Download or read book Auditor Sensitivity to Real Earnings Management written by Benjamin P. Commerford and published by . This book was released on 2017 with total page 40 pages. Available in PDF, EPUB and Kindle. Book excerpt: Differentiating real earnings management (REM) from normal business decisions poses a unique challenge for auditors, researchers, and investors. The ambiguity associated with REM, and the fact that REM does not violate GAAP, may explain why its use is on the rise. While some assert that auditors are not, and should not be, concerned with REM, recent research suggests that REM may influence some auditor judgments. Using Correspondent Inference Theory as our theoretical framework, we extend REM research by investigating the ways in which auditors respond to REM and how auditors deal with the intrinsic ambiguity associated with REM. We administer a 3x2 between-subjects experiment to 113 highly-experienced auditors, manipulating the level of ambiguity surrounding the observed REM (Explicit REM, Potential REM, or No REM) and the earnings context in which the client engages in REM (the client beat or missed the consensus earnings forecast). We find that auditors respond to REM by lowering assessments of management tone (i.e., management's commitment to a culture of high ethical standards), being more likely to discuss the issue with the audit committee, and being less likely to retain the client. Auditors respond to Explicit REM regardless of the earnings context, but respond to Potential (i.e., ambiguous) REM only when the client beats the forecast. Finally, we find that management tone mediates the relation between REM and auditor responses, even after controlling for various audit-related risks. Thus, for auditors, REM appears to be primarily a “people” issue, as REM provides a negative signal about management.

Download or read book Auditor Sensitivity to Earnings Management written by D. Eric Hirst and published by . This book was released on 1994 with total page 31 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Accounting based Earnings Management and Real Activities Manipulation written by Wei Yu and published by . This book was released on 2008 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: In the first essay, I examine the association between auditor industry specialization and earnings management choices. Prior research suggests that industry specialist auditors constrain accounting-based earnings management. But such actions may cause client companies to seek alternative means to manage earnings. Specifically, companies that hire industry specialist auditors may alter operating decisions to meet earnings targets, referred to as real activities manipulation. This essay investigates whether clients of industry specialist auditors that have an incentive to manage earnings are constrained from managing earnings through accruals manipulation and, therefore, are more likely to engage in real activities manipulation. Further, I examine whether operating performance declines for firms suspected of real activities manipulation. My findings indicate that clients of industry specialist auditors with incentives to manage earnings have lower absolute value of accruals relative to firms with incentives to manage earnings that do not hire industry specialist auditors. These clients of industry specialist auditors are also more likely to engage in real activities manipulation, suggesting this is a possible unintended consequence of hiring an industry specialist auditor. I also document evidence that firms suspected of real activities manipulation have lower future operating performance relative to firms not suspected of real activities manipulation.

Download or read book The Relationship Between Aggressive Real Earnings Management and Current and Future Audit Fees written by Adam J. Greiner and published by . This book was released on 2018 with total page 56 pages. Available in PDF, EPUB and Kindle. Book excerpt: We examine the relationship between aggressive income-increasing real earnings management (REM) and current and future audit fees. Managers pursue REM activities to influence reported earnings and, as a consequence, alter cash flows and sacrifice firm value. We posit that the implications of REM are considered in auditors' assessments of engagement risk related to the client's economic condition and result in higher audit fees. We find that, with the exception of abnormal reductions in SG&A, aggressive income-increasing REM is positively associated with both current and future audit fees. Additional analyses provide evidence consistent with increased effort combined with increased risk contributing to the current pricing effect with increased business risk primarily driving the future pricing effect. We therefore provide evidence that aggressive income-increasing REM activities have a significant influence on auditor pricing behavior consistent with the audit framework associating engagement risk with audit fees.

Download or read book Real Earnings Management written by Benjamin P. Commerford and published by . This book was released on 2016 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Real earnings management (REM) is an increasingly common method of manipulating financial results, yet little research examines auditors' perceptions of and responses to REM. Using the auditor comfort framework (Pentland 1993; Carrington and Catasús 2007), we examine the extent to which REM impacts auditor comfort and how, in the presence of REM, auditors rely on comfort-building strategies in trying to move from a state of discomfort (i.e., fear of failing to identify misstatements) to comfort. Based on in-depth interviews of 20 experienced auditors, we find that auditors are aware of REM and often identify REM through formalized protocols that include analytical procedures, discussions with management, or their knowledge of the business. Formal audit procedures play a role when trying to address, “rationally,” the risk of REM, but we also find that auditors use emotive phrases and references to body senses related to discomfort, indicating that there also is an emotional component to dealing with REM (Guénin-Paracini, Malsch, and Paillé 2014). Most of the interviewees have concerns about REM (i.e., it threatens comfort), largely because they believe that it is indicative of management's desire to meet short-term targets (i.e., poor management tone), and that it may signal the use of other, less acceptable earnings management methods (i.e., accruals-based earnings management) to meet those targets. Interviewees respond to the discomfort caused by REM in many ways, including engaging in discussions with the client, increasing skepticism, and altering audit procedures and risk assessments. Auditors may even go as far as resigning from an engagement because of REM. Our analysis reveals that REM is a significant source of auditor discomfort and that auditors use both their rationality and their emotions/body senses to identify and try to alleviate that discomfort.

Download or read book How and why Does Real Earnings Management Affect Auditors Evaluations of Management s Estimates written by Benjamin P. Commerford and published by . This book was released on 2015 with total page 220 pages. Available in PDF, EPUB and Kindle. Book excerpt: Prior research often asserts that, because real earnings management (REM) does not violate Generally Accepted Accounting Principles (GAAP), it is not likely to draw auditor scrutiny. However, informed by Correspondent Inference Theory, I predict and find that observing REM can affect auditors' decisions in audit areas unrelated to REM. This study reports the results of an experiment in which auditors evaluate quantitatively immaterial audit differences arising from management's subjective estimates. I manipulate the presence versus absence of REM, and whether or not the audit difference affects the client's ability to meet an earnings target (i.e., qualitative materiality). Results indicate that, when a quantitatively immaterial audit difference affects the client's ability to meet an earnings target, auditors have a higher propensity to propose an adjustment. Further, regardless of whether or not the audit difference is qualitatively material, auditors are more likely to constrain management's estimates in the presence of REM. Finally, consistent with the notion of a cascading effect of dispositional inferences, I find that auditors' perceptions regarding the aggressiveness of management's disposition mediate the effect of REM on auditors' adjustment decisions. Additional analyses indicate that, when the audit difference is qualitatively material or when REM is present (or both) auditors have a heightened concern that management's estimates are biased. This study contributes to the literature by demonstrating that auditors' altered perceptions, stemming from observing REM, can affect their treatment of audit differences and, ultimately, impact the financial statements.

Download or read book Audit Committee Interlocks and the Contagion of Accrual Based and Real Earnings Management written by Ravi Dharwadkar and published by . This book was released on 2016 with total page 46 pages. Available in PDF, EPUB and Kindle. Book excerpt: Cohen et al. (2008) document that firms switched from accrual-based earnings management (AEM) to real earnings management (REM) within three years after passage of the Sarbanes-Oxley Act (SOX) in 2002. A remaining question is how so many firms could have made the transition from one accounting practice to another in such a short period of time. We investigate a hidden mechanism underlying this large-scale, accelerated transfer of accounting knowledge. Our study reveals that audit committee interlocks facilitated firms' post-SOX substitution from AEM to REM, contributed to the contagion of AEM before SOX and to the contagion of REM after SOX. Our results are robust for subsamples of intangible-intensive firms and manufacturing firms, which are more susceptible to REM. We further create a REM-AEM substitution index and find that the contagion of substitution from AEM to REM was disseminated through audit committee interlocks. Overall, we identify audit committee interlocks as a significant channel for transmitting accounting information between firms.

Download or read book The Relation Between Auditors Fees for Non Audit Services and Earnings Quality written by Frankel Richard M and published by Franklin Classics. This book was released on 2018-10-14 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This work has been selected by scholars as being culturally important and is part of the knowledge base of civilization as we know it. This work is in the public domain in the United States of America, and possibly other nations. Within the United States, you may freely copy and distribute this work, as no entity (individual or corporate) has a copyright on the body of the work. Scholars believe, and we concur, that this work is important enough to be preserved, reproduced, and made generally available to the public. To ensure a quality reading experience, this work has been proofread and republished using a format that seamlessly blends the original graphical elements with text in an easy-to-read typeface. We appreciate your support of the preservation process, and thank you for being an important part of keeping this knowledge alive and relevant.

Download or read book Constraints to Earnings Management written by Paul Miles Clikeman and published by . This book was released on 1995 with total page 230 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Evidence on the Tradeoff Between Real Manipulation and Accrual Manipulation to 25 Pages 26 to 50 Pages 51 to 75 Pages 76 to 100 Pages 101 to 120 written by Amy Yunzhi Zang and published by ProQuest. This book was released on 2000 with total page 120 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book A Question of Ambiguity Risk and Trust written by Dana Porter Garner and published by . This book was released on 2008 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This research study investigates the relationship between ambiguity, litigation risk, and auditor decision-making. In addition, this study investigates how auditor trust of his or her client may change these relationships. It is important to investigate the relationships of ambiguity, litigation risk, and client trust to auditor decision-making because auditors face these factors on a regular basis. This research uses a 2x2 experiment to investigate auditor reaction to ambiguity and litigation risk. The first factor, ambiguity is operationalized as auditor reaction to potential real transaction earnings management (low ambiguity) and potential accrual transaction earnings management (high ambiguity). The second factor, litigation risk is operationalized through an income increasing (high) or income decreasing (low) earnings management attempt. Auditors were given company background information, selected account information, and comparative financial statements and then asked to state the likelihood of material misstatement in the financial statements as a whole and the sales, selling and marketing expenses, research and development expenses, and general and administrative expenses individual accounts. The ambiguity manipulation was imbedded in the description of the research and development account while the litigation risk factor was imbedded in the comparative financial statements. The findings indicate that the subjects reported a relatively high likelihood of material misstatement of research and development expenses regardless of the earnings management method. The findings further indicate that when a real earnings management transaction was present, auditors rated the likelihood of material misstatement in sales and the financial statements as a whole higher than when an accrual earnings management transaction is present. Additionally, when the subject group is limited to individuals working for Big-4 and National non Big-4 firms the auditors assessed the likelihood of material misstatement in the financial statements as a whole, sales, selling and marketing expenses, and general and administrative expenses significantly higher when a real earnings management transaction is present than when an accrual earnings management transaction is present. The lawsuit risk factor was not found to be significant in any of the primary analyses.

Download or read book Earnings Management written by Joshua Ronen and published by Springer Science & Business Media. This book was released on 2008-08-06 with total page 587 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book is a study of earnings management, aimed at scholars and professionals in accounting, finance, economics, and law. The authors address research questions including: Why are earnings so important that firms feel compelled to manipulate them? What set of circumstances will induce earnings management? How will the interaction among management, boards of directors, investors, employees, suppliers, customers and regulators affect earnings management? How to design empirical research addressing earnings management? What are the limitations and strengths of current empirical models?

Download or read book The Interplay Between Related Party Transactions and Earnings Management written by Moataz El-Helaly and published by . This book was released on 2018 with total page 45 pages. Available in PDF, EPUB and Kindle. Book excerpt: Related party transactions (RPTs) are considered a potential tool for shareholders' wealth expropriation, as they offer opportunities to transfer wealth between the firm and related parties. While considerable evidence has been reported on the negative consequences of RPTs (declines in shareholder wealth, lowered accounting quality and an increased likelihood of financial fraud), studies examining how RPTs may be used in earnings management are relatively rare. Therefore, we aim to provide evidence on how RPTs and earnings management are related. Consequently, we investigate whether RPTs are associated with real or accrual earnings management or used as a third alternative to manage reported earnings. Our study employs a sample of firms listed on the Athens Stock Exchange during the period between 2009 and 2014. Our results confirm that, on average, real earnings management and RPTs appear to be used as substitutes. However, additional tests show that this substitution is not significant if the firm is audited by one of the Big 4 auditors. Contrarily, we do not find any significant association between accrual earnings management and RPTs. Our evidence adds to understanding around the interplay between RPTs and earnings management and how audit quality can affect the relationships investigated.

Download or read book The Effect of Audit Quality on Earnings Management written by Connie L. Becker and published by . This book was released on 1997 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This study examines the relation between audit quality and earnings management. Consistent with prior research, we treat audit quality as a dichotomous variable and assume that Big Six auditors are of higher quality than non-Big Six auditors. Earnings management is captured by discretionary accruals that are estimated using a cross-sectional version of the Jones (1991) model. Prior literature suggests that auditors are more likely to object to management's accounting choices that increase earnings (as opposed to decrease earnings) and that auditors are more likely to be sued when they are associated with financial statements that overstate earnings (as compared to understate earnings). Therefore, we hypothesize that clients of non-Big Six auditors report discretionary accruals that increase income relatively more than the discretionary accruals reported by clients of Big Six auditors. This hypothesis is supported by evidence from a sample of 10, 379 Big Six and 2, 179 non-Big Six firm-years. Specifically, clients of non-Big Six auditors report discretionary accruals that are, on average, 1.5 to 2.1 percent of total assets higher than the discretionary accruals reported by clients of Big Six auditors. Also, consistent with earnings management, we find that the mean and median of the absolute value of discretionary accruals are greater for firms with non-Big Six auditors. This also indicates that lower audit quality is associated with more quot;accounting flexibility.quot.

Download or read book Auditors Reactions to and Companies Control of Classification Shifting written by Yinghong Zhang and published by . This book was released on 2010 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Business Administration/Accounting

Download or read book The Effect of Earnings Management on Auditor Litigation written by William Guy Heninger and published by . This book was released on 1997 with total page 95 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Earnings Management Pressure on Audit Clients written by Nathan J. Newton and published by . This book was released on 2013 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This study investigates whether auditors respond to earnings management pressure created by analyst forecasts. Analyst forecasts create an important earnings target for management, and professional standards direct auditors to consider how this pressure could affect their clients. Using annual analyst forecasts available during the planning phase of the audit, I examine whether this form of earnings management pressure affects clients' financial statement misstatements. Next, I investigate whether auditors respond to earnings forecast pressure through audit fees and reporting delay. I find that higher levels of analyst forecast pressure increase the likelihood of client restatement. I also find that auditors charge higher audit fees and delay the issuance of the audit report in response to pressure from analyst expectations. Finally, I find that when audit clients are subject to high analyst forecast pressure, a high audit fee response by auditors mitigates the likelihood of client misstatements. The electronic version of this dissertation is accessible from http://hdl.handle.net/1969.1/151105