Articlegreen2004

Former Audit Partners and Abnormal Accruals

383 citations0/0 files storedThe Accounting Review

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Auditing, Earnings Management, Governance Corporate Finance and Governance Corporate Governance and Financial Management

Abstract

Audit clients often employ a former partner of their present auditor as an officer or a director. This “revolving door” practice presents a potential threat to auditor independence. Using the Jones (1991) model to calculate abnormal accruals for firms in 1998 and 1999, we find that firms employing former partners as officers or directors report larger signed and unsigned abnormal accruals than other firms, after controlling for other factors that plausibly affect abnormal accruals. To ensure that the results are not driven by performance characteristics of the former partner firms, we construct a performance-matched control sample and obtain consistent results. We also observe a disproportionately higher (lower) proportion of former partner firms than expected just meeting (missing) analysts' earnings forecasts.

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References

1991Earnings Management During Import Relief Investigations 2002Audit committee, board of director characteristics, and earnings management 1998The Effect of Audit Quality on Earnings Management*1984Methodological Issues Related to the Estimation of Financial Distress Prediction Models 2003Earnings management and corporate governance: the role of the board and the audit committee 1999Earnings Management to Exceed Thresholds 2002Errors in Estimating Accruals: Implications for Empirical Research 1996The pricing of discretionary accruals

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