TY - JOUR
T1 - The differential effect of accrual-based and real earnings management on audit fees
T2 - international evidence
AU - Choi, Ahrum
AU - Lee, Eugenia Y.
AU - Park, Sunyoung
AU - Sohn, Byungcherl Charlie
N1 - Funding Information:
This work was supported by Hong Kong Baptist University [grant number FRG2/16-17/025]. We thank two anonymous reviewers, Koon-Hung Chan, Raymond Chan, Agnes Cheng, Jong-Hag Choi, Sunhwa Choi, Mark Clatworthy (editor), Simon Fung, Zhaoyang Gu, Wonsuk Ha, Lee-Seok Hwang, Iny Hwang, Zhenpin Kenny Lin, James Ohlson, Taeyoung Paik, Susan Shu, Catherine Sonu, Woody Y. Wu, and Joon Sun Yang, and workshop participants at Chinese University of Hong Kong, Hong Kong Baptist University, Hong Kong Polytechnic University, Lingnan University, Neoma Business School, Seoul National University, and Tilburg University, as well as conference participants at the American Accounting Association and Korean Accounting Association’s annual meetings for their helpful comments and suggestions. All remaining errors and omissions are our own. Ahrum Choi gratefully acknowledges financial support from Hong Kong Baptist University (FRG2/16-17/025).
Funding Information:
We thank two anonymous reviewers, Koon-Hung Chan, Raymond Chan, Agnes Cheng, Jong-Hag Choi, Sunhwa Choi, Mark Clatworthy (editor), Simon Fung, Zhaoyang Gu, Wonsuk Ha, Lee-Seok Hwang, Iny Hwang, Zhenpin Kenny Lin, James Ohlson, Taeyoung Paik, Susan Shu, Catherine Sonu, Woody Y. Wu, and Joon Sun Yang, and workshop participants at Chinese University of Hong Kong, Hong Kong Baptist University, Hong Kong Polytechnic University, Lingnan University, Neoma Business School, Seoul National University, and Tilburg University, as well as conference participants at the American Accounting Association and Korean Accounting Association’s annual meetings for their helpful comments and suggestions. All remaining errors and omissions are our own. Ahrum Choi gratefully acknowledges financial support from Hong Kong Baptist University (FRG2/16-17/025).
Publisher Copyright:
© 2021 Informa UK Limited, trading as Taylor & Francis Group.
PY - 2022/4/16
Y1 - 2022/4/16
N2 - 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.
AB - 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.
KW - accrual-based earnings management
KW - audit fees
KW - auditor type
KW - legal regime
KW - litigation risk
KW - M41
KW - M42
KW - real earnings management
UR - https://www.ingentaconnect.com/content/routledg/rabr20/2022/00000052/00000003/art00002
UR - http://www.scopus.com/inward/record.url?scp=85104725760&partnerID=8YFLogxK
U2 - 10.1080/00014788.2021.1911779
DO - 10.1080/00014788.2021.1911779
M3 - Journal article
AN - SCOPUS:85104725760
SN - 0001-4788
VL - 52
SP - 254
EP - 290
JO - Accounting and Business Research
JF - Accounting and Business Research
IS - 3
ER -