The differential effect of accrual-based and real earnings management on audit fees: international evidence

Ahrum CHOI*, Eugenia Y. Lee, Sunyoung Park, Byungcherl Charlie Sohn

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

This study investigates the relative importance of accrual-based earnings management (AEM) and real earnings management (REM) as reflected in audit fees. Auditors charge not only for AEM, but also for REM, because it increases the litigation risks and audit complexity they face by dampening firms’ long-term fundamentals; however, whether auditors charge more for AEM or for REM is relatively unexplored. Using data from 24 countries, we find that auditors, on average, charge a higher premium for REM than for AEM. We also find that a strong legal regime increases the audit fee premium charged on both AEM and REM, where the premium for REM increases to a greater extent than it does for AEM. Overall, our results provide novel evidence of the relative importance of the different types of earnings management under different legal regimes to auditors.

Original languageEnglish
JournalAccounting and Business Research
Early online date22 Apr 2021
DOIs
Publication statusE-pub ahead of print - 22 Apr 2021

Scopus Subject Areas

  • Accounting

User-Defined Keywords

  • accrual-based earnings management
  • audit fees
  • auditor type
  • legal regime
  • litigation risk
  • M41
  • M42
  • real earnings management

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