Abstract
Purpose – The objective of the paper is to investigate whether managers behave opportunistically by manipulating earnings and whether financial restatements, required by the auditors from the auditees, have the potential to decrease management opportunism. Design/methodology/approach – The empirical approach undertaken uses a self-constructed model in order to detect the influence of financial restatements on discretionary accruals and to observe possible earnings management practices, considering financial restatements as the explanatory variable. Findings – The values computed for discretionary accruals confirm the existence of earnings management and suggest possible management bias in accounting estimates and other accounting policies. Originality/value – This study provides a tool for overcoming deficiencies in relation to accounting estimates and other accounting policies in the auditing process, by assessing the relationship between management opportunism and auditors’ reactions using financial restatement requirements.
Highlights
In light of the many well-known financial scandals that have occurred, it is highly recommended for the users of accounting information to be able to evaluate financial reporting quality (FRQ hereinafter) and to filter related effects in order to understand the reported figures (Beneish, Press, & Vargus, 2012; Zang, 2012)
In order to enable auditors to minimize the risk associated with accounting estimates and similar issues, we provide empirically tested indicators that could suggest management opportunism, revealing its direct relationship with restatements required in previous years
Bearing in mind the need to enhance financial reporting quality, which leads to benefits for financial information users, we conceived a model to check whether restatements could reduce audit risks by decreasing management bias in the subsequent period
Summary
In light of the many well-known financial scandals that have occurred, it is highly recommended for the users of accounting information to be able to evaluate financial reporting quality (FRQ hereinafter) and to filter related effects in order to understand the reported figures (Beneish, Press, & Vargus, 2012; Zang, 2012). It is important to understand the extent to which accounting estimates and other disclosures (for example, the classification of elements in financial statements and the capitalization of expenditures), as well as elements of accounting reasoning and management discretion, can affect the information disclosed. These effects are relevant for the users of financial statements, and for auditors.
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