Title: Audit Quality, Materiality & Threshold-Induced Earnings Management
Authors: Van Caneghem, Tom
Editors: Madtha, C.M
Issue Date: 2007
Host Document: Creative Accounting: Concepts and Cases
Abstract: Several prior studies (see e.g. Burgstahler & Dichev, 1997; Degeorge, Patel & Zeckhauser, 1999; Gore, Pope & Singh, 2001; Holland & Ramsay, 2003) document statistically significant discontinuities in the distribution of reported earnings figures around certain targets (i.e. zero earnings, analysts' earnings forecasts and prior year's earnings). These discontinuities are then ascribed to threshold-induced earnings management. Relying on a sample of listed UK firms and employing a similar methodology, I examine whether high-quality audits serve as a constraint on earnings management practices. In order to capture audit quality, I rely on the traditional brand name proxy (i.e. BigN vs. non-BigN auditors) and a proxy for auditors' industry expertise. While results suggest that high-quality audits constrain loss avoidance, this is not true for earnings management aimed at meeting last year’s earnings figure. This discrepancy in obtained results might be attributable to the fact that the latter type of earnings enhancement will often not be quantitatively material and that auditors (i.e. both high- and low-quality auditors) neglect qualitative factors in order to assess materiality.
ISBN: 81-314-1158-8
Publication status: published
KU Leuven publication type: IHb
Appears in Collections:Research Centre for Finance, Accountancy & Tax, Campus Brussels (-)

Files in This Item:

There are no files associated with this item.

Request a copy


All items in Lirias are protected by copyright, with all rights reserved.