Title

The relation between earnings management and audit quality.

SelectedWorks Author Profiles:

Wenshan Lin

Document Type

Article

Publication Date

2005

ISSN

1093-5770

Abstract

Recent high-profile earnings management cases (e.g., WorldCom) and the collapse of Enron have put the role and quality of external audit in ensuring the quality of corporate earnings under considerable scrutiny. Much research has been conducted on the determinants of earnings management, such as a firm’s financial characteristics and audit quality. Since earnings management is inherently unobservable, most studies used measures of accruals as proxies for earnings management. The purpose of this study is to examine the relationship between audit quality and a more direct measure of earnings management – earnings restatements. Contrary to the concerns of many in accounting practice and research, as well as the results in prior research, this study finds no statistically significant relationship between earnings restatements and non-audit fees. This does not support the claim that non-audit fees paid to the auditor are the primary reason for auditor independence impairment that results in lower audit and earnings quality. On the other hand, this study provides evidence that total fees and audit fees are positively associated with earnings restatements.

Publisher

American Academy of Accounting and Finance

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

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