Abstract

Prior study report that suspected non－listed firms that slightly achieve earnings benchmarks (toavoid losses or to avoid earnings decreases) tend to manage earnings using discretionary accrualsas well as real earnings management (Choi and Kwak 2010). Also, Burgstahler and Dichev (B&D,1997) argue that managers overstate earnings in order to avoid reporting losses and earningsdecreases, and they find a significant discontinuity around zero in the earnings distribution. Therefore, this paper investigates whether non－listed firms audited from the Big 4 auditorssuppress the avoidance of reporting losses or earnings decreases than non－listed firms auditedfrom the non－Big 4 auditors. For the analysis, we employ the cross－sectional discontinuitycharacteristic of earnings distribution (earnings levels and earnings changes) around zero, itfollows from B&D (1997)’s methodology (Park and Kim 2013；Choi and Kwak 2010 etc). Thispaper uses the total 40,362 firm－year observations for the period from 2002 to 2007. The empirical findings of this paper are following. First, we find that the non－listed firmsaudited from the Big 4 auditors were shown to lower probability of avoiding losses than the nonlistedfirms audited from the non－Big 4 auditors. Second, we find that the non－listed firmsaudited from the Big 4 auditors were shown to lower probability of avoiding earnings decreasesthan non－listed firms audited from the non－Big 4 auditors. These results shows that the Big 4auditors are more effective than non－Big 4 auditors in suppressing the tendency of switching non－listed firms’ earnings decreases into increases for reporting. Thus, we interpret our results assupporting the conclusion that Big 4 auditors are of higher quality than non－Big 4 auditors. In summary, the result of this paper confirming that hiring Big 4 auditors with respect to nonlistedfirms suppress avoidance of reporting losses or earnings decreases more effectively than non－Big 4 auditors is significant. That is, it shows the effectiveness of audit quality of the Big 4auditors even for non－listed firms with relatively low accounting environment is also quitedifferent from that of listed firms. Therefore, this paper’s findings are expected to make additional contributions to relevant research on audit quality as well as to provide useful implications forregulatory institution interested in the reliability of non－listed firms’ financial reports. Also,academics can apply the discussion in this paper for related researches.

Keywords

• Non－listed firms
• Audit quality
• Small positive earnings to avoid losses
• Small earnings increase to avoid earnings decrease
• Discretionary accrual

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