Abstract
This research investigates the relationship between financial reporting quality and audit quality within the context of French listed companies. The auditor brand name (Big4) is used as a proxy for audit quality and earnings management is ascertained through real and accruals earnings management estimation. Discretionary accruals are estimated using the Jones Model and the Modified Jones Model while real earnings management is estimated through the use of models proposed by Roychowdhury (2006). The results indicate that clients of Big4 audit firms record higher levels of accruals and real earnings management. This assertion could be attributed to the low level of auditor litigation risk in France. This study contributes to the literature by investigating the case for both discretionary accruals and real earnings management in a French environment that has peculiar auditing characteristics. Key words: Audit quality, financial reporting quality, earnings management, discretionary accruals, real earnings management.
Highlights
The quality of financial statements produced by the management of companies is of utmost importance to current and potential investors, as they rely on these statements to make investment decisions
This study focuses on both accruals earnings management (AEM) and real earnings management (REM) as proxies for measuring earnings management
Due to missing data needed for the estimation of various earnings management proxies, there is a disparity in the firm-year observations for the REM proxies and other variables
Summary
The quality of financial statements produced by the management of companies is of utmost importance to current and potential investors, as they rely on these statements to make investment decisions. As a result of information asymmetry, the managers of some companies try to manipulate profit figures in cases where these profits fall below the expected benchmarks and thereof influence investor decisions (Thomas, 1989). This act lowers the quality of financial reporting and accounting information (Chi and Pevzner, 2011). After the occurrences of major scandals such as Xerox (2000), Enron (2001) and WorldCom (2002), the role played by the quality of external auditing in an attempt to curb these misfortunes has been a major topic of discussion (Sarwoko and Agoes, 2014). Stated by Defond and Zhang (2014), high audit quality can be equated to the assurance of high quality of financial reporting
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