Earnings management within Europe: the effects of member state audit environment, audit firm quality and international capital markets

Steven Maijoor and Ann Vanstraelen

Accounting and Business Research, 2006, vol. 36, issue 1, 33-52

Abstract: This paper studies earnings management in a European context. More specifically, the effects of three factors on earnings management within Europe are studied: member state audit environment, audit firm quality and presence in international capital markets. The national audit environments within Europe vary strongly in terms of independence rules and auditor liability. Hence, it can be expected that the restrictions imposed by national audit environments on earnings management vary. However, there are two factors that can mitigate the national audit environment effect: Big Four audit firm quality and a company's reliance on international capital markets. Using data for the period 1992–2000 from listed firms in three EU countries with clearly distinct audit environments (France, Germany and the UK), we have the following main findings. First, a stricter audit environment reduces the magnitude of earnings management, irrespective of the type of auditor (Big Four audit firm or non-Big Four audit firm). Second, there is no evidence of an international Big Four audit quality effect in Europe. Third, a company's reliance on international capital markets does not limit its earnings management. The evidence provided in this study is relevant for the current debate in the European Union on the harmonisation of auditing. For the comparability of earnings, not only is the standardisation of financial reporting important but also the standardisation of enforcement mechanisms, as embodied in the national audit environment and the quality of audit firms. The results of this study suggest that the enforcement of financial reporting still varies strongly across member states of the EU.

Date: 2006
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (42)

Downloads: (external link)
http://hdl.handle.net/10.1080/00014788.2006.9730005 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:acctbr:v:36:y:2006:i:1:p:33-52

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RABR20

DOI: 10.1080/00014788.2006.9730005

Access Statistics for this article

Accounting and Business Research is currently edited by Vivien Beattie

More articles in Accounting and Business Research from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().