The impact of audit quality on real and accrual earnings management around IPOs |
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| Institution: | 1. Southampton Management School, University of Southampton, Highfield, Southampton SO17 1BJ, UK;2. School of Business and Management, Francis Bancroft Building, Queen Mary, University of London, Mile End Road, London E1 4NS, UK;3. Beijing Institute of Securities and Futures, East Wing, Fortune Times Building, Taipingqiao Street, Xicheng District, Beijing 100032, China;1. International Finance and Risk Management Research Center, School of Finance and Statistics, East China Normal University, China;2. Department of Accounting and Corporate Governance, Macquarie University, Australia;3. UTS Business School, University of Technology, Sydney, Australia;4. School of Finance and Statistics, East China Normal University, China;1. University of Bath, School of Management, Claverton Down Rd, Combe Down, Bath BA2 7AY, UK;2. University of Essex, Wivenhoe Park, Colchester CO4 3SQ, UK |
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| Abstract: | We examine the relation between audit quality and the earnings management activities of IPO firms. The impact of high quality auditors on real earnings management has been researched in a number of settings e.g. SEOs. However, to date, there has been no work on the effect of high quality auditors on real activities-based manipulation around IPOs. We examine UK IPOs between 1998 and 2008 and find evidence that high quality auditors constrain the use of real activities manipulation that occurs via the management of discretionary expenses. We also find evidence, consistent with prior research, that high quality auditors constrain the manipulation of discretionary accruals. Crucially, we find IPO firms audited by high quality auditors undertake sales-based manipulation in order to manage earnings upward at the end of the IPO year. The presence of high quality auditors is not, therefore, sufficient to constrain all forms of earnings management. |
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| Keywords: | Earnings management Discretionary accruals Real activities manipulation Audit quality Initial public offering G14 M40 M41 M42 |
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