The Influence Of Real Earnings Management On Audit Fees:an Empirical Study

Real earnings management (RM) is the manipulation of a company’s real activities. Since it consumes the economic resources of a company, RM contributes to the rising operating risk (Gunny,2005; Roychowdhury,2006). Hence RM affects auditing.To begin with, this study lists the existing literatures on RM and on audit fees. And then, a theoretical framework is built based on the audit risk model and the audit fees model. Due to the operational risk accrued, RM affects both audit cost and litigation risk, and hence contributes to audit fees. Meanwhile, listed companies use RM for different purposes, and this difference affected the directions of earnings manipulation. Therefore, the study takes into account of the directions of earnings manipulation, that is, whether it is profit-exaggerating or profit-hiding.Using a data set of A-share listed companies between 2010 and 2013,we conduct an empirical research on the relationship of RM on audit fees, and the implications of difference in RM motivations. Multiple regression results indicate that RM has a significant positive impact on audit fees. Thus, we prove the contribution of RM on audit fees. Following on the confirmation of this relationship, we distinguish from profit-exaggerating RM from profit-hiding RM. The results show that only profit-exaggerating RM explains the increment of audit fees. The profit-hiding RM, nevertheless, do not necessarily results in a rising audit fees.Finally, we analyze the results, as well as the limitations, on the summarizing of the findings. We hope that this paper will be of valuable use to the policy makers, and to the investors.