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Earnings Management, Auditor Changes and Ethics: Evidence from Companies Missing Earnings Expectations

Author

Listed:
  • Eric Lohwasser

    (Colorado State University)

  • Yaou Zhou

    (Montclair State University)

Abstract

Companies’ earnings are arguably their most important financial disclosure, and corporate tactics to manage earnings can be directly constrained by audit procedures. In this article, we examine whether there is a link between companies’ earnings performance and changes in the accounting firm they choose to audit their financial statements. We find that when companies’ reported earnings just miss analysts’ expectations, they are more likely to change their auditor. Consistent with an opportunistic auditor switch, we also find that these companies have lower levels of earnings quality after the change. Our results concentrate on companies with more incentive or ability to act opportunistically, including those with negative market reactions to earnings, higher levels of accruals flexibility, and weaker corporate governance. Our study advances research into the public’s interest by providing evidence of suspect auditor changes that increase auditors’ ethical conflict to maintain independence and objectivity.

Suggested Citation

  • Eric Lohwasser & Yaou Zhou, 2024. "Earnings Management, Auditor Changes and Ethics: Evidence from Companies Missing Earnings Expectations," Journal of Business Ethics, Springer, vol. 191(3), pages 551-570, May.
    • Handle: RePEc:kap:jbuset:v:191:y:2024:i:3:d:10.1007_s10551-023-05453-6
    DOI: 10.1007/s10551-023-05453-6
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    More about this item

    Keywords

    Earnings management; Auditor changes; Auditor independence;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing

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