Research On Auditing And Earnings Management

As a service industry, auditing has a long history of more than two hundred years and the academics have done multiple studies on auditing. Many researches did empirical studies between auditing and earnings management to improve whether auditing was deserved. Most of these researches focus on mandatory auditing, while, they could not improve whether the results of their studies are determined by other factors. Because of the voluntary selection of interim auditing, the Chinese stock market provides a unique angle to investigate empirically why listed firms voluntarily have their financial reports audited and whether auditing enhances their credibility.With the modified Jones Model and Heckman's Two-Stage Model, this thesis does the empirical research from three aspects and this thesis collects a voluntary auditing sample of 445 firm-year observations from 2001 to 2005 of A-share listed companies in Chinese stock market, and selects a non-auditing control sample by industry and size.Main contents of this thesis are as followings. First, to specify the related theories about auditing, semiannual reports and earnings management. Second, to research the determinants of interim auditing, the effect of interim auditing on earnings management and the self-selection problem that exists in interim auditing, with the help of empirical method. Finally, to sum up and give some advice under the base of the results this thesis finally gets.Main results of this thesis are as followings. 1. More profitable firms and higher leveraged firms are more likely to have their interim reports audited and firms with higher quality auditor are less likely to have their interim report audited.2. The decision of interim auditing is positively associated with the level of earnings management. Moreover, higher operating cash flow and leverage are likely to result in lower earnings management.3. In order to control the endogeneity of interim auditing decisions, the thesis estimates two-stage models using the Heckman (1979) methodology, and finally finds that the lambda is consistently negative across different models and is highly significant. It means that firms with high earnings quality are more likely to have their interim reports audited.