Do Individual Auditors Affect Clients’ Real Activities Manipulation? Evidence of Learning and Auditor Quality

Abstract

We find empirical evidence that clients’ real activities manipulation (RAM) varies across individual auditors. More specifically, both audit-firm and individual-auditor fixed effects on RAM are significant; yet only the latter remain significant in regressions including auditors’ propensity to issue qualified audit opinions as an explanatory variable. This incremental effect of individual auditors on RAM is beyond what is proxied by qualified audit opinions. We also find that auditors’ personal demographics have limited power in explaining RAM’s variation. Taken together, these findings suggest that audit quality take root in individual auditors, who influence clients’ economic decisions, not just accounting policy choices.

Keywords: Auditor identity disclosure; partner rotation; auditor quality; qualified audit opinion; and real activities manipulation

JEL Classification: M49