Who Can Dominate Earnings Management? The Roles of Industry Specialist Auditors versus Managerial Abilities

• In Event: Auditing Issues Roundtable

Abstract

This study examines examine whether high-ability managements change their decision on tradeoff between three types of earnings management based on previous literature. (Huang and Sun 2017). There are many accounting scandals caused by aggressive earnings management and thus is of concern to global regulators, legislators, and researchers. Different types of earnings management have substantial influences on firms’ operation. For instance, real earnings management may harm operating results in the future. Moreover, industry-specialized auditors are regarded as high audit quality (Mayhew and Wilkins 2003). Auditors who owns more market share in a specific industry seems to perform higher-quality audit service because they have enough and competent knowledges.
Testing an enormous sample comprising all listed-companies in the U.S. between 1999 and 2016, we find that (1) higher-ability managers would adopt more real earnings management if their auditors are industry-specialists. (2) In the tradeoff between real and accruals-based earnings management, higher-ability managers use larger amounts of real earnings management if their auditors own more market shares in the industry of the firm. (3) higher-ability managers in large companies would lower real earnings management alternatively when their auditors are industry-specialist auditors.

Author

• Yi Cheng Tsai, National Cheng Kung University