The Association of Real Earnings Management with Audit Report Lags

• In Event: Accounting History & Forensics

Abstract

We assess the impact of real earnings management [REM] on audit effort by examining the association between REM and audit report lags [ARLs]. Our results indicate that REM is associated with longer ARLs and that the impact of REM on ARLs is greater for firms just meeting earnings benchmarks. These results are significant because although REM violates no accounting principles, it likely triggers higher risk assessments by auditors and a resulting increase in audit effort. Since prior research indicates that REM has, to a large extent, replaced accruals management as a way for firms to meet earnings benchmarks, these results should be of importance to auditors as they plan and price audits and also to regulators since shorter filing deadlines put greater pressure on auditors and may interfere with their ability to conduct additional substantive tests when they encounter REM.

Authors

• Angel Arturo Pacheco Paredes, Texas A&M International University

• Clark M Wheatley, Florida International University