TY - BOOK AU - Abdel-Meguid,Ahmed AU - Ahmed,Anwer AU - Duellman,Scott TI - Auditor independence, corporate governance and aggressive financial reporting: an empirical analysis SN - 13853457 AV - HD31 JOU PY - 2013/// CY - Dordrecht PB - Springer KW - Corporate governance KW - Aggressive financial reporting KW - Auditor independence N2 - This paper seeks to provide empirical evidence on the efficacy of three important governance mechanisms (auditors, directors, and institutional shareholders) in constraining aggressive financial reporting, proxied by abnormal accruals. It also examines the effects of the Sarbanes–Oxley Act (SOX) on their efficacy. Using a sample of US firms audited by the Big 5 (4) auditors between 2000 and 2004, we document a positive relation between abnormal accruals (our proxy for financial reporting aggressiveness) and auditors’ economic dependence on their clients. Furthermore, we find that this relation is driven by firms with weak non-auditor governance mechanisms before and after the enactment of SOX. The results suggest that aggressive financial reporting occurs only when multiple governance mechanisms ‘fail’. More specifically, such type of reporting requires that a highly dependent auditor operates in a ‘poor’ governance setting. Thus, the paper underscores the importance of strong governance in constraining aggressive financial reporting. Moreover, our results suggest that governance regulation (such as SOX) is not a substitute for strong governance mechanisms and thus caution against the over reliance on SOX-type legislation in other parts of the world UR - https://doi.org/10.1007/s10997-011-9176-3 ER -