Influence of audit tenure on earnings management in publicly traded brazilian companies
Keywords:
Audit; Earnings management by accruals; Earnings management for real operational activities.
Abstract
We analyzed the effect of the audit firm and partner tenure on earnings management by accruals and operating activities of public companies in the Brazilian market. Our sample was composed by 147 companies, totaling 1,138 observations for the period 2011-2019. For the models of earnings management by discretionary accruals and by real operational activities, we used as a basis the studies of Dechow, Sloan and Sweeny (1995) and Dechow, Kothari and Watts (1998), respectively. We found that the audit firm tenure positively influences earnings management through discretionary accruals. We found that this influence did not occur at the level of individuals, since the tenure of the audit partner was not related to earnings management by accruals. In addition, we found that the audit firm and partner tenure are not related to earnings management by actual operating activities. Our work contributes on a practical level, especially in discussions by regulatory bodies, as it reveals evidence about the effect of the auditor's tenure in providing an increase in opportunistic actions by managers.
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References
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BAKER, T.; COLLINS, D.; REITENGA, A. Stock option compensation and earnings management incentives. Journal of Accounting, Auditing & Finance, v. 18, n. 4, p. 557-582, 2003.
BELL, T. B.; CAUSHOLLI, M.; KNECHEL, W. Robert. Audit firm tenure, non‐audit services, and internal assessments of audit quality. Journal of Accounting Research, v. 53, n. 3, p. 461-509, 2015.
CARDOSO, R. L.; SOUZA, F. S. R. N.; DANTAS, M. M. Impactos da Adoção do IFRS na Acumulação Discricionária e na Pesquisa em Gerenciamento de Resultados no Brasil. Revista Universo Contábil, v. 11, n. 2, p. 65-84, 2015.
CAREY, P.; SIMNETT, R. Audit partner tenure and audit quality. The accounting review, v. 81, n. 3, p. 653-676, 2006.
CAUSHOLLI, M. Evidence of organizational learning and organizational forgetting from financial statement audits. Auditing: A Journal of Practice & Theory, v. 35, n. 2, p. 53-72, 2016.
CHEN, C.; LIN, C.; LIN, Y. Audit partner tenure, audit firm tenure, and discretionary accruals: Does long auditor tenure impair earnings quality?. Contemporary accounting research, v. 25, n. 2, p. 415-445, 2008.
CHENG, Q.; WARFIELD, T. D. Equity incentives and earnings management. The accounting review, v. 80, n. 2, p. 441-476, 2005.
CHI, W.; HUANG, H. Discretionary accruals, audit-firm tenure and audit-partner tenure: Empirical evidence from Taiwan. Journal of Contemporary Accounting & Economics, v. 1, n. 1, p. 65-92, 2005.
CHI, W.; LISIC, L. L.; PEVZNER, M. Is enhanced audit quality associated with greater real earnings management?. Accounting horizons, v. 25, n. 2, p. 315-335, 2011.
COHEN, D. A.; ZAROWIN, P. Accrual-based and real earnings management activities around seasoned equity offerings. Journal of accounting and Economics, v. 50, n. 1, p. 2-19, 2010.
Comissão de Valores Mobiliários (CVM). Instrução CVM nº 308 de 14 de maio de 1999 com as alterações introduzidas pelas instruções CVM nº 509/2011, 545/2014 e 591/2017. Rio de Janeiro, 1999.
CONSONI, S.; COLAUTO, R. D.; LIMA, G. A. S. F. A divulgação voluntária e o gerenciamento de resultados contábeis: evidências no mercado de capitais brasileiro. Revista Contabilidade & Finanças, v. 28, n. 74, p. 249-263, 2017.
CORNETT, M. M.; MCNUTT, J. J.; TEHRANIAN, H. Corporate governance and earnings management at large US bank holding companies. Journal of Corporate finance, v. 15, n. 4, p. 412-430, 2009.
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DAVIS, L. R.; SOO, B. S.; TROMPETER, Gregory M. Auditor tenure and the ability to meet or beat earnings forecasts, v. Contemporary Accounting Research, v. 26, n. 2, p. 517-548, 2009.
DECHOW, P. M.; KOTHARI, S. P.; WATTS, R. L. The relation between earnings and cash flows. Journal of accounting and Economics, v. 25, n. 2, p. 133-168, 1998.
DECHOW, P. M.; SLOAN, R. G.; SWEENEY, A. P. Detecting earnings management. The Accounting review, v. 70, n. 2, p. 193-225, 1995.
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DOPUCH, N.; DRAKE, D. F. The effect of alternative accounting rules for nonsubsidiary investments. Journal of Accounting Research, p. 192-219, 1966.
DOYLE, J.; GE, W.; MCVAY, S. Determinants of weaknesses in internal control over financial reporting. Journal of accounting and Economics, v. 44, n. 1-2, p. 193-223, 2007.
EILIFSEN, A.; KNIVSFLA, K. The role of audit firm size, non‐audit services, and knowledge spillovers in mitigating earnings management during large equity issues. International Journal of Auditing, v. 20, n. 3, p. 239-254, 2016.
EISENHARDT, K. M. Agency theory: An assessment and review. Academy of management review, v. 14, n. 1, p. 57-74, 1989.
ELLIOTT, J. A.; SHAW, W. H. Write-offs as accounting procedures to manage perceptions. Journal of accounting research, p. 91-119, 1988.
FÁVERO, L. P.; BELFIORE, P. Manual de análise de dados: estatística e modelagem multivariada com Excel®, SPSS® e Stata®. Elsevier Brasil, 2017.
FITZGERALD, B. C.; OMER, T. C.; THOMPSON, A. M. Audit partner tenure and internal control reporting quality: US evidence from the not‐For‐Profit sector. Contemporary Accounting Research, v. 35, n. 1, p. 334-364, 2018.
FRANCIS, J. R.; WANG, D. The joint effect of investor protection and Big 4 audits on earnings quality around the world. Contemporary accounting research, v. 25, n. 1, p. 157-191, 2008.
FRANCIS, J. R.; YU, M. D. Big 4 office size and audit quality. The accounting review, v. 84, n. 5, p. 1521-1552, 2009.
FRANCIS, J.; HANNA, J. D.; VINCENT, L. Causes and effects of discretionary asset write-offs. Journal of Accounting Research, v. 34, p. 117-134, 1996.
FRANCIS, J. R.; PINNUCK, M. L.; WATANABE, O. Auditor style and financial statement comparability. The Accounting Review, v. 89, n. 2, p. 605-633, 2014.
FRANKEL, R. M.; JOHNSON, M. F.; NELSON, K. K. The relation between auditors' fees for nonaudit services and earnings management. The accounting review, v. 77, n. s-1, p. 71-105, 2002.
GARCIA-BLANDON, J.; ARGILES, J. M. Audit firm tenure and independence: A comprehensive investigation of audit qualifications in Spain. Journal of international accounting, auditing and taxation, v. 24, p. 82-93, 2015.
GARCIA-BLANDON, J.; ARGILES-BOSCH, J. M. The interaction effects of firm and partner tenure on audit quality. Accounting and Business Research, v. 47, n. 7, p. 810-830, 2017.
GE, W. Essays on real earnings management (Doctoral dissertation, McGill University). 2009.
HADI, A. S. Identifying multiple outliers in multivariate data. Journal of the Royal Statistical Society: Series B (Methodological), v. 54, n. 3, p. 761-771, 1992.
HARRIS, K.; WHISENANT, S. Mandatory audit rotation: an international investigation. University of Houston, 2012.
HO, L. J.; LIU, C.; SCHAEFER, T. Audit tenure and earnings surprise management. Review of Accounting and Finance, v.9, n.2, 2010.
HOCHBERG, Y. V. Venture capital and corporate governance in the newly public firm. Review of Finance, v. 16, n. 2, p. 429-480, 2012.
HRIBAR, Paul; COLLINS, Daniel W. Errors in estimating accruals: Implications for empirical research. Journal of Accounting research, v. 40, n. 1, p. 105-134, 2002.
IBRAHIM, S.; LLOYD, C. The association between non-financial performance measures in executive compensation contracts and earnings management. Journal of Accounting and Public Policy, v. 30, n. 3, p. 256-274, 2011.
JENSEN, M. C.; MECKLING, W. H. Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of financial economics, v. 3, n. 4, p. 305-360, 1976.
JOHNSON, V. E.; KHURANA, I. K.; REYNOLDS, J. K. Audit‐firm tenure and the quality of financial reports. Contemporary accounting research, v. 19, n. 4, p. 637-660, 2002.
JONES, J. J. Earnings management during import relief investigations. Journal of accounting research, v. 29, n. 2, p. 193-228, 1991.
KAHN, J. Wirecard shows auditing is broken. Here’s why—and how to fix it. Fortune. 25 de junho de 2020. Disponível em: https://fortune.com/2020/06/25/wirecard-auditing-is-broken-fintech-ey-ernst-and-young/. Acesso em: 28 jun. 2020.
KINDER, T. Decision looms over Big Four consultancy and audit ‘conflict’. Financial Times. 29 de janeiro de 2020. Disponível em: https://www.ft.com/content/dfd5703a-2363-11ea-b8a1-584213ee7b2b. Acesso em: 29 jun. 2020.
KLEIN, A. Audit committee, board of director characteristics, and earnings management. Journal of accounting and economics, v. 33, n. 3, p. 375-400, 2002.
LI, Y.; SINGAL, M. Firm Performance in the Hospitality Industry: Do CEO Attributes and Compensation Matter?. Journal of Hospitality & Tourism Research, v. 43, n. 2, p. 272-282, 2019.
LIN, J. W.; HWANG, M. I. Audit quality, corporate governance, and earnings management: A meta‐analysis. International journal of auditing, v. 14, n. 1, p. 57-77, 2010.
MAIJOOR, S. J.; VANSTRAELEN, A. Earnings management within Europe: the effects of member state audit environment, audit firm quality and international capital markets. Accounting and business research, v. 36, n. 1, p. 33-52, 2006.
MANRY, D. L.; MOCK, T. J.; TURNER, J. L. Does increased audit partner tenure reduce audit quality?. Journal of Accounting, Auditing & Finance, v. 23, n. 4, p. 553-572, 2008.
MARRA, A.; MAZZOLA, P.; PRENCIPE, A. Board monitoring and earnings management pre-and post-IFRS. The international journal of Accounting, v. 46, n. 2, p. 205-230, 2011.
MILBOURN, T. T. CEO reputation and stock-based compensation. Journal of Financial Economics, v. 68, n. 2, p. 233-262, 2003.
MURPHY, K. J. Executive compensation. Handbook of labor economics, v. 3, p. 2485-2563, 1999.
MYERS, J. N.; MYERS, L. A.; OMER, T. C. Exploring the term of the auditor‐client relationship and the quality of earnings: A case for mandatory auditor rotation?. The accounting review, v. 78, n. 3, p. 779-799, 2003.
PAULO, E.; MOTA, R. H. G. Ciclos econômicos e estratégias de gerenciamento de resultados contábeis: um estudo nas companhias abertas brasileiras. Revista Contabilidade & Finanças, v. 30, n. 80, p. 216-233, 2019.
POURCIAU, S. Earnings management and nonroutine executive changes. Journal of accounting and economics, v. 16, n. 1-3, p. 317-336, 1993.
REID, L. C.; CARCELLO, J. V. Investor reaction to the prospect of mandatory audit firm rotation. The Accounting Review, v. 92, n. 1, p. 183-211, 2017.
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Published
2022-10-11
How to Cite
Manoel de Sousa, A., Krauspenhar Pinto Figari, A., & Douglas Colauto, R. (2022). Influence of audit tenure on earnings management in publicly traded brazilian companies. Enfoque: Reflexão Contábil, 41(3), 74-95. https://doi.org/10.4025/enfoque.v41i3.57044
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Original Articles
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