Does auditor-client distance matter to real earnings management? Evidence from China

Xue Li, Zhiru Lin and Jin-hui Luo

Asia-Pacific Journal of Accounting & Economics, 2020, vol. 27, issue 5, 531-557

Abstract: Using a large sample of Chinese listed firms and accounting firms during 2004–2013, this study investigates whether and how auditor-client distance affects corporate real earnings management (REM). We find that REM is positively associated with auditor-client distance, and the positive association is more pronounced in client firms with lower information transparency and higher business complexity, suggesting that information advantage arising from geographical proximity may facilitate auditors’ supervision over their client firms’ REM. Moreover, both marketization environment and ownership concentration significantly attenuate the positive association, thereby reflecting a substitution effect between external audit and the other two governance mechanisms.

Date: 2020
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DOI: 10.1080/16081625.2019.1567353

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Asia-Pacific Journal of Accounting & Economics is currently edited by Yin-Wong Cheung, Hong Hwang, Jeong-Bon Kim, Shu-Hsing Li and Suresh Radhakrishnan

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