Abstract
Informed by Perceptual Deterrence Theory, we conduct multiple experiments to investigate when and how auditor actions can help deter manager opportunism. In Study 1A, we find that managers are less likely to use real earnings management (REM) when they expect auditors to both increase scrutiny and communicate their observations to the board. However, this effect occurs only when managers' operational decisions are inconsistent (versus consistent) with peer behavior. Study 1B findings suggest that increased auditor scrutiny alone (without auditor-board communication) is not likely to deter REM. In Study 2, we find that increased auditor scrutiny with communication to the board effectively deters both accruals-based earnings management (AEM) and REM, reducing the total level of manager opportunism. However, without communication, increased auditor scrutiny deters AEM, but also induces more REM. Our findings highlight the importance of auditor-board communication and demonstrate how auditor actions can contribute to the deterrence of manager opportunism.
| Original language | English |
|---|---|
| Pages (from-to) | 141-163 |
| Number of pages | 23 |
| Journal | Accounting Review |
| Volume | 96 |
| Issue number | 3 |
| DOIs | |
| State | Published - 2021 |
Bibliographical note
Publisher Copyright:© 2021 American Accounting Association. All rights reserved.
Funding
We appreciate the feedback received from participants at the 2019 Hawaii Accounting Research Conference, the 2018 Virginia Tech Accounting Research Conference, the 2018 British Accounting and Finance Association Audit and Assurance Conference, the 2017 International Symposium on Audit Research, 2017 AAA Auditing Section Midyear Meeting, 2016 AAA Accounting Behavior and Organizations Research Conference, as well as workshop participants at University of Georgia, Georgia State University, Miami University, and University of Nevada, Las Vegas. We also thank Bradley Bennett, Mary Kate Dodgson, Brian Goodson, Ryan Guggenmos, Jackie Hammersley, Sean Hillison, Peter Kipp, Justin Leiby, Nikki MacKenzie, Curtis Mullis, Mark E. Peecher (editor), Julie Petherbridge, Dave Piercey, Matthew Starliper, Chad Stefaniak, Kyle Stubbs, Tu Xu, two anonymous reviewers for their helpful comments, and Yushi Tian for her research assistance. We are grateful to University of Massachusetts Amherst and University of Kentucky for the financial support of this study.
| Funders | Funder number |
|---|---|
| University of Nevada, Reno | |
| Miami University | |
| University of Kentucky | |
| University of Massachusetts Amherst |
Keywords
- Accruals-based earnings management
- Auditor scrutiny
- Auditor-board communication
- Consistency with peer behavior
- Manager opportunism
- Perceptual deterrence theory
- Real earnings management
ASJC Scopus subject areas
- Accounting
- Finance
- Economics and Econometrics