The Influence of Management’s Internal Audit Experience on Earnings Management

• In Event: Internal Audit and Technology

Abstract

We examine whether firms with managers that have prior internal audit experience are less likely
to manage earnings. We find that firms with managers that have internal audit experience are
associated with less overall earnings management, driven by lower real earnings management.
Importantly, these firms do not trade-off reduced real earnings management with increased
accruals-based earnings management. Further tests reveal that this effect is generally strongest
when managers with internal audit experience currently hold financial roles or roles with higher
power within the company. We also confirm that real earnings management is negatively
correlated with future firm performance, as measured by Tobin’s Q and abnormal returns. Overall,
these results point to a potentially important benefit of manager internal audit experience, as
research suggests that real earnings management is common, difficult to detect, not always within
the scope of financial reporting regulators, and detrimental to future performance.

Authors

• Matthew Stephen Ege, Texas A&M University

• Timothy Andrew Seidel, Brigham Young University

• Mikhail Sterin, Texas State University

• David A Wood, Brigham Young University