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The differential effect of accrual-based and real earnings management on audit fees: international evidence

Author

Listed:
  • Ahrum Choi
  • Eugenia Y. Lee
  • Sunyoung Park
  • Byungcherl Charlie Sohn

Abstract

This study investigates the relative importance of accrual-based earnings management (AEM) and real earnings management (REM) as reflected in audit fees. Auditors charge not only for AEM, but also for REM, because it increases the litigation risks and audit complexity they face by dampening firms’ long-term fundamentals; however, whether auditors charge more for AEM or for REM is relatively unexplored. Using data from 24 countries, we find that auditors, on average, charge a higher premium for REM than for AEM. We also find that a strong legal regime increases the audit fee premium charged on both AEM and REM, where the premium for REM increases to a greater extent than it does for AEM. Overall, our results provide novel evidence of the relative importance of the different types of earnings management under different legal regimes to auditors.

Suggested Citation

  • Ahrum Choi & Eugenia Y. Lee & Sunyoung Park & Byungcherl Charlie Sohn, 2022. "The differential effect of accrual-based and real earnings management on audit fees: international evidence," Accounting and Business Research, Taylor & Francis Journals, vol. 52(3), pages 254-290, April.
    • Handle: RePEc:taf:acctbr:v:52:y:2022:i:3:p:254-290
    DOI: 10.1080/00014788.2021.1911779
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    Cited by:

    1. Pascal Flurin Meier & Raphael Flepp & Egon Franck, 2022. "Are Expectations Misled by Chance? Quasi-Experimental Evidence from Financial Analysts," Working Papers 396, University of Zurich, Department of Business Administration (IBW).
    2. Costa, Mabel D. & Habib, Ahsan, 2023. "Local creative culture and audit fees," The British Accounting Review, Elsevier, vol. 55(2).
    3. Fernando Comiran & Subprasiri Siriviriyakul, 2023. "Detecting overproduction: Evidence from inventory write‐down," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(3), pages 3351-3386, September.

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