Do Big Four Auditors Limit Real Earnings Management?

Authors

  • Rahayu Abdul Rahman
  • Normah Hj Omar
  • Amir Hakim Osman
  • Maheran Zakaria

Abstract

This study examines the relationship between audit quality and real earnings management (REM) among Top 100 firms listed on Bursa Malaysia. This study uses three proxies to measure REM; abnormal cash flow from operations (RCFO), abnormal production costs (RPC) and abnormal discretionary expenses (RDE) and one proxy for audit quality; Big 4 audit firms. Using a final sample of 656 firm-year observations from 2007 to 2014, this study finds that Big 4 auditor has a significant and negative relation with proxies of REM; RPC and RDE. Further, the results also document that a significant and negative relation between Price Waterhouse Cooper (PwC) and REM measures. The findings suggest that high quality auditor constrains real activities manipulations. In addition, the results suggest that PwC is the most effective audit firms in limiting REM among Malaysian Top 100 firms.

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Published

2020-04-11

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Section

Articles