The Effect of Audit Adjustments on Earnings Quality: Evidence from China

Posted: 17 Apr 2017

See all articles by Clive S. Lennox

Clive S. Lennox

University of Southern California

Xi Wu

Central University of Finance and Economics

Tianyu Zhang

The Chinese University of Hong Kong

Date Written: August 22, 2015

Abstract

We examine how adjustments to earnings during year-end audits affect measures of earnings quality. There are four key findings. First, audit adjustments cause earnings to become smoother and more persistent. Second, the adjustments result in higher accrual quality. Third, audit adjustments have a larger negative effect on signed accruals than absolute accruals. Fourth, the adjustments do not reduce the discontinuity in the earnings distribution around zero. These findings are of interest to researchers who use earnings properties as proxies for earnings quality and audit quality. However, we caution that our findings for China may not generalize to other countries.

Keywords: auditing; earnings quality

JEL Classification: M4

Suggested Citation

Lennox, Clive and Wu, Xi and Zhang, Tianyu, The Effect of Audit Adjustments on Earnings Quality: Evidence from China (August 22, 2015). Journal of Accounting & Economics (JAE), Vol. 61, No. 2-3, 2016, Available at SSRN: https://ssrn.com/abstract=2649413

Clive Lennox (Contact Author)

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

Xi Wu

Central University of Finance and Economics ( email )

Xue Yuan Nan Road 39
Hai Dian District
Beijing, 100081
China
86-10-62288073 (Phone)

Tianyu Zhang

The Chinese University of Hong Kong ( email )

Shatin, N.T.
Hong Kong

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