Aggregate Audit Adjustments and Discretionary Accruals: Further Evidence on the Relation between Audit Quality and Earnings Management

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29 Pages Posted: 10 Nov 2004

See all articles by Yung-Ming Hsieh

Yung-Ming Hsieh

Soochow University. Taiwan

Yann Tsai

National Taiwan University

Date Written: November 5, 2004

Abstract

This study uses a new measure, aggregate audit adjustment (AAA), of audit quality to reexamine the relation between audit quality and earnings management. The AAA is defined as the difference between pre-audited earning and post-audited earning, which represents an objective measure of the auditors' ability at detecting errors and irregularities in the pre-audited financial statements, and then credibly making necessary adjustments. We predict that there is a negative effect of aggregate audit adjustment on earnings management (measured by discretionary accruals). The empirical result indicates that even in the case of controlling the auditor type (Big 5 vs. Non-Big 5), this relation still holds. This means that higher quality auditors can not only report a lower degree of discretionary accruals but also adjust a larger amount/magnitude of errors (or perhaps unwarranted accruals) included in their client's pre-audited earnings. This finding complements and reinforces the findings of prior research, in particular those provided in Becker et al. (1998).

Keywords: audit quality, earnings management, discretionary accruals, pre-audited earnings, self-selection

JEL Classification: M41

Suggested Citation

Hsieh, Yung-Ming and Tsai, Yann, Aggregate Audit Adjustments and Discretionary Accruals: Further Evidence on the Relation between Audit Quality and Earnings Management (November 5, 2004). Available at SSRN: https://ssrn.com/abstract=616221 or http://dx.doi.org/10.2139/ssrn.616221

Yung-Ming Hsieh (Contact Author)

Soochow University. Taiwan ( email )

No. 56, Kwei-Yang St., Sec. I,
Taipei, Taiwan 10048
Taiwan
+886920512043 (Phone)
+886223118573 (Fax)

HOME PAGE: http://teacher.acc.scu.edu.tw/ymhsieh/

Yann Tsai

National Taiwan University ( email )

1 Sec. 4, Roosevelt Road
Taipei, 106
Taiwan

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