Audit quality and earnings management for Taiwan IPO firms

Abstract

Purpose -This paper investigates the relationship between audit quality (as measured by auditor size and industry specialization) and earnings management (as measured by unexpected accruals) for Taiwan IPO firms. Design/methodology/approach -First uses unexpected accruals in the modified Jones model to measure earnings management in the IPO process. Then uses auditor type (big five versus non-big five) and industry specialist to measure audit quality. The hypothesis predicts that Taiwanese firms with higher quality auditors engage less in earnings management in the IPO process. The sample consists of 367 new issues between 1999 and 2002 from the Taiwan Economic Journal database. Findings -It is found that big five auditors are related to less earnings management in the IPO year in Taiwan. This shows that higher quality auditors constrain earnings management for Taiwan IPO firms.Research limitations/implications -The finding shows that high quality auditors constrain earnings management and provide more precise information. This is important, given that management has incentive to engage in earnings management in the IPO process to garner greater proceeds and at-issue earnings management is negatively related to post-issue earnings performance and stock returns. Practical implications -The research might be of interest to investors in IPO firms, given that at-issue unexpected accruals are opportunistic. Originality/value -The study contributes to the literature in that it shows that audit firm size is an important determinant in earnings management for Taiwan IPO firms.

Corporate Governance, Family Ownership and Earnings Management: Emerging Market Evidence

“…The first suggests that big firms with a high chance of receiving political attention are more likely to manipulate earnings to avoid political scrutiny (Jeong & Rho, 2004), and some studies evidence that asset size correlates positively with abnormal accruals (Dechow & Dichev, 2002;Chtourou & Bedard, 2001;Prawitt et al, 2009). The second view suggests that larger firms are more visible so are less likely to manage earnings (Chen, Lin, & Zhou, 2005), and other studies' findings support this prediction (Davidson et al, 2005;Wang, 2006). Another control variable, Leverage, is measured as total debt divided by total assets.…”

“…Following prior research (Davidson et al, 2005;Baxter et al, 2009;Felo, Krishnamurthy, & Solieri, 2003;Xie et al, 2003), the current study measures audit committee size simply by the numbers of audit committee members. Again following prior studies (Chtourou & Bedard, 2001;Jeong & Rho, 2004;Davidson et al, 2005;Chen et al, 2005;Carcello et al, 2006;Piot & Janin, 2007;Baxter & Cotter, 2009;Chang & Sun, 2010), the current study uses Big4 as a control variable which takes the value of 1 if the firm is audited by one of the "big four" auditing firms, otherwise 0. The study controls for the effects of large block holders and measures ConcOwner as the percentage of shares held by the largest three substantial shareholders with more than 5 percent of the shares.…”

“…This is because prior research provides evidence that measurement of discretionary accruals can be a problem for firms which have extreme financial performance (Dechow et al, 1995;Kothari et al, 2005). Following prior studies, Loss is also added as a control variable to clarify managers' incentive to avoid losses (Chen et al, 2005;Prawitt et al, 2009;Baxter, 2009). Burgstahler and Dichev (1997) state that firms manage reported earnings to avoid reporting earnings decreases and losses.…”

“…Another control variable, Leverage, is measured as total debt divided by total assets. DeFond and Jiambalvo (1994) and Iatridis and Kadorinis (2009) provide evidence that managers manipulate earnings to avoid getting close to debt covenants, and this variable is widely used in EM studies (Peasnell et al, 1998;Klein, 2002;Park & Shin, 2004;Davidson et al, 2005;Chen et al, 2005;Carcello et al, 2006;Prawitt et al, 2009;Baxter et al, 2009;Chang & Sun, 2010). Matsumoto (2002) claims that managers of high-growth firms have major incentives to avoid missing earnings expectations, creating an extra incentive for them to manage earnings.…”

Audit Quality and Earnings Management among Nigerian Listed Deposit Money Banks

“…The results indicate that auditing the financial statements of companies by large audit firms (high audit quality) is not effective in reducing the manipulation of discretionary accruals by managers and cannot control the opportunistic behaviours of managers. The obtained results are consistent with the research results of Jeong and Rho [13] and Abdul and Ali [14], Memis and Cetenak [15] but, contrary to research results of Chen et al [16], Becker et al [17] and Zgarni et al [18]. provide evidence that auditors' industry specialization affects negatively the accruals earnings management, as documented in prior studies [17,19].…”