Auditor independence, corporate governance and aggressive financial reporting: an empirical analysis created by Ahmed M. Abdel-Meguid, Anwer S. Ahmed and Scott Duellman
Material type:
- text
- unmediated
- volume
- 13853457
- HD31 JOU
Item type | Current library | Call number | Vol info | Copy number | Status | Notes | Date due | Barcode | |
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Main Library - Special Collections | HD31 JOU (Browse shelf(Opens below)) | Vol. 17, no. 2 (pages 283-308) | SP21084 | Not for loan | For in house use |
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.
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