Choice of auditors and earnings management during the Asian financial crisis

Abstract

Purpose -This study sets out to examine the effect of the choice of auditors in constraining earnings management within a rule-based reporting framework during the Asian financial crisis. Design/methodology/approach -Using the iterative seemingly unrelated regression methodology, 383 firm-observations of service-oriented listed companies in Singapore are analysed. Findings -The results show that service-oriented companies engage in income decreasing earnings management during the crisis period. More importantly, the results indicate that only the Big-6 firms are able to significantly constrain the earnings management of managers of such companies. Practical implications -The ability of Big-6 firms to constrain earnings management is perceived to add credibility to the quality of reported earnings, and hence contributes to the competitive advantage of the Big-6 firms in the market for auditing services. Originality/value -The evidence contributes to the literature on corporate governance and the competitiveness of the market for audit services in the context of an economy-wide financial crisis from an Asian perspective.

How has the financial crisis affected earnings management? A European study

“…In most of the countries, the abnormal accruals after the crisis are more negative than the ones before the crisis, suggesting that the gap between the total accruals that the firms would have reported if the crisis had never burst and the effectively reported ones increases. This evidence that suggests a decrease of earnings management is probably due to both the high quality of financial reporting (LaFond and Watts, 2008;Francis et al, 2013) and audit quality over a financial crisis (Chia et al, 2007). All these results validate our research hypothesis that by analysing non-financial entities listed in the 15 countries that belong to the EU at the time of issuance of EU Regulation 1606/2002, accrual-accounting earnings management decreases after the burst of the 2008 financial crisis.…”

“…By analysing a sample of 11 844 non-financial entities listed in the 15 countries that belonged to the EU at the time of issuance of EU Regulation 1606/2002, we test the hypothesis of reduction in earnings management after the burst of the financial crisis. We are reasonably confident about reduction in earnings management during the crisis because, on the one hand, the increase of conditional conservatism during the financial crisis should raise earnings quality and impair earnings management; on the other hand, the close monitoring activity of the auditor (most of the cases were represented by a Big 4 auditor) during the crisis contributes to an increase in the quality of financial reporting, which reduces earnings management, thanks to the scrutiny of the auditor (Chia et al, 2007;LaFond and Watts, 2008;Francis et al, 2013). As a consequence, a set of accounting standards, standalone is not enough to limit earnings management.…”

“…More than other audit firms, they are able to constrain earnings management thanks to their monitoring activity. In this regard, Chia et al (2007), investigating how the choice of auditors during the Asian financial crisis constrained earnings management within a rulebased reporting framework, found that the presence of Big 6 as auditor reduces earnings management. Generally speaking, the reason why the presence of Big 4 reduces earnings management, especially during a financial crisis, is twofold.…”

“…Earnings management has been the focus of considerable amount of empirical research in the last decades (Healy and Wahlen, 1999; tendency of insiders to manipulate the substance of annual reports by carrying out earnings management. Our research hypothesis, grounded in the accounting literature (Chia et al, 2007;LaFond and Watts, 2008;Francis et al, 2013), is that earnings management decreases probably because of both the high quality of financial reporting and audit quality over a financial crisis.…”

Earning Quality e o Desempenho das Companhias Brasileiras de Capital Aberto

“…Y. . Chen, Lin, & Zhou, 2006;Chen, 2016;Chia, Lapsley, & Lee, 2007;De Bos & Donker, 2004;De Miguel, Pindado, & De La Torre, 2004;Fama & Jensen, 1983;Gabrielsen, Gramlich, & Plenborg, 2002;Houqe & Zijl, 2010;Lefort, 2005;Yeo, Tan, Ho, & Chen, 2002 Ainda, outras pesquisas procuram destacar a relação entre qualidade do lucro e a adoção ao padrão full IFRS (Barth, Landsman, & Lang, 2007;Barth, Landsman, Lang, & Williams, 2012;Bushman & Smith, 2001;Byard, Brown, Dahya, Darrough, Davisfriday & Gore 2010;Covrig, Defond, & Hung, 2007;Daske et al, 2008;Iatridis, 2010;Landsman et al, 2012;Li, 2010;Persakis & Iatridis, 2017;Samarasekera, 2013;Silva et al, 2017;Tan, Wang, & Welker, 2011). Essas pesquisas sugerem que as empresas que usam IFRS geralmente apresentam a informação contábil com maior qualidade do que àquelas que utilizam Generally Accepted Accounting Principles (GAAPs) locais (e.g., Barth et al, 2007).…”