Audit Quality, Institutional Environments, and Earnings Management: An Empirical Analysis of New Listings

Abstract

The purpose of this article is to investigate the relationship between audit quality, the role of institutional environments at the provincial level, and earnings management around listing events by using data from 189 newly-listed companies on the Hochiminh Stock Exchange. Audit quality was proxied by Big4, auditor tenure, and auditor industry specialization, while earnings management was quantified as current discretionary accruals. The findings indicated that there was no role for Big 4, auditor tenure, and auditor industry specialization in curbing earnings management, as indicated by the regression result of the full sample. Interestingly, the effect differed substantially across signs of earnings management. The regression results of different forms of earnings management showed a contrast and indicated that the auditor tenure can mitigate the activities of income-increasing activities in the positive model, the auditor tenure and auditor industry specialization can explain the incentives for managing earnings in the negative model. Moreover, this study found no evidence of the impact of provincial governance on earnings management in the full regression model. However, a negative effect of provincial governance on earnings management was found in the case of a motive for upward earnings management, while good governance tends to provide greater benefits to reduce the occurrence of negative earnings management. After controlling for dummy listing and interaction variables that may be related to audit quality and institutional environment, this relationship remains unchanged. Finally, The study’s findings make several contributions to the earnings management literature and are relevant for investors, policymakers, and firms.

Organization capital and modified audit opinion

“…The coefficient b 2 of the control variable A_AC i,t , proxying the absolute value of the discretionary accruals, shows a positive sign, as expected, though it is not significant. This finding, consistent with previous literature (Abid et al, 2018;Bradshaw et al, 2001;Butler et al, 2004;Duong Thi, 2023), indicates that accrual-based earnings management initiatives do not drive the probability of receiving a modified audit opinion. The coefficient b 3 of the control variable B4 i,t , a dummy variable proxying the engagement of a Big-N auditor, shows a negative but not significant sign, contrary to our expectations.…”

“…, 2001; Butler et al. , 2004; Duong Thi, 2023), indicates that accrual-based earnings management initiatives do not drive the probability of receiving a modified audit opinion. The coefficient β 3 of the control variable B4 i,t , a dummy variable proxying the engagement of a Big-N auditor, shows a negative but not significant sign, contrary to our expectations.…”

Is earnings management impacted by audit fees and auditor tenure? An analysis of the Big Four audit firms in the US market

“…At a global level, the results confirm that the longer the auditor tenure, the higher the quality of the results. Therefore, these results are in line with those authors who argue against mandatory auditor rotation, as greater experience at the company facilitates the detection of accounting practices aimed at manipulating financial results (Duong Thi, 2023;Hsu & Liao, 2023;Kuang et al, 2020;Le & Moore, 2023;Lin & Yen, 2022;Nekhili et al, 2022). Therefore, these results contradict those that, based on the theory of influence, advocate the establishment of a mandato-ry auditor rotation (Bamahros & Wan Hussin, 2015;Firth et al, 2012;Tran et al, 2023;Zgarni et al, 2016).…”

“…In fact, this research pro-vides some indication of superior auditing quality for such firms. Likewise, researchers such as Nekhili et al (2022), Duong Thi (2023, Hsu and Liao (2023), and Le and Moore (2023) found that the longer the auditor tenure, the lower the EM. This therefore implies that auditor rotation does not reduce EM.…”

“…The scientific literature offers a large number of studies that focus on external threats to independence, especially on the effect of rotations and audit fees (Duong Thi, 2023;Gandía & Huguet, 2018;Lohwasser & Zhou, 2023;Nekhili et al, 2022;Salehi et al, 2022;Usman et al, 2022), with inconclusive results. Some authors, such as Zgarni et al (2016), Choi et al (2022b) and Hoang et al (2022), have even focused on analyzing these threats within the so-called Big Four accounting firms.…”