Can Auditors detect the opportunistic behaviors of managers in earnings reporting?

This research examined the relationship between accounting earnings management and auditor type over the period 2009 to 2013 in 205 companies listed in TSE. Accounting earnings management is derived from models based on accrual items. The index used to measure earnings management, was residual values derived from testing the Jones adjusted model for accrual items. The auditor type is valued at zero or one, depending on auditor dependency on the government or independence as a private body. Results indicated a significant negative relationship between auditor type and accounting earnings management. It means that companies audited by large audit firms such as the Iranian Audit Organizationhave made fewer attempts at earnings management. Accordingly it could be concluded that being audited by large public audit firms, is a limiting factor in opportunistic attempts made by managers to manage earnings. It should be noted that this relationship has also been examined separately among two groups of sample companies displaying decreasing and increasing earnings management. Results suggest that in both groups, auditor type has a significant negative relationship with accounting earnings management.

Keywords:

Accounting Earnings Management , Accruals , Audit Type (Size) , Audit Quality