Examining the Effect of Joint and Dual Audits on Earnings Management Practices

Abstract

The purpose of the paper is to determine the impact of the voluntary adoption of the joint external audit approach in reducing earnings management practices through accruals and real operations compared with the adoption of the dual external audit approach. The research follows a quantitative approach to collect and analyze data from companies listed on the Egyptian Stock Exchange during the period 2010-2014. 104 firm-year observations are tested in the sample. The findings of the empirical study shows evidence that there are consistent earnings management practices in the studied sample regardless of the type of audit (joint or dual). There is a negative association between joint audit and discretionary accruals compared to dual audit. This means that firms with joint audit are less engaged in accrual earnings management practices. In addition, large firms that adopt joint audit are less engaged in accrual earnings management. However, there is no effect of joint audit on real earnings management practices compared to dual audit. Our results are consistent for firm size, profitability and leverage. Both firm profitability and leverage show positive association with earnings management practices while size did not have a significant effect on either type of practice. Finally, we find that firms with high (low) profitability that adopt joint audits are less (more) likely to engage in real earnings management practices. Our results are of use to regulators, external auditors and investors.

The effect of auditor type on audit quality in emerging markets: evidence from Egypt

“…To understand the effects of joint audits and dual audit on audit quality, reader may refer toMandour et al (2018); El-Dyasty (2017); El Assy (2015)…”

العلاقة بین جودة المراجعة المدركة وقابلیة تقریر مراقب الحسابات عن مراجعة القوائم المالیة السنویة للقراءة: دلیل من الشركات غیر المالیة المقیدة بالبورصة المصریة

“…‫عح‬ ‫تدت‬ ‫س‬ ‫تدعحا‬ ‫اس‬ ‫لت‬ ‫تّحا‬ ‫ح‬ ‫ت‬ ‫تحا‬ ‫ظدق‬ (Boritz et al, 2016;Chang & Stone, 2019a;Smith, 2019;Chang &Stone, 2019b ;Karim & Sarkar, 2020 ;Deshmukh & Zhao, 2020;Jia & Hsiao, 2021;ALikhani et al ,2021;Salehi et al, (Hamdan et al, 2012;Lin &Lin, 2016;Khasanah, 2016;Kato&Semba, 2016;Mawardi, 2017;Pestovic et al,2021 ;Le et al,2021 ;Chen,2022 (Akhalumeh et al,2017 ;Mandour et al,2018;Blum et al,2022) ‫ح‬ ‫و‬ ‫ح‬ ‫تدمي‬ ‫تفحا‬ ‫تدحا‬ ‫كط‬ ‫ح‬ (Smii, 2016;Saha & Roy, 2016 ;Bills et al, 2016 ;Blum et et al (Alfaih,2016 ;Ugwunta et al,2018;Riccard et al,2019 ;Pestovic et al,2021;Jia & Hsiao, 2021 ;Chen,2022 (Boritz et al, 2016;Chang & Stone, 2019a;Smith, 2019 ;Chang & Stone, 2019b;Karim & Sarkar, 2020;Rautiainen et al,2021 ;ALikhani et al,2021 ;Salehi et al, Kawada & Wang, 2020;Blanco et al, 2021;Dalwai, 2021;Goicoech...…”

Audit quality and abolition of mandated joint-audits: evidence from Kuwait

“…He (El-Assy 2015) found earnings conservatism is significantly higher among companies using joint-audits compared to counterparts using a solo-audit. Mandour et al (2018), meanwhile, examined the impact on accrual and real earnings management of the voluntary adoption of joint-audits compared to dual-audits by Egyptian listed companies. Mandour et al, (2018) found a significant negative association between voluntary joint-audit adoption and discretionary accruals compared to dual-audits.…”