Audit tenure and earnings surprise management

Ho, Li-Chin Jennifer; Liu, Chao‐Shin; Schaefer, Thomas F.

doi:10.1108/14757701011044152

Cited by 12 publications

(2 citation statements)

References 37 publications

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“…Discretionary accruals decrease significantly as audit firm tenure and partner tenure increases (Jennifer Ho et al , 2010; Chen et al , 2008). Similarly, audit quality increases and is perceived by investors to be improved with auditor tenure, especially for firms audited by industry specialists (Lim and Tan, 2010; Ghosh and Moon, 2005; Fernando et al , 2010).…”

Section: Literature Reviewmentioning

confidence: 99%

Are earnings strings restrained after SOX?

Kohlbeck

Sankara

Stewart

2018

RAF

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Purpose This paper aims to examine whether external monitors (auditors and analysts) constrain earnings strings, an indicator of earnings management, and whether this monitoring is more effective after the implementation of the Sarbanes-Oxley Act of 2002 (SOX), given the emphasis of SOX on improving auditing, financial reporting and the information environment. Design/methodology/approach Agency theory establishes the premise between external monitoring and earnings strings. Auditor tenure and number of analysts following provide measures for external monitoring quality. Using prior research, empirical models explaining the presence of an earnings strings and earnings strings trend are developed to test the hypotheses. Findings Pre-SOX, extreme auditor tenure, indicating lower quality external monitoring, is associated with greater earnings strings trend, and analyst coverage is associated with increased likelihood of earnings strings and greater earnings strings trend consistent with analyst pressure on management. More effective auditor and analyst monitoring occurs post-SOX in terms of reduced likelihood of earnings strings and earnings strings trend. Originality/value The authors provide evidence on how elements of external monitoring are associated with increased earnings strings pre-SOX. Further, they contribute to the debate on the impact of SOX on external firm monitoring and the overall financial information environment. By focusing on earnings strings, the outcome of earnings management, the authors provide a unique understanding of external monitoring that also provides insight on the overvaluation of equity and ultimate destruction of firm value. The evidence demonstrates how regulation has contributed to an improved financial reporting environment and external monitoring.

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Section: Literature Reviewmentioning

confidence: 99%

Are earnings strings restrained after SOX?

Kohlbeck

Sankara

Stewart

2018

RAF

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“…Issues of auditor selection and tenure remain controversial, especially in countries with low incentives for high-quality reporting. Prior studies on auditor tenure suggest that firms should retain their incumbent auditor, as auditors with shorter tenure are associated with lower earnings quality than auditors with longer tenure (Ball et al, 2015;Bamahros and Wan-Hussin, 2015;Garcia-Blandon et al, 2020a, 2020bGhosh and Moon, 2005;Jennifer et al, 2010;Johnson et al, 2002;Myers et al, 2003). It is argued that newly appointed auditing firms have insufficient client-specific knowledge (Gul et al, 2007) or are more lax in the early years of audit engagement because of clients' lowballing activities (DeAngelo, 1981).…”

Section: Introductionmentioning

confidence: 99%

Auditor switching, lowballing and conditional conservatism: evidence from selected Asian countries

Kamarudin

Islam

Habib

et al. 2022

MAJ

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Purpose This paper aims to investigate the effect of auditor switching and lowballing on conditional conservatism, particularly how different types of auditor switching, namely, upward, downward and lateral switching to/from Big 4 and industry specialists, affect earnings quality in the following selected Asian countries: Indonesia, Malaysia, the Philippines, South Korea and Thailand. Design/methodology/approach Using conditional conservatism as a proxy for earnings quality, this study hypothesises that upward switching from non-Big 4 to Big 4 auditors, or from non-specialist to specialist auditors, would result in high conditional conservatism, while downward switching would lead to low conditional conservatism. The study further tests whether lowballing provides a viable explanation for reduced earnings conservatism in firms that switch from Big 4 to non-Big 4 auditors, or from specialist to non-specialist auditors. Findings The analysis, on a sample of 28,073 firm-year observations from 2007 to 2016, shows that the decision to downgrade auditors leads to lower conditional conservatism in the year of switching, compared with other firms and the pre-switching year. The evidence further shows that, when firms downgrade their auditors, lowballing contributes to a decrease in conditional conservatism in the first year of audit switching. Further, this research finds that switching to specialist auditors will result in increased conditional conservatism, while switching from specialist auditors to non-specialist auditors will result in reduced conditional conservatism. Practical implications The findings of this study are useful to investors who are looking to diversify their investment portfolio in developing markets, as evidence about auditor switching and quality of financial reporting may be an important factor in their investment decisions. Downward auditor switches and lowballing could act as red flags to investors in the sense that these events could signal a decrease in conditional conservatism and, hence, quality of earnings. Originality/value This research offers new evidence to support the view that management decisions to switch to lower-quality auditors will force newly appointed auditors to acquiesce to clients’ demands for reporting low-quality earnings.

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Acquisition deal characteristics and earnings management: New evidence from Gulf Cooperation Council countries

Alghemary,

Al‐Najjar,

Polovina

2024

Int. J Fin Econ

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In this study, we empirically investigate the association between acquisition deal characteristics and two forms of earnings management: accruals earnings management and real earnings management. Our focus is on acquiring firms listed in six Gulf Cooperation Council (GCC) countries. Employing a panel data approach to explore these interrelationships, our findings suggest that acquiring companies involved in cross‐border deals tend to resort to accruals earnings management before the acquisition rather than real earnings management. Conversely, acquiring firms engaged in unrelated industrial deals are inclined to employ real earnings management over accruals earnings management. Moreover, our analysis indicates that the extent of acquired ownership acts as an effective tool in mitigating both forms of earnings management. Similarly, cash payment acquisitions emerge as an efficient means of curtailing both accruals and real earnings management. These results underscore that the engagement of GCC acquiring firms in earnings management is influenced by the specific characteristics inherent in the acquisition deals.

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Audit tenure and earnings surprise management

Cited by 12 publications

References 37 publications

Are earnings strings restrained after SOX?

Are earnings strings restrained after SOX?

Auditor switching, lowballing and conditional conservatism: evidence from selected Asian countries

Acquisition deal characteristics and earnings management: New evidence from Gulf Cooperation Council countries

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