Investigation the Relationship between Audit Firm Size and Cash-Based Earnings Management for the Companies Listed on Tehran Stock Exchange (TSE)

Abstract

There are many researches in relation of earnings management and audit quality. However, there are three ways to earnings management: 1. Accruals earnings management 2. Real activities manipulation and 3. Shifting of core expense; the famous methods to earnings management are accruals earnings management and real activities manipulation. This research investigates the relationship between audit firm size and cash – based earnings management (real earnings management) for the companies listed on Tehran Stock Exchange. Financial managements have more incentives for earnings management by real activities than accruals. The sample consists of 61 companies in the period 2008–2012 and for testing the hypothesis the statistical panel data regression was exerted. For measuring real earnings management have used the model developed by Cohen and Zarowin (2010). The results show that there is not a relationship between audit firm size and real earnings management. This means that, big audit firm are not more capable than small audit firms in finding real earnings management. In addition, the results show that there is a positive relation between firm size and a negative relation between financial leverage and firm growth with real earnings management.