The Joint Effect of Audit Quality and Legal Regimes on the Use of Real Earnings Management : International Evidence

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

15 Scopus Citations
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Author(s)

Detail(s)

Original languageEnglish
Pages (from-to)2225-2257
Journal / PublicationContemporary Accounting Research
Volume35
Issue number4
Online published22 Nov 2017
Publication statusPublished - Oct 2018
Externally publishedYes

Abstract

This study investigates whether and how a firm's real earnings management (REM) is influenced by the strength of a country's legal regime and the presence of a Big 4 auditor. In a cross-country examination using data from 22 countries, we find that REM increases in countries with stronger legal regimes as firms switch from accrual-based earnings management (AEM) to REM. The presence of a Big 4 auditor reduces REM (as well as AEM) and attenuates the positive relation between legal regime strength and REM. Our results suggest that higher-quality auditors limit client firms' use of REM, especially in countries with a strong legal regime.

Research Area(s)

  • audit quality, gestion du résultat réel, legal regime, qualité de l'audit, real earnings management, régime juridique