Effects of audit quality on earnings management Chinese listed firms

Abstract

There are many factors influencing earnings management. Audit quality is one of the influencing factors on earnings management. In this study, the purpose focus on the effects of audit quality on earnings management, especially in Chinese listed firms. The data are collected from CSMAR-CSRC Industry Classification 2012 Edition in 2014-2016. There are other control variables: cash flow from operating activities, the natural logarithm of total assets, the absolute value of total accruals, the ratio of market value to book value of equity, dummy variable indicating whether the firm is among the highest decile of leverage. Using Big 4 (PwC, DTT, KPMG, EY) or not Big 4 to measure audit quality, discretionary accruals to measure earnings management, we find audit quality would have a significant negative effect on discretionary accruals. As a result, the audit quality has a significant negative effect on earnings management, especially in Chinese listed firms.