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Is There a Trade-Off Between Accrual-Based and Real Earnings Management Activities in the Presence of (fe) Male Auditors?

Abstract

Prior research suggests that the presence of high-quality auditors (i.e. proxied by audit firm characteristics) constrains accrual-based earnings management, but it inadvertently leads to higher real activities manipulation. We investigate whether such trade-off exists between accrual-based and real earnings management activities in the presence of female or male auditors. We use a sample of UK firms for the period 2009 to 2016 and find that firms audited by female auditors do not resort to a higher-level real activities manipulation when their ability to engage in accruals management is constrained. Overall, our results suggest that the benefits of hiring female auditors (i.e. less accrual-based earnings management) are overwhelmingly higher than the costs they might bring to the client firms (i.e. higher real activities manipulation).

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Notes

  1. 1.

    To sustain sufficient number of observations, we follow previous literature (Rosner 2003; Athanasakou et al. 2011; Iqbal et al. 2009; Alhadab and Clacher 2018) and exclude firms with less than 8 observations from our expectation model. Specifically, and due to lack of sufficient observations, our approach is an improvement from both Athanasakou et al. (2011) and Alhadaba and Clacher (2018) who employed 6 observations each in the calculation of their earnings management variables in the UK.

  2. 2.

    It is important to highlight that we did not include abnormal level of cash flow from operations in determining our REM. This is because extant research (see Roychowdhury 2006; Zang 2012) suggests that while for example price discount and overproduction decrease cash flow from operations, cutting discretionary expenses increases it. Because these real activities affect cash flow from operations in different directions, the results is always ambiguous, hence, we excluded them from our main analysis.

  3. 3.

    As at the end of 2016, there were 350,912 members across the UK and Republic of Ireland accountancy bodies relative to 294,996 in 2009, a difference representing 19% increase (Financial Reporting Council 2017).

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Acknowledgements

We would like to thank the Accounting and Business Ethics Section Editor Sheila Killian, and two (2) anonymous expert reviewers for their positive and constructive suggessions. We also acknowledge Coventry University (2016-2017) Pump-Prime funding award for this project.

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Correspondence to Andrews Owusu.

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Owusu, A., Zalata, A.M., Omoteso, K. et al. Is There a Trade-Off Between Accrual-Based and Real Earnings Management Activities in the Presence of (fe) Male Auditors?. J Bus Ethics (2020). https://doi.org/10.1007/s10551-020-04672-5

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Keywords

  • Auditor gender
  • Abnormal accruals
  • Real activities