Auditor Independence and Auditor Specialization: Determinants of Earnings Management?

• Main Authors: Rusmin, Rusmin, Van der Zahn, Jean-Luc Wolfgang Mitchell, Tower, Greg, Brown, Alistair
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2005
• Subjects: Accounting; Business Law, Public Responsibility, and Ethics; Corporate Finance
• Online Access: https://ink.library.smu.edu.sg/soa_research/40
• Institution: Singapore Management University

This study examines the relation between two audit value characteristics – auditor independence and auditor quality – and the magnitude of earnings management. Our analysis also draws on Porter’s (1985) competitive strategy to consider the possible mitigating influence of a client’s absolute size and relative size bargaining power. Using 2003 data hand collected from 298 Singapore firms we find no significant association between the non-audit/total fee ratio and the magnitude of earnings management. We also find a firm engaging an audit firm with industry specialization skills has significantly lower levels of absolute discretionary accruals than a firm using the services of a non-specialist. Finally, we find a client’s absolute size bargaining power but not a client’s relative size bargaining power mitigates the association between auditor specialization and earnings management. Main findings of our study are robust to various sensitivity checks with have implications for various stakeholders such as policy makers and reformists