An Examination of Real Earnings Management and Audit Fees

• In Event: Breakfast and Research Forum
  In Roundtable Session: Table 4: Audit Fees: Measures, Markets, and Real Earnings Management

Abstract

We examine the relationship between real earnings management (REM) and audit fees. While a range of studies have investigated the influence of accrual-based earnings management on audit fees, empirical research is silent on whether REM activities explain audit fees. We find evidence consistent with both current and prior period REM impacting audit fees. The prior period REM finding is consistent with the auditor treating the observed REM as indicating increased auditor business risk, while the current period effect may be the result of a perceived increase in auditor business risk or an increase in auditor effort. To provide more insight into the source of the current period effect, we extend our analysis into the banking industry to examine a REM activity (gains trading) less likely to require additional audit effort. We again document a positive prior period REM effect, but are unable to find the current period effect. This result provides additional support that the prior period effect is likely capturing increased auditor business risk. The inability to find a current period effect among the banking industry provides additional support that the current period effect found in our main analysis might best be attributable to increased auditor effort.

Authors

• Adam James Greiner, Florida Atlantic University

• Mark Kohlbeck, Florida Atlantic University

• Thomas Joseph Smith, Florida Atlantic University