This study examines the relationship between qualified audit opinions and earnings management, as measured by discretionary accruals (accounting earnings management) and abnormal production cost (real earnings management), for listed firms on the Tehran Stock Exchange (TSE). For this purpose, four hypotheses are developed and tested by using multiple regressions and sample of 2818 firm-years. The results show that qualified opinions are related to accounting earnings management but are not related to real earnings management. Client financial characteristics, such as profitability, size, experience, type of audit opinion in previous year and prior year loss are determinants of the qualified audit opinion decision.

Contribution/ OriginalityThis study is one of few studies which have investigated the linear and nonlinear relationship between inflation, operating cycle and cash holdings in Iranian firms. So, the results of this study could develop the existent literature about this subject in Iran and other areas.