AUDIT QUALITY AND REAL EARNINGS MANAGEMENT: EVIDENCE FROM TUNISIAN BANKS
Keywords:
Real Earnings Management, Audit Reputation, Audit Tenure, Product on Equity Securities, Tunisian Commercial Banks.
Abstract
The beginning of the 21st century was marked by a multitude of financial scandals, notably the Enron affair in 2001 and the fall of the auditing firm Arthur Andersen (2002). Such scandals have called into question of the financial reporting quality. The main cause of these scandals was the failure of the external audit quality which is considered crucial to ensure the reliability and relevance of accounting information. Moreover, following the promulgation of the SOX law (2002), managers tend rather towards the real activities manipulation to avoid the detection of the accounting earnings management. In fact, managers can resort to certain adjustments whose opportunistic or optimal nature is difficult to discern by auditors, in particular the reduction in selling prices, the granting of more lenient credit terms, overproduction and the reduction or postponement of research and development (R&D) and advertising expenditure. This study therefore aims to show the role that external audit quality can play in limiting real activities manipulation and therefore in the quality of accounting information. For this, we conducted an empirical study with a sample of the main. Tunisian commercial banks observed over a period from 2006 to 2019, using the panel data method. The results indicate that the presence of a reputable auditor limits real earnings management. However, the results show that the tenure of auditors increases these discretionary practices.
JEL Classification Codes: M41, M42, G21.
References
Abbott, L. J. & Parker, S. (2000). Auditor selection and audit committee characteristics. Auditing: A Journal of Practice & Theory, 19(2), 47-66.
Bartov, E. (1993). The Timing of Asset Sales and Earnings Manipulation. The Accounting Review, 68(4), 840-855.
Bedard, J. C., Ettredge, M., & Johnstone, K. M. (2008). Fee pressure and the longitudinal dynamics of audit engagement budgeting and reporting. Advances in Accounting, 24(1), 32–40.
Behn, B.K., Carcello, J.V., Hermanson, D.R., & Hermanson, R.H. (1997). The Determinants of Audit Client Satisfaction among Clients of Big 6 Firms. Accounting Horizons, 11(1), 7–24.
Brown, K.F., Dang, L. & McCullough, B.D. (2005). Assessing Audit Quality: A Value Relevance Perspective. Annual Meeting, Septembre, San Francisco, California, USA
Carcello, J.V., Hermanson, R.H., & McGrath, N.T. (1992). Audit quality attributes: The perceptions of audit partners, preparers and financial statement users. Auditing: A Journal of Practice & Theory 11(1), 1-15.
Carey, P., & Simnett, R. (2006). Audit Partner Tenure and Audit Quality. The Accounting Review. 81(3), 653-676.
Charreaux, G. (1997). Corporate governance. Economica, Paris.
Chemingui, M., & Manita, R. (2005). Assessment approaches and indicators for measuring audit quality: a critical review. AFC International Congress: Accounting and the Environment.
Chemingui, M., & Pigé, B. (2004). Audit quality: critical analysis and proposal of an evaluation approach based on the nature of the audit work carried out. Norms and Globalization, France. pp. CD-Rom. ffhalshs-00593012f
Chi, W., Lisic L.L., & Pevzner, M. (2011). Is Enhanced Audit Quality Associated with Greater Real Earnings Management? Accounting Horizons, 25(2), 315–335. https://doi.org/10.1080/10.2308/acch-10025
Choi, A., Choi, J.H., & Sohn, B. C. (2018). The Joint Effect of Audit Quality and Legal Regimes on the Use of Real Earnings Management: International Evidence. Contemporary Accounting Research. 89 page. https://doi.org/10.1080/10.1111/1911-3846.12370
Choi, A.B., Sohn, C., & Yuen, D. (2016). Do auditors care about real earnings management in their audit fee decisions? Asia-Pacific Journal of Accounting & Economics, 25(1-2), 21-41. https://doi.org/10.1080/16081625.2016.1231580
Citron, D.B., & Taffler, R.J. (1992). The audit report under going concern uncertainties: an empirical analysis. Accounting and Business Research, 22(88), 337-345.
Clikeman, P. (1998). Auditor Independence: Continuing Controversy. Ohio CPA Journal, 57, 40–43.
Cohen, J., L. Holder-Webb, D. S., & Pant. L. (2007). The effects of perceived fairness on opportunistic behavior. Contemporary Accounting Research, 24(4), 1119–1138.
Cohen, D. A., & Zarowin, P. (2010). Accrual-based and real earnings management activities around seasoned equity offerings. Journal of Accounting and Economics, 50(1), 2-19
Collis, J., Jarvis, R., & Skerratt, L. (2004). The demand for the audit in small companies in the UK. Accounting and Business Research, 34(2), 87–100.
Copley, P., Doucet, M., & Gaver, K. J. (1995). A simultaneous equations analysis of quality control review outcomes and engagement fees for audits or recipients of federal financial assistance. The Accounting Review, 69(1), 244-256.
De Angelo, L.E. (1981). Auditor size and audit quality, Journal of Accounting and Economics, 3, 183-199.
DeFond, M. L. (1992). The association between changes in client firm agency costs and auditor switching. Auditing, 11(1), 16-31.
dit Hauret, C. P. (2003). The Auditor's Independence: An Empirical Study Based on Three Psychological Components of Behavior. Accounting Auditing Control, 9(2), 31-58.
Fan, J. H., Wong T. J., (2005). Do External Auditors Perform a Corporate Governance Role in Emerging Markets? Evidence from East Asia. Journal of Accounting Research, 43(1), 35-72. https://doi.org/10.1111/j.1475-679x.2004.00162.x
Firth, M., & Smith, A. (1992). Selection of auditor firms by companies in the new issue market. Applied Economics, 24(2), 247-255. https://doi.org/10.1080/00036849200000123
Flint, D. (1988). Philosophy and Principles of Auditing. An Introduction. London etc. Macmillan Education.
Francis, J., & Wilson, E. (1988). Auditor changes: A joint test of theories relating to agency costs and auditor differentiation. The Accounting Review, 63(4), 663–682.
Fuerman, R. D. (2004). Audit Quality Examined One Large Cpa Firm at a Time: Empirical Evidence of a Precursor of Arthur Andersen's Collapse. http://dx.doi.org/10.2139/ssrn.451521
Graham, J., Harvey, C., & Rajgopal, S. (2005). The economic implications of corporate financial reporting. Journal of Accounting and Economics, 40, 3–73.
Gunny, K. (2005). What are the consequences of real earnings management? Economics, 47.
Hay, D., Knechel, W., & Ling, J. (2008). Evidence on the impact of internal control and corporate governance on audit fees. International Journal of Auditing, 12(1), 9–24.
Hay, D., & Davis, D. (2004). The Voluntary Choice of an Auditor of Any Level of Quality. Auditing, A Journal of Practice & Theory, 23(2), 37–53. https://doi.org/10.2308/aud.2004.23.2.37
Herrmann, D., Inoue, T., & Thomas, W. B. (2003). The sale of assets to manage earnings in Japan. Journal of Accounting Research, 41(1), 89–108. https://doi.org/10.1111/1475-679X.00097
Hopkins, P. (1996). The effect of financial statement classification of hybrid financial instruments on financial analysts’ stock price judgements. Journal of Accounting Research, 34 (Supplement), 33-50.
Ibrahim, S., Xu, L. & Rogers, G. (2011). Real and accrual‐based earnings management and its legal consequences: Evidence from seasoned equity offerings. Accounting Research Journal, 24(1), 50-78. https://doi.org/10.1108/10309611111148779
Iyer, V. M., & Rama, D.V. (2004). Clients' Expectations on Audit Judgments: A Note. Behavioral Research in Accounting, 16(1), 63-74. https://doi.org/10.1080/10.2308/bria.2004.16.1.63
Jensen, M.C., & Meckling, W.H. (1976). Theory of the firm, managerial behaviour, agency costs and ownership structure. Journal of Financial Economics, 3(4) 305–360.
Johnson, W.B., & Lys, T. (1990). The market for audit services: Evidence from voluntary auditor changes. Journal of Accounting and Economics, 12(1–3), 281-308.
Khanh, H.T.M., & Khuong, N.V. (2018). Audit Quality, Firm Characteristics and Real Earnings Management: The Case of Listed Vietnamese Firms. International Journal of Economics and Financial Issues, Econjournals, 8(4) 243-249.
Kim, Y. & Park, M.S., (2014). Real Activities Manipulation and Auditors' Client-Retention Decisions. The Accounting Review, 89(1), 367-401. https://doi.org/10.1080/10.2308/accr-50586
Knapp, M. (1991). Factors that audit committees use as surrogates for audit quality. Auditing: A Journal of Practice & Theory, 10(1) 35-52.
Krishnan, G. V. (2002). Audit Quality and the Pricing of Discretionary Accruals. Auditing A Journal of Practice & Theory, 22(1), 35. https://doi.org/10.1080/10.2139/ssrn.320164
Mock, T.J., & Wright, A.M. (1999). Are audit program plans risk-adjusted? Auditing: A Journal of Practice and Theory, 18(1), 55-74.
Moizer, P. (1997). Auditor reputation: the international empirical evidence. International Journal of Auditing, 1(1), 61-74.
O’Sullivan, N., & Diacon, S. (1999). Internal and External Governance Mechanisms: evidence from the UK insurance industry. Corporate Governance, 7(4), 363-373. https://doi.org/10.1111/1467-8683.00166
Ormrod, P., & Cleaver, K. C. (1993). Financial Reporting and Corporate Accountability. Accounting and Business Research, 23(sup1), 431-439. Corporate Governance Special Issue, https://doi.org/10.1080/00014788.1993.9729910
Pigé, B. (2003). The challenges of the audit market. French Management Review, 29(147), 87-103. (Revue Française de Gestion),
Piot, C. (2001). Agency costs and audit quality: evidence from France. European Accounting Review, 10(3), 461-499. https://doi.org/10.1080/713764630
Pittman, J.A., & Fortin, S. (2004). Auditor choice and the cost of debt capital for newly public firms. Journal of Accounting and Economics, 37(1), 113-136 https://doi.org/10.1016/j.jacceco.2003.06.005
Roychowdhury, S. (2006). Earnings management through real activities manipulations. Journal of Accounting and Economics, 42, 335–370
Schipper, K. (1989). Commentary on earnings management. Accounting Horizons, 3(4), 91-102.
Sitanggang, R.P., Karbhari, Y., Matemilola, B.T., & Ariff, M. (2019). Audit quality and real earnings management: evidence from the UK manufacturing sector. International Journal of Managerial Finance, 16(2), 165-181. https://doi.org/10.1108/IJMF-03-2018-0095
Tong, L. (2006). Does Opinion Shopping Impair Auditor Independence and Audit Quality? Journal of Accounting Research, 44(3), 561-583. https://doi.org/10.1080/10.1111/j.1475-679X.2006.00211.x
Watts, R.L., & Zimmerman, J.L. (1981). The Markets for Independence and Independent Auditors Working Paper n ° GPB / 80-10. http://hdl.handle.net/1802/4864
Watts, R L., & Zimmerman, J. L., (1985). Agency Theory Research in Accounting. Presented at the American Accounting Association. Doctoral Consortium, New York.
Yeoh, E., & Jubb, C.A. (2001). Governance and audit quality: is there an association? Retrieved from http://accounting.rutgers.edu/raw/aaa/audit/midyear/02midyear/papers/yeoh&jubb.htm
Zang, A. (2007). Evidence of the tradeoff between real manipulation and accrual manipulation. working papers, University of Rochester.
Bartov, E. (1993). The Timing of Asset Sales and Earnings Manipulation. The Accounting Review, 68(4), 840-855.
Bedard, J. C., Ettredge, M., & Johnstone, K. M. (2008). Fee pressure and the longitudinal dynamics of audit engagement budgeting and reporting. Advances in Accounting, 24(1), 32–40.
Behn, B.K., Carcello, J.V., Hermanson, D.R., & Hermanson, R.H. (1997). The Determinants of Audit Client Satisfaction among Clients of Big 6 Firms. Accounting Horizons, 11(1), 7–24.
Brown, K.F., Dang, L. & McCullough, B.D. (2005). Assessing Audit Quality: A Value Relevance Perspective. Annual Meeting, Septembre, San Francisco, California, USA
Carcello, J.V., Hermanson, R.H., & McGrath, N.T. (1992). Audit quality attributes: The perceptions of audit partners, preparers and financial statement users. Auditing: A Journal of Practice & Theory 11(1), 1-15.
Carey, P., & Simnett, R. (2006). Audit Partner Tenure and Audit Quality. The Accounting Review. 81(3), 653-676.
Charreaux, G. (1997). Corporate governance. Economica, Paris.
Chemingui, M., & Manita, R. (2005). Assessment approaches and indicators for measuring audit quality: a critical review. AFC International Congress: Accounting and the Environment.
Chemingui, M., & Pigé, B. (2004). Audit quality: critical analysis and proposal of an evaluation approach based on the nature of the audit work carried out. Norms and Globalization, France. pp. CD-Rom. ffhalshs-00593012f
Chi, W., Lisic L.L., & Pevzner, M. (2011). Is Enhanced Audit Quality Associated with Greater Real Earnings Management? Accounting Horizons, 25(2), 315–335. https://doi.org/10.1080/10.2308/acch-10025
Choi, A., Choi, J.H., & Sohn, B. C. (2018). The Joint Effect of Audit Quality and Legal Regimes on the Use of Real Earnings Management: International Evidence. Contemporary Accounting Research. 89 page. https://doi.org/10.1080/10.1111/1911-3846.12370
Choi, A.B., Sohn, C., & Yuen, D. (2016). Do auditors care about real earnings management in their audit fee decisions? Asia-Pacific Journal of Accounting & Economics, 25(1-2), 21-41. https://doi.org/10.1080/16081625.2016.1231580
Citron, D.B., & Taffler, R.J. (1992). The audit report under going concern uncertainties: an empirical analysis. Accounting and Business Research, 22(88), 337-345.
Clikeman, P. (1998). Auditor Independence: Continuing Controversy. Ohio CPA Journal, 57, 40–43.
Cohen, J., L. Holder-Webb, D. S., & Pant. L. (2007). The effects of perceived fairness on opportunistic behavior. Contemporary Accounting Research, 24(4), 1119–1138.
Cohen, D. A., & Zarowin, P. (2010). Accrual-based and real earnings management activities around seasoned equity offerings. Journal of Accounting and Economics, 50(1), 2-19
Collis, J., Jarvis, R., & Skerratt, L. (2004). The demand for the audit in small companies in the UK. Accounting and Business Research, 34(2), 87–100.
Copley, P., Doucet, M., & Gaver, K. J. (1995). A simultaneous equations analysis of quality control review outcomes and engagement fees for audits or recipients of federal financial assistance. The Accounting Review, 69(1), 244-256.
De Angelo, L.E. (1981). Auditor size and audit quality, Journal of Accounting and Economics, 3, 183-199.
DeFond, M. L. (1992). The association between changes in client firm agency costs and auditor switching. Auditing, 11(1), 16-31.
dit Hauret, C. P. (2003). The Auditor's Independence: An Empirical Study Based on Three Psychological Components of Behavior. Accounting Auditing Control, 9(2), 31-58.
Fan, J. H., Wong T. J., (2005). Do External Auditors Perform a Corporate Governance Role in Emerging Markets? Evidence from East Asia. Journal of Accounting Research, 43(1), 35-72. https://doi.org/10.1111/j.1475-679x.2004.00162.x
Firth, M., & Smith, A. (1992). Selection of auditor firms by companies in the new issue market. Applied Economics, 24(2), 247-255. https://doi.org/10.1080/00036849200000123
Flint, D. (1988). Philosophy and Principles of Auditing. An Introduction. London etc. Macmillan Education.
Francis, J., & Wilson, E. (1988). Auditor changes: A joint test of theories relating to agency costs and auditor differentiation. The Accounting Review, 63(4), 663–682.
Fuerman, R. D. (2004). Audit Quality Examined One Large Cpa Firm at a Time: Empirical Evidence of a Precursor of Arthur Andersen's Collapse. http://dx.doi.org/10.2139/ssrn.451521
Graham, J., Harvey, C., & Rajgopal, S. (2005). The economic implications of corporate financial reporting. Journal of Accounting and Economics, 40, 3–73.
Gunny, K. (2005). What are the consequences of real earnings management? Economics, 47.
Hay, D., Knechel, W., & Ling, J. (2008). Evidence on the impact of internal control and corporate governance on audit fees. International Journal of Auditing, 12(1), 9–24.
Hay, D., & Davis, D. (2004). The Voluntary Choice of an Auditor of Any Level of Quality. Auditing, A Journal of Practice & Theory, 23(2), 37–53. https://doi.org/10.2308/aud.2004.23.2.37
Herrmann, D., Inoue, T., & Thomas, W. B. (2003). The sale of assets to manage earnings in Japan. Journal of Accounting Research, 41(1), 89–108. https://doi.org/10.1111/1475-679X.00097
Hopkins, P. (1996). The effect of financial statement classification of hybrid financial instruments on financial analysts’ stock price judgements. Journal of Accounting Research, 34 (Supplement), 33-50.
Ibrahim, S., Xu, L. & Rogers, G. (2011). Real and accrual‐based earnings management and its legal consequences: Evidence from seasoned equity offerings. Accounting Research Journal, 24(1), 50-78. https://doi.org/10.1108/10309611111148779
Iyer, V. M., & Rama, D.V. (2004). Clients' Expectations on Audit Judgments: A Note. Behavioral Research in Accounting, 16(1), 63-74. https://doi.org/10.1080/10.2308/bria.2004.16.1.63
Jensen, M.C., & Meckling, W.H. (1976). Theory of the firm, managerial behaviour, agency costs and ownership structure. Journal of Financial Economics, 3(4) 305–360.
Johnson, W.B., & Lys, T. (1990). The market for audit services: Evidence from voluntary auditor changes. Journal of Accounting and Economics, 12(1–3), 281-308.
Khanh, H.T.M., & Khuong, N.V. (2018). Audit Quality, Firm Characteristics and Real Earnings Management: The Case of Listed Vietnamese Firms. International Journal of Economics and Financial Issues, Econjournals, 8(4) 243-249.
Kim, Y. & Park, M.S., (2014). Real Activities Manipulation and Auditors' Client-Retention Decisions. The Accounting Review, 89(1), 367-401. https://doi.org/10.1080/10.2308/accr-50586
Knapp, M. (1991). Factors that audit committees use as surrogates for audit quality. Auditing: A Journal of Practice & Theory, 10(1) 35-52.
Krishnan, G. V. (2002). Audit Quality and the Pricing of Discretionary Accruals. Auditing A Journal of Practice & Theory, 22(1), 35. https://doi.org/10.1080/10.2139/ssrn.320164
Mock, T.J., & Wright, A.M. (1999). Are audit program plans risk-adjusted? Auditing: A Journal of Practice and Theory, 18(1), 55-74.
Moizer, P. (1997). Auditor reputation: the international empirical evidence. International Journal of Auditing, 1(1), 61-74.
O’Sullivan, N., & Diacon, S. (1999). Internal and External Governance Mechanisms: evidence from the UK insurance industry. Corporate Governance, 7(4), 363-373. https://doi.org/10.1111/1467-8683.00166
Ormrod, P., & Cleaver, K. C. (1993). Financial Reporting and Corporate Accountability. Accounting and Business Research, 23(sup1), 431-439. Corporate Governance Special Issue, https://doi.org/10.1080/00014788.1993.9729910
Pigé, B. (2003). The challenges of the audit market. French Management Review, 29(147), 87-103. (Revue Française de Gestion),
Piot, C. (2001). Agency costs and audit quality: evidence from France. European Accounting Review, 10(3), 461-499. https://doi.org/10.1080/713764630
Pittman, J.A., & Fortin, S. (2004). Auditor choice and the cost of debt capital for newly public firms. Journal of Accounting and Economics, 37(1), 113-136 https://doi.org/10.1016/j.jacceco.2003.06.005
Roychowdhury, S. (2006). Earnings management through real activities manipulations. Journal of Accounting and Economics, 42, 335–370
Schipper, K. (1989). Commentary on earnings management. Accounting Horizons, 3(4), 91-102.
Sitanggang, R.P., Karbhari, Y., Matemilola, B.T., & Ariff, M. (2019). Audit quality and real earnings management: evidence from the UK manufacturing sector. International Journal of Managerial Finance, 16(2), 165-181. https://doi.org/10.1108/IJMF-03-2018-0095
Tong, L. (2006). Does Opinion Shopping Impair Auditor Independence and Audit Quality? Journal of Accounting Research, 44(3), 561-583. https://doi.org/10.1080/10.1111/j.1475-679X.2006.00211.x
Watts, R.L., & Zimmerman, J.L. (1981). The Markets for Independence and Independent Auditors Working Paper n ° GPB / 80-10. http://hdl.handle.net/1802/4864
Watts, R L., & Zimmerman, J. L., (1985). Agency Theory Research in Accounting. Presented at the American Accounting Association. Doctoral Consortium, New York.
Yeoh, E., & Jubb, C.A. (2001). Governance and audit quality: is there an association? Retrieved from http://accounting.rutgers.edu/raw/aaa/audit/midyear/02midyear/papers/yeoh&jubb.htm
Zang, A. (2007). Evidence of the tradeoff between real manipulation and accrual manipulation. working papers, University of Rochester.
Published
2022-01-22
How to Cite
Zgarni, A., & Chikhaoui, M. (2022). AUDIT QUALITY AND REAL EARNINGS MANAGEMENT: EVIDENCE FROM TUNISIAN BANKS. Indian Journal of Finance and Banking, 9(1), 71-82. https://doi.org/10.46281/ijfb.v9i1.1562
Section
Research Paper/Theoretical Paper/Review Paper/Short Communication Paper
Copyright (c) 2022 Amina Zgarni, Monia Chikhaoui
This work is licensed under a Creative Commons Attribution 4.0 International License.
