), pages 166-193.
- Anil Arya & Shyam Sunder & Jonathan Glover, 2002. "Are Unmanaged Earnings Always Better for Shareholders?," Yale School of Management Working Papers ysm295, Yale School of Management, revised 01 Feb 2003.
- DeFond, Mark L. & Park, Chul W., 1997. "Smoothing income in anticipation of future earnings," Journal of Accounting and Economics, Elsevier, vol. 23(2), pages 115-139, July.
- Leuz, Christian & Nanda, Dhananjay & Wysocki, Peter D., 2003. "Earnings management and investor protection: an international comparison," Journal of Financial Economics, Elsevier, vol. 69(3), pages 505-527, September.
- Holthausen, Robert W. & Larcker, David F. & Sloan, Richard G., 1995. "Annual bonus schemes and the manipulation of earnings," Journal of Accounting and Economics, Elsevier, vol. 19(1), pages 29-74, February.
- DeFond, Mark L. & Jiambalvo, James, 1994. "Debt covenant violation and manipulation of accruals," Journal of Accounting and Economics, Elsevier, vol. 17(1-2), pages 145-176, January.
- Craswell, Allen T. & Francis, Jere R. & Taylor, Stephen L., 1995. "Auditor brand name reputations and industry specializations," Journal of Accounting and Economics, Elsevier, vol. 20(3), pages 297-322, December.
- DeAngelo, Linda Elizabeth, 1981. "Auditor size and audit quality," Journal of Accounting and Economics, Elsevier, vol. 3(3), pages 183-199, December.
- Bernard, Victor L. & Skinner, Douglas J., 1996. "What motivates managers' choice of discretionary accruals?," Journal of Accounting and Economics, Elsevier, vol. 22(1-3), pages 313-325, October.
- Eng, L. L. & Mak, Y. T., 2003. "Corporate governance and voluntary disclosure," Journal of Accounting and Public Policy, Elsevier, vol. 22(4), pages 325-345.
When requesting a correction, please mention this item's handle: RePEc:eme:majpps:v:25:y:2010:i:7:p:618-638. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Louise Lister)
If references are entirely missing, you can add them using this form.