The same network auditor, family business groups and earnings manipulation: an evidence from emerging market

Abstract

Purpose This paper aims to examine whether family business groups’ (FBG) having the same network auditor among their affiliates mitigates earnings manipulation (EM). Design/methodology/approach This paper used unbalanced panel data from the years 2010–2019. The sample of the study is composed of 327 nonfinancial listed Pakistan Stock Exchange firms, consisting of 187 FBG-affiliated firms and 140 nonaffiliated firms. The ordinary least square and generalized least square regressions have been used to check the hypothesized relationship. Furthermore, the propensity score matching technique is used to ascertain comparable companies’ features and to control the potential endogeneity problem. Finally, the results are robust to various measures of EM and FBG’ proxies. Findings The findings of the study show that the same network auditor is reducing EM in FBG affiliates. In addition, the BIG4 same network auditors are also instrumental in constraining EM as compared to non-BIG4 audit firms. Overall, the results of this study depict that the same network auditor in FBG’s affiliated firms significantly influences EM. These results are robust with respect to generalized least squares and the endogeneity problem. Research limitations/implications This research study has two important implications for the interested parties. First, although the authors find in this research study that the same network auditor is negatively associated with EM in the FBG-affiliated firms, however, FBG-affiliated firms might use opportunistically the real activity manipulation. Second, regulators highlight the change in audit partner/firm rotation, though the study findings indicate that regulators and practitioners may consider the benefits associated with the same network auditors for FBG. Originality/value This research study adds a new investigation to previous literature by examining the role of the same network auditors in the EM of the FBG’ affiliates. To the best of the author’s knowledge, this is the first study to bring new knowledge by investigating the role played by the same network auditors along with the BIG4 same network audit firms in constraining EM in FBG.

Corporate board, audit committee and earnings manipulation: does the corporate regulation matter? An emerging economy perspective

“…In the related literature, BIG4 audit firms are considered one of the most important determinants of EM, which mitigates EM. The study (Khan and Kamal, 2023), which looked at Pakistan, Khan and Kamal (2023) found. Moreover, these results are in line with Abid et al (2018), who reported that BIG4 audit firms are not effective in Pakistan, as they are not operating in Pakistan under their real brand name but rather under local affiliates.…”

“…The ability to effectively control EM and enhance the quality of financial reports requires the BOD's accounting knowledge (financial expertise), which is essential to the BOD's monitoring role (Siam et al, 2014). Moreover, in Pakistan, there is a dominance of insiders and family directors in the boards of PSX-listed firms; as reported by Khan (2023), there is a majority of family directors in the boards of PSX-listed firms, and every third member in PSX-listed firms is a family member. Therefore, due to the importance of independent and expert members in the boards, their inclusion in the board and AC was made mandatory in Pakistan via CCG-2017.…”

“…Consequently, we can say that diverse boards with valuable resources such as information, skill and expertise can effectively curb EM. Traditionally, in Pakistan, there is a low ratio of independent directors as compared to family directors (Khan, 2023). Moreover, PSX-listed firms have 17% board independence as compared to UK firms, which have 60% board independence (Hasan et al, 2022).…”

“…Moreover, Hasan et al (2022) reported that during the period from 2009 to 2018, in Pakistan, there was 6% gender diversity as compared to the UK, which has 19% gender diversity. In addition to this, Pakistan is a male-dominated society, and there is less representation of women in every field of life (Khan, 2023). Moreover, Khan (2023) added that there is on average 10% female representation in PSX-listed firms, while in PSX-listed family firms there is only 7% female representation on the board of Pakistani companies.…”

“…In addition to this, Pakistan is a male-dominated society, and there is less representation of women in every field of life (Khan, 2023). Moreover, Khan (2023) added that there is on average 10% female representation in PSX-listed firms, while in PSX-listed family firms there is only 7% female representation on the board of Pakistani companies. Furthermore, Amin et al (2021) added that female directors have a vital role in reducing agency costs, reducing principal and agent conflict and enhancing board monitoring, which will result in less earnings manipulation.…”