Appendix B: Audit Quality and Earnings Management Title Author (S) Object of Sample Research Methodology Outcome the study 1. The Connie L. This study 10379 firm 1. They use Big Six 1. The clients of non-Big effect of Becker, examines year auditors as proxy for audit Six auditors report more audit Mark L. the observations quality and discretionary discretionary accruals than quality on Defond, audited by accruals as proxy for those reported by earnings James between Big Six earnings management; companies of Big Six Jiambalvo, audit auditors and 2. They adopt the auditors; K.R. quality 2179 firm Jones Model to 2. The discretionary and year measure earnings accruals of firms audited (1998) earnings observations management (DeFond and by non-Big Six auditors audited by Jiambalvo, 1994, DeFond are 1.5%-2.1% of total non-Big Six and Subramanyam, 1997). assets higher than the auditors from discretionary accruals the 1993 reported by clients of Big Compustat Six auditors; database in 3. Mean and median of the America. absolute value of discretionary accruals are significantly larger for firms with non-Big Six auditors; 4. Lower audit quality relates to more accounting flexibility; 5. The quality of Big Six auditors is higher than non-Big Six auditors. 2. Big 4 Jere R. This study 6568 U.S. 1. They use aggregate 1. Larger audits provide office size Francis and tests the firm year audit fees (total audit fees higher quality audits; and audit Michael D. relation observations and ranks of fees) received 2. Clients reported by quality Yu (2009) between and 2,572 from SEC registrants to larger auditors carry out Big 4 unique firms measure Big 4 auditor less aggressive earnings office size during the size; management; and audit period 2. Then, they use abnormal 3. Larger audits are more quality. which accruals and earnings likely to issue are audited distributions as proxy for audit reports, of by 285 earning quality and which are more accurate unique Big 4 earnings management; with regard to predict offices from 3. Lastly, a probit model is next-period client the adopted to test two bankruptcy. Compustat common benchmarks; and Audit those are reporting small Analytics positive profits earnings databases. increase.
Appendix B: Audit Quality and Earnings Management Title Author (S) Object of the study Sample Research Methodology Outcome 1. The effect of audit quality on earnings Connie L. Becker, Mark L. Defond, James Jiambalvo, K.R. (1998) This study examines the between audit quality and earnings 10379 firm year observations audited by Big Six auditors and 2179 firm year observations audited by non-Big Six auditors from the 1993 Compustat database in America. 1. They use Big Six auditors as proxy for audit quality and discretionary accruals as proxy for earnings management; 2. They adopt the Jones Model to measure earnings management (DeFond and Jiambalvo, 1994, DeFond and Subramanyam, 1997). 1. The clients of non-Big Six auditors report more discretionary accruals than those reported by companies of Big Six auditors; 2. The discretionary accruals of firms audited by non-Big Six auditors are 1.5%-2.1% of total assets higher than the discretionary accruals reported by clients of Big Six auditors; 3. Mean and median of the absolute value of discretionary accruals are significantly larger for firms with non-Big Six auditors; 4. Lower audit quality relates to more accounting flexibility; 5. The quality of Big Six auditors is higher than non-Big Six auditors. 2. Big 4 office size and audit quality Jere R. Francis and Michael D. Yu (2009) This study tests the relation between Big 4 office size and audit quality. 6568 U.S. firm year observations and 2,572 unique firms during the period which are audited by 285 unique Big 4 offices from the Compustat and Audit Analytics databases. 1. They use aggregate audit fees (total audit fees and ranks of fees) received from SEC registrants to measure Big 4 auditor size; 2. Then, they use abnormal accruals and earnings distributions as proxy for earning quality and earnings management; 3. Lastly, a probit model is adopted to test two common benchmarks; those are reporting small positive profits earnings increase. 1. Larger audits provide higher quality audits; 2. Clients reported by larger auditors carry out less aggressive earnings management; 3. Larger audits are more likely to issue audit reports, of which are more accurate with regard to predict next-period client bankruptcy.