Surplus Free Cash Flow and Earnings Management: The Moderating Role of Auditor Size
الموضوعات :
Ahmad Abdollahi
1
(Faculty member of Department of Accounting, Golestan Institue of Higher Education. Gorgan. Iran.)
Yasser Rezaei Pitenoei
2
(Assistant Professor of Accounting, University of Guilan, Rasht, Iran.)
الکلمات المفتاحية: Earnings Management, Auditor Size, Surplus Free Cash Flow,
ملخص المقالة :
This Study seeks to scrutinize whether surplus free cash flow is correlated with earnings management, if auditor size moderates this relationship. To do so, modified Jones discretionary accrual model (1995) and audit firm size are used as audit quality indicator to measure earnings management. The research hypotheses are built upon a sample of 103 companies listed on the Tehran Stock Exchange during the years 2013 to 2017 and then tested using multiple regression model based on panel data techniques. The results reveal that earnings management is significantly associated with surplus free cash flow. Furthermore, the findings confirm that auditor size exerts no significant impact on the relationship between surplus free cash flow and corporate earnings management.
[1] Ahmadi Shadmehri, S., Khansalar, E., Giannopoulos, G., and Lari Dasht-Bayaz, M., The Impact of Surplus Free Cash Flow, Corporate Governance and Firm Size on Earnings Predictability in Companies Listed in Tehran Stock Exchange, International Business Research, 2017, 10(11), P. 20-28. Doi:10.5539/ibr.v10n11 p20
[2] Aini, A., Takiah, M.I., Pourjalali, H., and Teruya, J., Earnings Management in Malaysia: A Study on Effects of Accounting Policy, Malaysian Accounting Review, 2006, 5(1), P. 185 – 209. Doi:10.2308/aud.2004.23. 2.13
[3] Banimahd, B., Hasasyeganeh, Y., and Yazdanian, N., Earnings management and auditor’s report; evidence from private audit sector, Management Accounting, 2014, 7(21), P. 17-32.
[4] Bartov, E., Gul, F.A., and Tsui, J.S.L., Discretionary-accruals models and audit qualifications, Journal of Accounting and Economics, 2011, 30(30), P. 421-452. Doi:10.1016/S0165-4101(01)00015-5
[5] Bauwhede, H.V., Willekens, M., and Gaeremynck, A., Audit Firm Size, Public Ownership, and Firms’ Discretionary Accruals Management, The International Journal of Accounting, 2003, 38, P. 1 – 22. Doi:10.1016/S0020-7063(03)00004-9
[6] Becker, C.L., DeFond, M.L., Jiambalvo, J., and Subramanyam, K.R., The effect of audit quality on earnings management, Contemporary Accounting Research, 1998, 15(1), P. 1-24. Doi:10.1111/j.1911-3846.1998.tb0 0547.x
[7] Bedard, J., Chtourou, S.M., and Courteau, L., The Effect of Audit Committee Expertise, Independence, and Activity on Aggressive Earnings Management, Auditing, A Journal of Practice and Theory, 2004, 23, P. 13 – 35. Doi:10.2308/aud.2004.23.2.13
[8] Bhundia, A., A comparative study between free cash flows and earning management, Business Intelligence Journal, 2012, 5(1), P. 123–139.
[9] Bliss, M.A., Gul, F.A., and Majid, A., Do political connections affect the role of independent audit committees and CEO duality? Some evidence from Malaysian audit pricing, Journal of Contemporary Accounting & Economics, 2011, 7(2), P. 82-98. Doi:10.1016/j.jcae.2011.10.002
[10] Bowen, R.M., DuCharme, L., and Shores, D., Stakeholders’ Implicit Claims and Accounting Method Choice, Journal of Accounting and Economics, 1995, 20, P. 255 – 295. Doi:10.1016/0165-4101(95)00404-1
[11] Bukit, R., and Iskandar, T.M., Surplus free cash flow, earnings management and audit committee, Journal of economics and management, 2009, 3(1), P. 204-223.
[12] Burgstahler, D., and Dichev, I., Earnings Management to Avoid Earnings Decreases and Losses, Journal of Accounting and Economics, 1997, 24, P. 99 – 126. Doi:10.1016/S0165-4101(97)00017-7
[13] Chung, R., Firth, M., and Kim, J.B., Earnings Management, Surplus Free Cash Flow, and External Monitoring, Journal of Business Research, 2005, 58, P. 766 –776. Doi:10.1016/j.jbusres.2003.12.002
[14] Davidson III, W.N., Jiraporn, P., Kim, Y.S., and Nemec, C., Earnings Management Following Duality-Creating Successions: Ethnostatistics, Impression Management, and Agency Theory, Academy of Management Journal, 2004, 2, P. 267 – 275. Doi:10.2139/ssrn.1483765
[15] DeAngelo, L.E., Auditor size and audit quality, Journal of Accounting and Economics, 1981, 3(3), P. 183-199. Doi:10.1016/0165-4101(81)90002-1
[16] DeFond, M.L., and Jiambalvo, J., Debt Covenant Violation and Manipulation of Accruals, Journal of Accounting and Economics, 1994, 17, P. 145 – 176. Doi:10.1016/0165-4101(94)90008-6
[17] Fernando, G. D., Abdel-Meguid, A. M., and Elder, R. J., Audit Quality Attributes, Client Size and Cost of Equity Capital, Review of Accounting and Finance, 2010, 9(4), P. 363–381. Doi:10.1108/14757701 011094571
[18] Francis, J. R., Richard, C., and Vanstraelen, A., Assessing France’s joint audit requirement: are two heads better than one? Auditing: A Journal of Practice and Theory, 2009, 28(2), P. 35–63. Doi:10.2308/aud.2009. 28.2.35
[19] Frankel, R.M., Johnson, M.F., and Nelson, M.W., The relation between auditors’ fees for non-audit services and earnings management, The Accounting Review, 2002, 77, P. 71-105. Doi:10.2308/accr.2002. 77.s-1.71
[20] Gaver, J.J., Gaver, K.M., and Austin, J.R., Additional Evidence on Bonus Plans and Income Management, Journal of Accounting and Economics, 1995, 19, P. 3 – 28. Doi:10.1016/0165-4101(94)00358-C
[21] Gujarati, D.N., Basic Econometrics. 5th edition. New York: Mc Graw-Hill, 2009.
[22] Gul, F.A., Free Cash Flow, Debt Monitoring and Managers’ LIFO/FIFO Policy Choice, Journal of Corporate Finance, 2001, 13, P. 475 – 492. Doi:10.1016/S0929-1199(01)00037-2
[23] Gul, F.A., Chen, C.J.P., and Tsui, J.S.L., Discretionary accounting accruals, managers’ incentives, and audit fees, Contemporary Accounting Research, 2003, 20(3), P. 441-464. Doi:10.1506/686E-NF2J-73X6-G540
[24] Gul, F.A., Fung, S.Y.K., and Jaggi, B., Earnings quality: some evidence on the role of auditor tenure and auditors’ industry expertise, Journal of Accounting and Economics, 2009, 47(3), P. 265-287. Doi:10.1016/j. jacceco.2009.03.001
[25] Gul, F.A., Kim, J.B., and Qiu, A.A., Ownership concentration, foreign shareholding, audit quality, and stock price synchronicity: evidence from China, Journal of Financial Economics, 2010, 95(3), P. 425-442. Doi:10.1016/j.jfineco.2009.11.005
[26] Han, J., and Wang, S., Political Costs and Earnings Management of Oil Companies During the 1990 Persian Gulf Crisis, The Accounting Review, 1998, 73, P. 103 – 117.
[27] Jensen, M.C., Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers, The American Economic Review, 1986, 76(2), P. 323-329.
[28] Jones, J., Earnings Management during Import Relief Investigations, Journal Accounting Research, 1991, 56(4), P. 193 – 228. Doi:10.2307/2491047
[29] Lai, K., Does audit quality matter more for firms with high investment opportunities? Journal of Accounting and Public Policy, 2009, 28(1), P. 33-50. Doi:10.1016/j.jaccpubpol.2008.11.002
[30] Lehn, K., and Poulsen, A., Free Cash Flow and Stockholders Gains in Going Private Transaction, Journal of Finance, 1989, 44(3), P. 771-787. Doi:10.2307/2328782
[31] Lin, J.W., and Hwang, M.I., Audit quality, corporate governance, and earnings management: a meta-analysis, International Journal of Auditing, 2010, 14(1), P. 57-77. Doi:10.1111/j.1099-1123.2009.00403.x
[32] Mohammdjani, A., and Sadeghi, M., the relationship between free cash flow in excess of earnings management and the audit committee, Paper presented at 1st International Conference on Accounting, Audit Management and Economics. Isfahan. 2015, (in Persian).
[33] Moradi, M., Osoulian, M., and Norouzi, M., Audit Opinion and Earnings Management: Uncertainty in Going-concern, Journal of Accounting and Auditing Review, 2014, 21(3), P. 313-328. Doi:10.22059/ac ctgrev.2014.52384
[34] Namazi, M., Bayazidi, A., and Jabbarzadeh kangarloee, S., Study of the relationship between audit quality and earnings management in companies listed on the Tehran Stock Exchange, Accounting Research, 2011, 9(3), P. 4-21.
[35] Nekhili, M., Ben Amar, I. F., Chtioui, T., and Lakhal, F., Free Cash Flow and Earnings Management: The Moderating Role of Governance and Ownership, Journal of Applied Business Research (JABR), 2015, 32(1), P. 255-268. Doi:10.19030/jabr.v32i1.9536
[36] Piot, C., and Janin, R., External Auditors, Audit Committees and Earnings Management in France, European Accounting Review, 2007, 16(2), P. 429–454. Doi:10.1080/09638180701391030
[37] Rusmin, R., Astami, E., and Hartadi, B., The impact of surplus free cash flow and audit quality on earnings management, Asian review of accounting, 2014, 22(3), P. 217-232.
Doi:10.1108/ARA-10-2013-0062
[38] Rusmin, R., Auditor quality and earnings management: Singaporean evidence, Managerial Auditing Journal, 2010, 25(7), P. 618-638, Doi:10.1108/02686901011061324
[39] Salehi, A., Mohammadi, S., and Afshari, M., Impact of Institutional Ownership and Board Independence on the Relationship between Excess Free Cash Flow and Earnings Management, Advances in Mathematical Finance and Applications, 2017, 2(3), P. 91-105. doi: 10.22034/amfa.2017.533104
[40] Soliman, M., and Ragab, A., Audit committee effectiveness, audit quality and earnings management: an empirical study of the listed companies in Egypt, Research journal of finance and accounting, 2014, 5(2), P. 155-166. https://www.iiste.org/Journals/index.php/RJFA/article/view/10690
[41] Teoh, S.H., Welch, I., and Wong, T.J., Earnings Management and the Underperformance of Seasoned Equity Offerings, Journal of Financial Economics, 1998, 50, P. 63-99. Doi:10.1016/S0304-405X(98)00032-4
[42] Vichitsarawong, T., and Pornupatham, S., Do audit opinions reflect earnings persistence? Managerial Auditing Journal, 2015, 30(3), P. 244-276. Doi:10.1108/MAJ-12-2013-0973
[43] Zaki, F., Ghozali, I., Harto, P., and Yuyetta, E.N.A., Free cash flow, investment inefficiency, and earnings management: evidence from manufacturing firms listed on the Indonesia Stock Exchange, Investment Management and Financial Innovations, 2018, 15(1), P. 299-310. Doi:10.21511/imfi.15(1).2018.25
