Audit effort and earnings management

Constantinos Caramanis, Clive Lennox

Research output: Contribution to journalArticlepeer-review

206 Citations (Scopus)

Abstract

We test the effect of audit effort on earnings management using a unique database of hours worked by auditors on 9,738 audits in Greece between 1994 and 2002. When audit hours are lower, (1) abnormal accruals are more often positive than negative, (2) positive abnormal accruals are larger, and (3) companies are more likely to manage earnings upwards in order to meet or beat the zero earnings benchmark. These results persist after we control for endogeneity between audit hours and earnings management. We conclude that low audit effort increases the extent to which managers are able to report aggressively high earnings.
Original languageEnglish
Pages (from-to)116-138
Number of pages23
JournalJournal of Accounting and Economics
Volume45
Issue number1
DOIs
Publication statusPublished - 1 Mar 2008

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