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The impact of audit quality on earnings rounding-up behaviour: some UK evidence

  • Tom Van Caneghem
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    Previous studies (see, for example, Carslaw, 1988; Thomas, 1989; Niskanen and Keloharju, 2000; Kinnunen and Koskela, 2002; Van Caneghem, 2002) clearly suggest that public companies' managers tend to round up the first digit of reported earnings (i.e. for companies reporting profits). Based on a sample of listed UK companies and employing earnings rounding-up behaviour (henceforth ERUB) as an indication of earnings management, I attempt to determine the impact of differences in audit quality on earnings management. When I rely on the very popular brand-name proxy (i.e. BigFive versus non-BigFive auditors) to capture differences in audit quality, findings are inconsistent with BigFive auditors constraining earnings management practices (i.e. findings suggest ERUB for both BigFive and non-BigFive clients). Employing an alternative proxy (i.e. based on auditors' industry expertise), findings are only weakly consistent with specialist BigFive auditors constraining earnings management (i.e. ERUB) practices.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/0963818042000216866
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    Article provided by Taylor & Francis Journals in its journal European Accounting Review.

    Volume (Year): 13 (2004)
    Issue (Month): 4 ()
    Pages: 771-786

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    Handle: RePEc:taf:euract:v:13:y:2004:i:4:p:771-786
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    1. Healy, Paul M., 1985. "The effect of bonus schemes on accounting decisions," Journal of Accounting and Economics, Elsevier, vol. 7(1-3), pages 85-107, April.
    2. Guay, W. & Kothari, S.P. & Watts, R.L., 1996. "A Market-Based Evaluation of Discretionary-Accrual Models," Papers 96-01, Rochester, Business - Financial Research and Policy Studies.
    3. Ball, Ray & Kothari, S. P. & Robin, Ashok, 2000. "The effect of international institutional factors on properties of accounting earnings," Journal of Accounting and Economics, Elsevier, vol. 29(1), pages 1-51, February.
    4. Fields, Thomas D. & Lys, Thomas Z. & Vincent, Linda, 2001. "Empirical research on accounting choice," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 255-307, September.
    5. 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.
    6. Kinney, William Jr. & McDaniel, Linda S., 1989. "Characteristics of firms correcting previously reported quarterly earnings," Journal of Accounting and Economics, Elsevier, vol. 11(1), pages 71-93, February.
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