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Big-Four Auditors and Financial Reporting Quality: Evidence from Pakistan
Corresponding Author(s) : Gholamreza Zandi
Humanities & Social Sciences Reviews,
Vol. 7 No. 2 (2019): March
Abstract
Purpose of Study: The purpose of this paper is to investigate whether firms audited by big four auditors have better financial reporting quality as compared to firms audited by non-big four auditors in Pakistan.
Methodology: This study examine whether firms are more engaged in real earnings’ management when their ability to manage accruals is constrained by big four auditors. In current study, we find that big four auditors’ have curtailed accrual- based earnings management activities in firms.
Results: However, firms audited by big four auditors are more engaged in costly real earnings’ management activities. The study used a sample of non-financial listed firms in Pakistan over the period of 2009–2016. This study contributes to the field of corporate governance, where it provides deep insight to policy-makers who are interested in improving financial reporting quality in transnational economies.
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- Abdulrasheed, B. (2017). Causality between government expenditure and government revenue in Nigeria. Asian Journal of Economics and Empirical Research, 4(2):91–98. DOI: https://doi.org/10.20448/journal.501.2017.42.91.98
- Abosedra, S. and Sita, B. (2018). Finance-growth volatility nexus: Evidence from Lebanon. Asian Economic and Financial Review, 8(4):466–477. DOI: https://doi.org/10.18488/journal.aefr.2018.84.466.477
- Adusei, C. (2018). Public procurement in the health services: Application, compliance and challenges. Humanities and Social Sciences Letters, 6(2):41–50. DOI: https://doi.org/10.18488/journal.73.2018.62.41.50
- Al-Dhamari, R. and Ismail, K. N. I. K. (2015). Cash holdings, political connections, and earnings quality: Some evidence from Malaysia. International Journal of Managerial Finance, 11(2):215–231. DOI: https://doi.org/10.1108/IJMF-02-2014-0016
- Berglund, N. R., Eshleman, J. D., and Guo, P. (2018). Auditor size and going concern reporting. Auditing: A Journal of Practice & Theory, 37(2):1–25. DOI: https://doi.org/10.2308/ajpt-51786
- Braam, G., Nandy, M., Weitzel, U., and Lodh, S. (2015). Accrual-based and real earnings management and political connections. The International Journal of Accounting, 50(2):111–141. DOI: https://doi.org/10.1016/j.intacc.2013.10.009
- Chen, C. J., Ding, Y., and Kim, C. F. (2010). High-level politically connected firms, corruption, and analyst forecast accuracy around the world. Journal of International Business Studies, 41(9):1505–1524. DOI: https://doi.org/10.1057/jibs.2010.27
- Chi, J., Liao, J., and Chen, X. (2016). Politically connected CEOs and earnings management: Evidence from China. DOI: https://doi.org/10.1080/13547860.2016.1176644
- Journal of the Asia Pacific Economy, 21(3):397–417. Chi, W., Lisic, L. L., and Pevzner, M. (2011).
- Choi, J. H., Kim, C., Kim, J. B., and Zang, Y. (2010). Audit office size, audit quality, and audit pricing. Auditing: A Journal of Practice & Theory, 29(1):73–97. DOI: https://doi.org/10.2308/aud.2010.29.1.73
- Cohen, D. A. and Zarowin, P. (2010). Accrual-based and real earnings management activities around seasoned equity offerings. Journal of Accounting and Economics, 50(1):2–19. DOI: https://doi.org/10.1016/j.jacceco.2010.01.002
- Deangelo, L. E. (1981). Auditor size and audit quality. Journal of Accounting and Economics, 3(3):183–199. DOI: https://doi.org/10.1016/0165-4101(81)90002-1
- Dechow, P., Ge, W., and Schrand, C. (2010). Understanding earnings quality: A review of the proxies, their determinants and their consequences. Journal of Accounting and Economics, 50(2-3):344–401. DOI: https://doi.org/10.1016/j.jacceco.2010.09.001
- Dechow, P. M. and Dichev, I. D. (2002). The quality of accruals and earnings: The role of accrual estimation errors. The Accounting Review, pages 35–59. DOI: https://doi.org/10.2308/accr.2002.77.s-1.35
- Eshleman, J. D. and Guo, P. (2014). Do big 4 auditors provide higher audit quality after controlling for the endogenous choice of auditor? Auditing: A Journal of Practice & Theory, 33(4):197–219. DOI: https://doi.org/10.2308/ajpt-50792
- Francis, J. R., Michas, P. N., and Yu, M. D. (2013). Office size of big 4 auditors and client restatements. Contemporary Accounting Research, 30(4):1626–1661. DOI: https://doi.org/10.1111/1911-3846.12011
- Francis, J. R. and Yu, M. D. (2009). Big 4 office size and audit quality. The Accounting Review, 84(5):1521–1552. DOI: https://doi.org/10.2308/accr.2009.84.5.1521
- Gerayli, M. S., Yanesari, A. M., and Ma, A. R. (2011). Impact of audit quality on earnings management: Evidence from Iran. International Research Journal of Finance and Economics, 66(1):77–84.
- Gul, F. A., Lynn, S. G., and Tsui, J. S. (2002). Audit quality, management ownership, and the informativeness of accounting earnings. Journal of Accounting, Auditing & Finance, 17(1):25–49. DOI: https://doi.org/10.1177/0148558X0201700102
- Gunny, K. A. (2010). The relation between earnings management using real activities manipulation and future performance: Evidence from meeting earnings benchmarks. Contemporary Accounting Research, 27(3):855–888. DOI: https://doi.org/10.1111/j.1911-3846.2010.01029.x
- Healy, P. M. and Wahlen, J. M. (1999). A review of the earnings management literature and its implications for standard setting. Accounting Horizons, 13(4):365–383. DOI: https://doi.org/10.2308/acch.1999.13.4.365
- Kothari, S. P., Mizik, N., and Roychowdhury, S. (2012). Working Paper.
- Lopes, A. P. (2018). Audit quality and earnings management: Evidence from Portugal. Athens Journal of Business & Economics, 4(2):179–192. DOI: https://doi.org/10.30958/ajbe.4.2.4
- Roychowdhury, S. (2006). Earnings management through real activities manipulation. Journal of Accounting and Eco- nomics, 42(3):335–370. DOI: https://doi.org/10.1016/j.jacceco.2006.01.002
- Rusmin, R. (2010). Auditor quality and earnings management: Singaporean evidence. Managerial Auditing Journal, 25(7):618–638. DOI: https://doi.org/10.1108/02686901011061324
- Sadiq, M. and Othman, Z. (2017). Earnings manipulations in politically influenced firms. Corporate Ownership & Control, 15(1):65–71. DOI: https://doi.org/10.22495/cocv15i1art6
- Tepalagul, N. and Lin, L. (2015). Auditor independence and audit quality: A literature review. Journal of Accounting, Auditing & Finance, 30(1):101–121. DOI: https://doi.org/10.1177/0148558X14544505
- Yaar, A. (2013). Big four auditors audit quality and earnings management: Evidence from Turkish stock market. Interna- tional Journal of Business and Social Science, 4(17):153–163.
References
Abdulrasheed, B. (2017). Causality between government expenditure and government revenue in Nigeria. Asian Journal of Economics and Empirical Research, 4(2):91–98. DOI: https://doi.org/10.20448/journal.501.2017.42.91.98
Abosedra, S. and Sita, B. (2018). Finance-growth volatility nexus: Evidence from Lebanon. Asian Economic and Financial Review, 8(4):466–477. DOI: https://doi.org/10.18488/journal.aefr.2018.84.466.477
Adusei, C. (2018). Public procurement in the health services: Application, compliance and challenges. Humanities and Social Sciences Letters, 6(2):41–50. DOI: https://doi.org/10.18488/journal.73.2018.62.41.50
Al-Dhamari, R. and Ismail, K. N. I. K. (2015). Cash holdings, political connections, and earnings quality: Some evidence from Malaysia. International Journal of Managerial Finance, 11(2):215–231. DOI: https://doi.org/10.1108/IJMF-02-2014-0016
Berglund, N. R., Eshleman, J. D., and Guo, P. (2018). Auditor size and going concern reporting. Auditing: A Journal of Practice & Theory, 37(2):1–25. DOI: https://doi.org/10.2308/ajpt-51786
Braam, G., Nandy, M., Weitzel, U., and Lodh, S. (2015). Accrual-based and real earnings management and political connections. The International Journal of Accounting, 50(2):111–141. DOI: https://doi.org/10.1016/j.intacc.2013.10.009
Chen, C. J., Ding, Y., and Kim, C. F. (2010). High-level politically connected firms, corruption, and analyst forecast accuracy around the world. Journal of International Business Studies, 41(9):1505–1524. DOI: https://doi.org/10.1057/jibs.2010.27
Chi, J., Liao, J., and Chen, X. (2016). Politically connected CEOs and earnings management: Evidence from China. DOI: https://doi.org/10.1080/13547860.2016.1176644
Journal of the Asia Pacific Economy, 21(3):397–417. Chi, W., Lisic, L. L., and Pevzner, M. (2011).
Choi, J. H., Kim, C., Kim, J. B., and Zang, Y. (2010). Audit office size, audit quality, and audit pricing. Auditing: A Journal of Practice & Theory, 29(1):73–97. DOI: https://doi.org/10.2308/aud.2010.29.1.73
Cohen, D. A. and Zarowin, P. (2010). Accrual-based and real earnings management activities around seasoned equity offerings. Journal of Accounting and Economics, 50(1):2–19. DOI: https://doi.org/10.1016/j.jacceco.2010.01.002
Deangelo, L. E. (1981). Auditor size and audit quality. Journal of Accounting and Economics, 3(3):183–199. DOI: https://doi.org/10.1016/0165-4101(81)90002-1
Dechow, P., Ge, W., and Schrand, C. (2010). Understanding earnings quality: A review of the proxies, their determinants and their consequences. Journal of Accounting and Economics, 50(2-3):344–401. DOI: https://doi.org/10.1016/j.jacceco.2010.09.001
Dechow, P. M. and Dichev, I. D. (2002). The quality of accruals and earnings: The role of accrual estimation errors. The Accounting Review, pages 35–59. DOI: https://doi.org/10.2308/accr.2002.77.s-1.35
Eshleman, J. D. and Guo, P. (2014). Do big 4 auditors provide higher audit quality after controlling for the endogenous choice of auditor? Auditing: A Journal of Practice & Theory, 33(4):197–219. DOI: https://doi.org/10.2308/ajpt-50792
Francis, J. R., Michas, P. N., and Yu, M. D. (2013). Office size of big 4 auditors and client restatements. Contemporary Accounting Research, 30(4):1626–1661. DOI: https://doi.org/10.1111/1911-3846.12011
Francis, J. R. and Yu, M. D. (2009). Big 4 office size and audit quality. The Accounting Review, 84(5):1521–1552. DOI: https://doi.org/10.2308/accr.2009.84.5.1521
Gerayli, M. S., Yanesari, A. M., and Ma, A. R. (2011). Impact of audit quality on earnings management: Evidence from Iran. International Research Journal of Finance and Economics, 66(1):77–84.
Gul, F. A., Lynn, S. G., and Tsui, J. S. (2002). Audit quality, management ownership, and the informativeness of accounting earnings. Journal of Accounting, Auditing & Finance, 17(1):25–49. DOI: https://doi.org/10.1177/0148558X0201700102
Gunny, K. A. (2010). The relation between earnings management using real activities manipulation and future performance: Evidence from meeting earnings benchmarks. Contemporary Accounting Research, 27(3):855–888. DOI: https://doi.org/10.1111/j.1911-3846.2010.01029.x
Healy, P. M. and Wahlen, J. M. (1999). A review of the earnings management literature and its implications for standard setting. Accounting Horizons, 13(4):365–383. DOI: https://doi.org/10.2308/acch.1999.13.4.365
Kothari, S. P., Mizik, N., and Roychowdhury, S. (2012). Working Paper.
Lopes, A. P. (2018). Audit quality and earnings management: Evidence from Portugal. Athens Journal of Business & Economics, 4(2):179–192. DOI: https://doi.org/10.30958/ajbe.4.2.4
Roychowdhury, S. (2006). Earnings management through real activities manipulation. Journal of Accounting and Eco- nomics, 42(3):335–370. DOI: https://doi.org/10.1016/j.jacceco.2006.01.002
Rusmin, R. (2010). Auditor quality and earnings management: Singaporean evidence. Managerial Auditing Journal, 25(7):618–638. DOI: https://doi.org/10.1108/02686901011061324
Sadiq, M. and Othman, Z. (2017). Earnings manipulations in politically influenced firms. Corporate Ownership & Control, 15(1):65–71. DOI: https://doi.org/10.22495/cocv15i1art6
Tepalagul, N. and Lin, L. (2015). Auditor independence and audit quality: A literature review. Journal of Accounting, Auditing & Finance, 30(1):101–121. DOI: https://doi.org/10.1177/0148558X14544505
Yaar, A. (2013). Big four auditors audit quality and earnings management: Evidence from Turkish stock market. Interna- tional Journal of Business and Social Science, 4(17):153–163.