Corporate Governance, Auditing and Earnings Management Through Accounting Choices and Operational Decisions in Brazil

20 Pages Posted: 24 Apr 2010

See all articles by Antonio Lopo Martinez

Antonio Lopo Martinez

University of Coimbra; University of Salamanca - University of Salamanca, Faculty of Law, Students

Date Written: April 23, 2010

Abstract

This article examines whether enhanced corporate governance, auditing by one of the Big Four and auditors’ opinions, are associated with the propensity to engage in earnings management through accounting choices or operational decisions in Brazil. Although there are some studies on earnings management by Brazilian companies, very few have examined the presence of operational decisions in this practice and none has addressed how to minimize this. Using our own models to infer earnings manipulation by accounting choices and operational decisions, we investigate if firms that manage earnings through discretionary accruals also make operational decisions for the same purpose. The evidence from a sample of Brazilian firms suggests that listing on the Novo Mercado (New Market) segment of the São Paulo Stock Exchange, which requires enhanced corporate governance practices, among other requirements, and auditing by one of the Big Four firms reduce earnings management by accounting choices, and that an auditors’ opinion with reservations is an indicator of earnings management. However, except in special cases, listing in the Novo Mercado segment and auditing by the Big Four do not assure less earnings management by operational decisions.

Keywords: Earnings management by accounting choices, earnings management by operational decisions, discretionary accruals, real earnings management

JEL Classification: M41, M49, G34, G38

Suggested Citation

Martinez, Antonio Lopo, Corporate Governance, Auditing and Earnings Management Through Accounting Choices and Operational Decisions in Brazil (April 23, 2010). Available at SSRN: https://ssrn.com/abstract=1595089 or http://dx.doi.org/10.2139/ssrn.1595089

Antonio Lopo Martinez (Contact Author)

University of Coimbra ( email )

University of Salamanca - University of Salamanca, Faculty of Law, Students ( email )

Salamanca, E37007
Spain

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