A Study On The Correlation Between Audit Quality And Choice Preference In Earnings Management Methods

Since the latter half of 2001, American securities market has undergone a series of financial fraud cases. Especially, the Enron, Xerox, the World Communication and other major financial scandals happened in 2002 all involved large accounting firms. Since then, people realized that a certain degree of divergence has happened between theory and practice in audit quality and earnings management, and began to set their sights on real earnings management. With the rising of real earnings management research, it became more and more complex to study the relationship between audit quality and earnings management. Will audit quality affect choice preference in earnings management mode? Do the managers of list firms have the motivations to use real earnings management to avoid high-quality external auditors? How to promote the overall reform of China audit industry to restrain accrued and real earnings management in list firms at the same time? It is of great importance to study and solve these questions. This paper will try to answer these questions with normative research and empirical study.This article can be divided into five chapters:the first chapter introduces the background of this article’s topic, the research significance, the main research content, the method, the thesis portal frame construction and the innovation points. The second chapter offers a brief review of Chinese and foreign literature. The third chapter offers theoretical elaboration. The forth chapter carried on an empirical test, the empirical study takes Shanghai and Shenzhen A-share market as research objects, processing their financial data from 2009 to 2012 with excel and stata. The article defines proxy of audit quality, accruals and real earnings management in this part, then constructs two step regression model to study the relationship between the relevant variables. The last chapter puts forward the conclusion and some policy suggestions.The findings of this paper as follows:the audit quality will play a significant role in the manager’s selection procedure of the methods of earnings management, the managers are more inclined to use real earnings management to replace accrued earnings management when they are faced with high level audit quality. The results also show that the high level audit quality has a bigger inhibiting effect in accrued earnings management than its trigger action in real earnings management. However, this situation would vary over time. Therefore, the article suggests that it is important to strengthen the study of real earnings management while promoting bigger and stronger strategy, and introduce policies about how to disclose and punish real earnings management.