Auditor’s Quality Control and Auditee’s Earnings Management through Real Activities
Asian Tax Journal Vol. 25 No. 5 (2024), pp. 85-109
Abstract
This study investigates the impact of auditors’ quality control efforts on real earnings management of audited firms. Our findings can be summarized as follows. First, auditors’ quality control hours are positively associated with real earnings management of audited firms. This suggests that the suppression of accrual－based earnings management through auditors’ quality control efforts leads to an unintended increase in real earnings management. Second, the positive association between quality control hours and real earnings management is observed only in firms with high discretionary accruals in the previous fiscal year. This indicates that firms with a stronger incentive for earnings management are more likely to exploit real earnings management actively when they must limit accrual－based earnings management due to increased auditors’ quality control. This study underscores the necessity of exploring institutional measures to ensure that the emphasis on auditors’ quality control efforts does not result in the unintended consequence of increased real earnings management.
Keywords
- rank audit hours
- quality control hours
- real earnings management
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