Earnings cosmetics and auditor gender: evidence from Finnish private firms

Abstract

This paper investigates whether there are differences in cosmetic earnings management between firms audited by male vs. female auditors in a sample of private Finnish firms. We find that earnings cosmetics is more likely to appear in firms audited by male auditors. Our results also indicate that private firms, too, do engage in cosmetic earnings management. Our results imply that gender diversity in the auditing profession may improve the quality of financial statements overall. This suggests that when selecting auditors, management and other stakeholders should pay attention also to the gender of the auditors that they engage or the gender distribution of the audit team. While this is the first study to combine earnings cosmetics and auditor gender, it is also the first one to document that earnings cosmetics takes place in private firms.