Search Results (45)

This study investigates whether audit tenure mandates—designed to curb managerial discretion—may unintentionally enable disguised opinion shopping. Specifically, it examines whether firms benefit from observed mandates that align with their unobservable preferences, despite appearing to comply with mandatory audit firm rotation or retention rules. A counterfactual framework is developed to estimate firms’ preference for switching or retention in the absence of regulation, allowing identification of strategic alignment under constraint. Empirical analysis using Korean data from 2000 to 2009 reveals that firms classified as disguised opinion shoppers are more likely to receive unmodified audit opinions and exhibit lower audit quality, as indicated by higher discretionary accruals and more frequent reporting irregularities. These effects are concentrated under mandatory retention and not observed under rotation, suggesting that forced auditor turnover weakens firms’ ability to secure favorable outcomes. Additional evidence shows that these firms are more likely to retain the same auditor after mandates expire, consistent with a reward-for-accommodation mechanism. Thus, this study not only provides empirical evidence that opinion shopping can persist under auditor tenure mandates, but also introduces a novel method for identifying such behavior when traditional signals—such as voluntary dismissals—are unavailable. These findings inform ongoing regulatory debates on the effectiveness of tenure-based reforms. Full article

This study investigates why firms with large book–tax differences (BTDs) exhibit lower earnings persistence, particularly during periods of revenue declines. While prior literature has linked BTDs, especially large positive BTDs (LPBTDs), to earnings management, we propose an alternative explanation rooted in operational disruptions. Using a large panel of U.S. firms from 1995 to 2016, we examine whether short-term earnings persistence is affected by sales trends and the direction of BTDs. Our findings reveal that both large positive and large negative BTDs are significantly associated with reduced earnings persistence when sales decline. The effect is pronounced in both accrual and cash flow components of earnings. We develop and test a framework based on “operations theory,” which attributes this reduction to real business shocks, such as asset write-downs, facility closures, and reserve adjustments, that arise during sales decline periods. These results highlight the importance of distinguishing operationally driven BTDs from those arising through discretionary accruals. Our findings have implications for investors, regulators, and researchers seeking to interpret BTDs more accurately in volatile economic environments. Full article

Performance evaluation systems serve as a crucial governance mechanism in enhancing operational efficiency and ensuring sustainable growth for state-owned enterprises (SOEs). Despite their significance, the effectiveness of these evaluation systems has received limited academic attention. This study examines how performance evaluations address earnings manipulation issues, focusing specifically on both accrual-based and real activity-based earnings management. Our empirical findings indicate that SOEs with higher accrual-based earnings management receive significantly lower ratings in performance evaluations. However, no significant relationship is observed between real activity-based management and performance evaluation ratings. These results suggest that while performance evaluations effectively account for accrual-based earnings manipulation, they fail to capture real activity-based earnings management. Our study emphasizes the need for a more nuanced approach to performance evaluation that not only detects accrual manipulation but also considers operational adjustments made by managers. Furthermore, these findings imply that performance evaluation committees and government regulators should integrate industry-specific expertise into the evaluation process to enhance the detection of real earnings manipulation, thereby strengthening governance tools in SOEs. This research contributes to the broader discourse on improving effectiveness in public sector performance assessments. Full article

This study introduces the Audit Risk Sentiment Value (ARSV), a novel audit risk proxy that leverages sentiment analysis to address limitations in traditional audit risk measures such as audit fees (LNFEE), audit hours (LNHOUR), and discretionary accruals (|MJDA|). Traditional proxies primarily capture quantitative dimensions, overlooking qualitative insights embedded in audit report narratives. By systematically analyzing sentiment and tone, ARSV captures nuanced audit risk dimensions that reflect the auditor’s risk perception. The study validates ARSV using a dataset of South Korean firms listed on the KOSPI from 2018 to 2023. The results demonstrate the ARSV’s superior explanatory power, as confirmed through the Vuong test, showing consistent performance across binary and continuous measures of explanatory language. ARSV bridges the gap between qualitative and quantitative audit risk assessments, offering significant benefits to auditors, regulators, and investors. Its ability to enhance the interpretability of audit reports improves transparency and trust in financial reporting, addressing stakeholder demands for actionable, forward-looking information. Furthermore, ARSV aligns with global trends emphasizing sustainability and accountability by integrating qualitative insights into audit practices. While this study provides robust evidence supporting ARSV effectiveness, its focus on South Korean firms may limit its generalizability. Future research should explore ARSV application in diverse regulatory and cultural contexts and refine the sentiment analysis tools using advanced machine learning techniques. Expanding ARSV to include other unstructured data, such as management commentary, could further enhance its applicability. This study marks a significant step toward modernizing audit methodologies, aligning them with evolving demands for comprehensive and transparent financial reporting. The empirical analysis reveals that ARSV outperforms traditional audit risk proxies with significantly higher explanatory power. Specifically, ARSV achieved a pseudo R² of 0.786, compared to 0.608 for LNFEE, 0.604 for LNHOUR, and 0.578 for |MJDA|. The Vuong test results further validate ARSV superiority, with Z-statistics of −12.168, −12.492, and −9.775 when compared against LNFEE, LNHOUR, and |MJDA|, respectively. The model incorporating ARSV demonstrated a 62.454 F-value and an Adjusted R² of 0.599, highlighting its robustness and reliability in audit risk assessment. These quantitative metrics underscore ARSV’s effectiveness in capturing qualitative audit risk dimensions, offering a more precise and informative measure for stakeholders. Full article

In 2006, the PCAOB implemented new restrictions on the auditor provision of some tax and contingent fee services provided to issuer audit clients. These restrictions were implemented to reduce auditor conflicts of interest inherent when the auditor provides any of these specific services and a financial statement audit. Subsequent research found that these tax service restrictions did not impact audit quality, measured as the probabilities of going concern opinions or financial statement restatements. We reexamine this research question in the context of the regulation’s earnings management effects. Our investigation of this question uses a difference-in-difference regression approach and 20,043 issuer company fiscal year observations from 2002 to 2009, consistent with that used in prior studies, and four measures of earnings management (discretionary accruals, abnormal working capital accruals, current accruals, and the likelihood of meeting or slightly beating the zero earnings change benchmark) to proxy for audit quality. We find, consistent with findings in prior studies, no detectable effects of the 2006 PCAOB tax service restrictions. These null results persist through a series of robustness tests that include re-estimating our primary regressions on a Big 4 subsample, adding multiple alternative treatment variable definitions, generating a propensity-score-matched sample, and adding a control for internal control weakness. These findings raise further doubt about the need for these non-audit service restrictions. Full article

This study investigates the impact of enterprise digital transformation through information and communication technology (ICT) on auditing fees. Based on data from publicly listed companies in China and employing information asymmetry theory, the research finds that the adoption of three factors associated with digital transformation—artificial intelligence (AI), cloud computing (CC), and big data technologies (BD)—exhibits a significant inverted U-shaped effect on auditing fees. Further analysis reveals that this effect is moderated by the quality of internal controls, the level of corporate governance, and discretionary accruals. These findings underscore the necessity for a nuanced understanding of the relationship between technology and auditing, as well as the importance for audit organizations to integrate new technologies into their practices to effectively respond to the rapid adoption of digital technologies by enterprises. Full article

The purpose of this study is to examine the influences of external auditor firm type, auditor tenure, and external auditor changes on the quality of Saudi Arabian financial reports. In particular, this study examines the quality of financial reports of companies listed on the Saudi Stock Exchange using a widely accepted evaluation model modified by JonesThis study aims to determine whether Big Four and non-Big Four audit firms, auditor tenures of three or more years, and external auditor changes have any impact on the quality of financial reports of Saudi-listed companies. This study uses 175 firm-year observations of 35 companies listed on the Tadawul Saudi Stock Exchange between 2017 and 2021. Using discretionary accruals (DACC) as modified by Jones to measure the quality of financial reports, the findings illustrate that there is a significant negative relationship between Big Four audit firms and DACC. However, the study also shows a significant positive correlation between auditor tenure and DACC. The research revealed that there is no significant relationship between auditor change and DACC. These results have practical implications for policy development. According to the outcomes of this research, there are numerous ramifications for both companies and the government in Saudi Arabia in terms of enhancing the relationship between companies and audit firms and determining the most suitable auditor tenure to improve the quality of financial reports. Full article

The main objective of the paper is to assess the relationship between firms’ financial resilience and firms’ strategic sustainable development vulnerabilities, in the context of implications of the COVID-19 pandemic on firms’ business environment. Background: The last decade has emphasized an increase in business models’ uncertainty and risk exposure. The COVID-19 pandemic has highlighted the awareness in this direction, especially in a changing context, that looks more and more for corporate sector operations’ orientation towards sustainable development. The question we would address in this paper is how the nexus between corporate sustainability performance and corporate financial resilience is affected by management decision through process improvements, product quality assurance, or managers’ preference to improve corporate financials by earnings management practice instead, especially in the context of specific corporate financial risk management. Methods: The data are extracted from the Refinitiv database. The sample is limited to 275 European Union listed firms, selected based on data availability. The empirical analysis consists of an OLS multiple regression. For robustness purposes, a quantile regression model is estimated as well. Results: The approach considers implications of the pandemic on firms’ business environment and earnings management accounting based policies and strategies as well. The result suggests that alignment to sustainability frameworks lead to the deterioration of firms’ financial resilience. Similar results show the negative impact of firms’ financial vulnerability (credit default risk) on firms’ financial resilience. Instead, the risk of bankruptcy, firms’ liquidity, or high product quality and business process improvement determine the positive impact on firms’ financial resilience. Conclusions: The study highlights several insights both for management and policy makers. First, the results underline the relevance of management’s choice for earnings management on ensuring firms’ financial resilience, which ask for better corporate governance and high-quality and effective institutional regulatory and enforcement mechanisms. Second, the paper brings evidence on the impact of the COVID-19 pandemic on firms’ financial sustainable development. Third, the study emphasizes the importance of the efforts of corporate process improvements and high-quality products on generating value-add, by looking on the relevance of those drivers on the level of corporate economic value-add, a measure that limits the impact of discretionary management accrual-based accounting choices on our discussion. Full article

This study evaluates the effect of earnings management on earnings quality and sustainability in the GCC region, particularly in distressed and non-distressed companies. Studies on earnings quality and sustainability have mostly concentrated on developed markets, with little attention paid to emerging markets like the GCC region. This research is the first to examine how manipulating earnings impacts the quality and sustainability of earnings in distressed and non-distressed companies. This study utilized a unique dataset that represents the GCC region, which has a specific socio-cultural context. We collected data from 839 publicly listed companies in the GCC region between 2011 and 2022 using DataStream^®, WorldScope (WS), and Refinitiv Eikon. To test our hypotheses and ensure accuracy, we used three types of regressions (the fixed effects model, OLS, and 2SLS) and conducted robustness and endogeneity tests. The results of this study indicate that accruals-based earnings management has a negative impact on earnings quality for distressed and non-distressed firms but a positive effect on earnings sustainability for both types of companies. The results of this study also find variations in earnings management practices across industries. These findings provide valuable guidance for auditors, investors, and other stakeholders to evaluate the earnings quality and sustainability of distressed and non-distressed companies, benefiting the GCC economy and similar economies. Full article

Earnings quality is crucial to provide investors and lenders with accurate information about the economic health of the firm and to help them make the right decisions. This paper examines whether the pooling of financial resources and internal funds allocation in corporate groups has a positive effect on earnings quality through reduced earnings management practices in affiliated firms. It is hypothesized that the funding benefits of pooling financial resources in corporate groups allow affiliated firms to reduce solvency problems arising from higher leverage, which in turn reduces incentives for earnings management. The study is based on a balanced panel data set of 95 non-financial firms traded on Borsa Istanbul covering the period between 2015 and 2022 (8 years) with a total of 760 observations. Using management’s discretionary accruals as a proxy variable to measure management’s flexibility to engage in earnings management, this study finds that being affiliated to a business group reduces earnings management incentives in group affiliates when firm’s leverage increases. The business group’s support on the debt-leveraged firm alleviates the motivation for earnings management practices. Full article

The main source of financing is bank loans for Portuguese small and medium-sized entities (SMEs), which implies several constraints to obtaining additional funds. Relying on the argument of Positive Accounting Theory (PAT) that accounting choices are not neutral and on Agency Theory that information asymmetry prevails between insiders and outsiders, we analyzed the impacts of debt on earnings quality, focusing on its level, its increases, and its term of payment. We estimated econometric regressions using panel data with fixed effects over 2013–2019, using discretionary accruals as an inverse proxy of earnings quality. We found empirical evidence that the relationship between debt and earnings quality tends to vary in sign, as the quality of financial information deteriorates with debt, but as debt becomes high, firms tend to increase the quality of earnings. Furthermore, we found that short-term debt tends to decrease earnings quality more than long-term debt. This article aimed to contribute to the prior literature by collecting evidence that debt levels tend to be an incentive to increase earnings management and fill the gap by analyzing the influence of different debt features. This evidence is useful because earnings management may compromise both stakeholders’ confidence and the efficient allocation of capital. Full article

This study draws on agency theory and evaluates the effect of the remuneration structures of board members on earnings management, proxied by discretionary accruals. To achieve the objective, this study uses a multiple regression model and a hand-collected dataset of Portuguese-listed firms from 2015 to 2019. This study suggests that fixed board remuneration is associated with lower levels of earnings management, as opposed to variable remuneration of board members, which is strongly associated with a higher level of earnings management. The findings based on this study provide useful information to investors and regulators in evaluating the effect of board compensation structure on earnings management. Additionally, this study expands the corporate governance literature by examining an under-researched mechanism to address the agency problem. Full article

We investigate whether accounting information system quality has an impact on the level and efficiency of firms’ investments. While firms’ growth depends on investment and financing decisions, accounting information is fundamental for the decision-making of several stakeholders. We assess the accounting information system quality by discretionary accruals, whereas the investment inefficiency is estimated by the residuals of an investment regression for a sample of 3073 Portuguese SMEs from 27 industries, over the period from 2016 to 2021 using a panel regression analysis. The empirical evidence suggests that firms exhibiting higher accounting information system quality tend to invest more. In addition, firms with a lower accounting information system quality have more inefficient investments, as they tend to engage in more overinvestment, although this is not significant for underinvestment. Therefore, this study provides new evidence regarding the impact of accounting information systems on investment that may be useful for several stakeholders, such as managers, creditors, regulators, and academics, by providing evidence for SMEs, where empirical studies are scarce. Full article

This study investigates the effect of the characteristics of the board of directors on the accrual and real earnings management level, focusing on the role of the corruption level. The employed dataset consists of 469 European-listed firms from 2011 to 2019. Using a fixed-effect panel data regression model, the results documented that larger boards lack coordination and communication in less corrupt economies, facilitating earnings manipulation through accruals and sales. In highly corrupt countries, oversized boards are associated with increased manipulation of production costs and discretionary expenses. Board meetings are positively related to accrual and sales manipulation in low-corruption countries, and board independence leads to reducing discretionary expenses regardless of corruption level. Board tenure negatively affects accruals and discretionary expenses but tends to increase manipulation through production costs in low-corruption contexts. Additionally, when the CEO serves as the board chairman, it encourages the manipulation of discretionary expenses while reducing real earnings manipulation through sales and production costs. In aggregate, the level of corruption can influence a board’s effectiveness under specific conditions. Full article

This study aims to analyze the relationship between earnings quality and investment efficiency in the European context, in order to understand whether higher earnings quality mitigates investment inefficiencies. To further understand the relationship between earnings quality and investment efficiency, the roles of cash and financial constraints are also analyzed. We use firm-year data based on unbalanced panel data, and control for country, year, and industry fixed effects using a sample composed of listed and unlisted European companies from 19 countries and 17 industries for the period 2010–2018. The results show a positive and significant relationship between earnings quality and investment efficiency. In both scenarios of investment inefficiency, overinvestment and underinvestment, the results suggest that a higher quality of reported earnings mitigates investment inefficiencies. The results also suggest that the negative relationship holds for cash-constrained and unconstrained firms, and that in firms that are financially unconstrained (higher levels of cash and lower levels of leverage) the combined effect with earnings quality is associated with a lower investment efficiency. Full article