Earnings Management and Auditor Quality

Savita Sahay, Harry ZviDavis and Meyer Peikes

Accounting and Finance Research, 2012, vol. 1, issue 1, 38

Abstract: This paper analyzes the relationship between a firm’s demand for different quality auditors and opportunities for earnings management.In our model, the firm simultaneously chooses the bias it introduces into its pre-audited earnings and the quality of its auditor. We show that firms that choose a highlevel of bias also choose a low-quality auditor, even though the market-maker makes a correction for the level of residual bias in audited reports. Firms that choose a low level of bias choose a high-quality auditor.We also study the effect of changes in the regulatory environment on the market equilibrium.Our analysis shows that stricter regulation leads to more firms choosing low-quality auditors, thus it is not in the interest of high quality auditors to support such measures.

Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:jfr:afr111:v:1:y:2012:i:1:p:38

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