The Joint Effect of Investor Protection and Big 4 Audits on Earnings Quality Around the World

Francis, Jere R.; Wang, Dechun

doi:10.2139/ssrn.928988

Cited by 355 publications

(699 citation statements)

References 39 publications

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“…One drawback of these models is their limited predictive accuracy and power to detect earnings management. However, they continue to be used to identify differences in audit quality (Francis and Wang, 2008;Francis et al, 2009). …”

Section: The Use Of Proxies To Operationalise Audit Quality and Auditmentioning

confidence: 99%

Joint Audit: Issues and Challenges for Researchers and Policy-Makers

Ratzinger‐Sakel

Audousset-Coulier

Kettunen

et al. 2013

Accounting in Europe

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The publication of the European Commission Green Paper, "Audit Policy: Lessons from the Crisis" in October 2010, has stirred up a lively debate on the role of joint audits. This literature review identifies and evaluates, for the benefit of future research and regulators, existing evidence about joint audits. We find limited empirical support to suggest that joint audits lead to increased audit quality, but some empirical support to suggest that joint audits lead to additional costs. Overall, this paper indicates that joint audit should be seen as a mechanism that is embedded in a broader institutional context, and not be considered in isolation from other factors that might impact the audit market. The results indicate that various country-level characteristics are simultaneously at play. While joint audits can potentially enhance the audit market competition by allowing smaller audit firms to maintain larger market shares, the related impact on audit quality has not yet been clearly demonstrated and thus provides a promising avenue for future research.3

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Section: The Use Of Proxies To Operationalise Audit Quality and Auditmentioning

confidence: 99%

Joint Audit: Issues and Challenges for Researchers and Policy-Makers

Ratzinger‐Sakel

Audousset-Coulier

Kettunen

et al. 2013

Accounting in Europe

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“…They use matching models to control client characteristics and find that the audit quality of Big 4 auditors does not differ significantly from that of non Big 4 auditors. Further, Francis and Wang (2008) report that the decrease of the magnitude of accruals earnings management is restricted to the clients of Big 4 auditors in the U.S. (in which legal regime is the strongest in the world) and those of non-Big 4 auditors are not affected by the legal regime changes. As a result, it is possible that auditors do not play any monitoring for the decrease of REM because the REM is harder for external auditors, regulators and other stakeholders to detect compared with AEM.…”

Section: Background and Hypothesis Developmentmentioning

confidence: 99%

“…Size is included because larger firms tend to have lower absolute abnormal accruals (Becker et al 1998;Myers et al 2003;Francis and Wang 2008;Lim and Tan 2009;Reichelt and Wang 2010). Firm size is defined as the natural logarithm of total assets at the end of period (LOGSIZE it = log (A i,t )).…”

Section: Measurement Of Control Variablesmentioning

confidence: 99%

Audit Quality and Earnings Management in the Tunisian Context

Zgarni¹,

Khmoussi²,

Zehri³

2012

ijafr

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In this study, we test the effect of the implementation of the financial security law (n° 2005-96) and the audit quality (Big 4 auditors, auditor industry specialization and audit tenure) on constraining the extent of real and accruals based earnings management in the Tunisian context. Using 319 firm-year observations during the period 2000-2010, our results suggest that auditor industry specialization and Big 4 auditors associated with lower levels of accruals earnings management. We also find that the Big 4 auditors enhance the extent of real earnings management (REM). Further, we document that longer auditor tenure is not associated with greater real and accruals earnings management. Finally, our findings suggest that the adoption of the financial securities law of 2005 is not effective on reducing earnings management in the Tunisian context.

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“…One explanation for higher quality earnings is that Big 4 auditors are more likely to issue audit reports than non-Big 4 auditors for the same set of client circumstances, which means that investors can have greater confidence in the reliability of earnings of Big 4 clients (Francis & Krishnan 1999, 2002. However, Francis and Wang (2008) find that earnings quality is higher for firms audited by Big 4 auditors compared to non-Big 4 auditors only in countries with strong investor protection. In this respect, we question whether adaptation of IFRS by a Mexican company has a stronger effect on the quality of earnings of that company when is audited by a Big 4 audit firm.…”

Section: H2: the Reduction In Earnings Management Due To Adaptation Omentioning

confidence: 86%

“…However, the results of Maijoor and Vanstraelen (2006) and Francis and Wang (2008) report that the constraint constituted by a Big 4 auditor on earnings management is not uniform across countries. Francis and Wang (2008) find that earnings quality is higher for firms audited by Big 5 compared to non-Big 5 auditors only in countries with strong investor protection. In this respect, we question whether adaptation of IFRS by a Mexican company has a stronger effect on the quality of earnings of that company when is audited by a Big 4 audit firm.…”

Section: Introductionmentioning

confidence: 99%

Keys to reduce earnings management in emerging markets

Manzano

Conesa

Sánchez

2014

SAJBM

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This paper examines earnings quality adapted to International Financial Reporting Standards in Mexican emerging capital market and how investor protection and audit quality to override managers' incentives to engage in earnings management. We evidence that the new accounting regulation could be considered of high quality financial reporting standard because it is associated with lower earnings management. The analyses also suggest that cross-listed firms have higher quality local generally accepted accounting principles accounting information as measured by earnings management. There is also evidence that earnings of Mexican companies with Big 4 auditors are of higher quality. The results contribute to the ongoing debate on whether high standards are sufficient and effective in countries with weaker investor protection rights.

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The Joint Effect of Investor Protection and Big 4 Audits on Earnings Quality Around the World

Cited by 355 publications

References 39 publications

Joint Audit: Issues and Challenges for Researchers and Policy-Makers

Joint Audit: Issues and Challenges for Researchers and Policy-Makers

Audit Quality and Earnings Management in the Tunisian Context

Keys to reduce earnings management in emerging markets

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