Empirical Research About Top Managers’ Prior Experience As An Auditor And Affiliation With Accounting Firm And The Preference Between Earnings Management

In recent years, as an academic field, the way to choose earning managements has been concerned by experts. Earnings management is divided into two approaches:accrued earnings management and real earning management. In general, based on accounting system, accrued earnings management changes reported earnings by manipulates accounting policies or accounting estimates, with low cost and less difficulties. But for the increasingly improved regulations and accounting standards, accrued earnings management’s applying is getting smaller and smaller, and this behavior is easy to be found. In comparison, real earning management is to be manipulated by changing company’s business activities. This way is more subtle, and caused more serious consequences. Therefore, different ways of earnings management will have different impacts on companies, and bring different regulatory difficulties. To sum up, management’ preference for earnings management becomes a new focus in academia.Previous studies of preference between two earning managements mostly is concentrated on the enterprise factors, not on executives personal factors. Based on upper echelons theory, top managers’ background characteristics plays a decisive role on the strategic choices of the company. Different background characteristics (gender, age, tenure, education) lead to different psychological preference (conservative or radical) and response capacity, which will ultimately affect the company’s decision. For auditors, public accounting experience is often a steppingstone to top managers of listed companies. Executives’expertise and work experience will affect their decisions, and then the selection of Surplus Management. Compared to the accrual earnings management, real activities manipulation accomplished by normal operational practices is relatively less risky. The professional prudence will not disappear immediately after the auditor changing his professional identity. In addition, auditor experience also endows executives the experts more rights in the financial decisions than others. So considering the risk of accrued and real earnings management, executive used to be an auditor inclines to implement a more subtle way—real earnings management, in order to maximize private interests. "Auditor affiliation" is a special form, in the case of top managers background. "Close relationship", between the company and the firm, is likely to improve the company’s external audit regulatory environment (Geiger et al.,2005), and give the company the ability to audit accruals earnings management, while the "auditor affiliation" makes executives understand the transaction private audit plan and test methods. Therefore, they more likely to choose lower-cost accrual earnings management.To analyze the impact of top managers’background characteristics (auditor experience, auditor affiliation) on the choice between accrual earnings management and real earnings management, the study chooses firms from 2008 to 2014 as samples, and find that top managers with auditor background have a high level of real activities earnings management. Also, "Auditor affiliation" can reduce the risk of executives to implement accrual earnings management, and make executives prefer to implement accrual earnings management.This paper investigates the effect of the executive’s own professional background characteristics (auditor experience, auditor affiliation), on company decision-making, expands the influencing factors of choosing earnings management, and provides some references for earnings management comprehensive studies.