Auditing and earnings management: an investigation in Brazilian companies publicly traded

Abstract

Companies listed on B3 are required by law to undergo regular audits and to publish their financial reports and supplementary information. Thus, the financial statements audit constitutes an important resource for good governance practice and transparency in modern corporations. In order to reduce informational asymmetry and improve these practices, CVM established the audit rotation. The present research investigated whether the substitution of the independent auditor impacts in some way the management of results (proxy adopted for quality of the audit) in the companies listed in B3 between 2012 and 2016. The final sample consisted of 207 non-financial companies, resulting in 1890 observations, and independent audit rotation was observed 280 times (51% voluntary) over the period. By means of the accruals method of Pae (2005) and after the exclusion of the outliers, the means of the groups were analyzed in order to identify if they were statistically different. It was found that the change of independent audit does not affect total accruals, but reduces the discretionary ones. This may be due to the lack of knowledge about the client’s context or the fear of taking legal risks, such as error detection or review of accounting procedures, for example. In any case, the consequence for the stakeholders can be positive, since there will be a new perspective on the economic and financial events of the organization, which increases the quality and relevance of the accounting information. On the other hand, if the new audit does not have the expertise, including the specific knowledge (accounting systems and the firm’s internal control structure), the change
may result in loss to the accounting information and possibly affect the comparability of the financial statements accounting.