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 journalJournal articlepeer-review

    16 Citations (Scopus)

    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
    Pages (from-to)254-290
    Number of pages37
    JournalAccounting and Business Research
    Volume52
    Issue number3
    Early online date22 Apr 2021
    DOIs
    Publication statusPublished - 16 Apr 2022

    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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