This study examines the relation between audit quality and earnings management. Consistent with prior research, we treat audit quality as a dichotomous variable and assume that Big Six auditors are of higher quality than non‐Big Six auditors. Earnings management is captured by discretionary accruals that are estimated using a cross‐sectional version of the Jones 1991 model. Prior literature suggests that auditors are more likely to object to management's accounting choices that increase earnings (as opposed to decrease earnings) and that auditors are more likely to be sued when they are associated with financial statements that overstate earnings (as compared to understate earnings). Therefore, we hypothesize that clients of non‐Big Six auditors report discretionary accruals that increase income relatively more than the discretionary accruals reported by clients of Big Six auditors. This hypothesis is supported by evidence from a sample of 10,379 Big Six and 2,179 non‐Big Six firm years. Specifically, clients of non‐Big Six auditors report discretionary accruals that are, on average, 1.5‐2.1 percent of total assets higher than the discretionary accruals reported by clients of Big Six auditors. Also, consistent with earnings management, we find that the mean and median of the absolute value of discretionary accruals are greater for firms with non‐Big Six auditors. This result also indicates that lower audit quality is associated with more “accounting flexibility”.

This paper tests models of mutual fund market timing that allow the manager's payo! function to depend on returns in excess of a benchmark, and distinguish timing based on publicly available information from timing based on "ner information. We simultaneously estimate parameters which describe the public information environment, the manager's risk aversion, and the precision of the fund's market-timing signal. Using a sample of more than 400 U.S. mutual funds for 1976}94, our "ndings suggest that mutual funds behave as highly risk averse, benchmark investors. Conditioning on public information improves the model speci"cation. After controlling for the public 0304-405X/99/$ -see front matter 1999 Elsevier Science S.A. All rights reserved. PII: S 0 3 0 4 -4 0 5 X ( 9 9 ) 0 0 0 0 6 -9 information, we "nd no evidence that funds have signi"cant market-timing ability.1999 Elsevier Science S.A. All rights reserved.JEL classi"cation: D82; G11; G12; G14; G23

This paper tests models of mutual fund market timing that allow the manager's payo! function to depend on returns in excess of a benchmark, and distinguish timing based on publicly available information from timing based on "ner information. We simultaneously estimate parameters which describe the public information environment, the manager's risk aversion, and the precision of the fund's market-timing signal. Using a sample of more than 400 U.S. mutual funds for 1976}94, our "ndings suggest that mutual funds behave as highly risk averse, benchmark investors. Conditioning on public information improves the model speci"cation. After controlling for the public 0304-405X/99/$ -see front matter 1999 Elsevier Science S.A. All rights reserved. PII: S 0 3 0 4 -4 0 5 X ( 9 9 ) 0 0 0 0 6 -9 information, we "nd no evidence that funds have signi"cant market-timing ability.1999 Elsevier Science S.A. All rights reserved.JEL classi"cation: D82; G11; G12; G14; G23