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Real and accrual-based earnings management in the pre- and post- engagement partner signature requirement periods in the United Kingdom

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  • Min Liu

    (Brooklyn College)

Abstract

In order to address the concern about whether the Public Company Accounting Oversight Board’s recent requirement to disclose an EP’s name in the United States (US) may cause unwanted consequences such as an increase in real earnings management (EM), I investigate the effect of requiring an engagement partner (EP) to sign audit reports on real and accrual-based earnings management in the United Kingdom, a comparable test environment. I measure accrual-based earnings management as the signed abnormal discretionary accruals and real earnings management as abnormally low levels of operating cash flows and discretionary expenses, as well as abnormally excessive production. I do not find a significant change in the usage of accrual-based and/or real earnings management for firm-years suspected of beating/meeting the zero, last-year, or analyst forecast consensus earnings threshold from the pre- to post-signature period. The results are robust to alternative proxies for EM and the control sample approach. My results mitigate the concern that managers may resort to more economically costly real earnings management following the mandatory disclosure of an EP’s name in the US.

Suggested Citation

  • Min Liu, 2020. "Real and accrual-based earnings management in the pre- and post- engagement partner signature requirement periods in the United Kingdom," Review of Quantitative Finance and Accounting, Springer, vol. 54(3), pages 1133-1161, April.
    • Handle: RePEc:kap:rqfnac:v:54:y:2020:i:3:d:10.1007_s11156-019-00827-2
    DOI: 10.1007/s11156-019-00827-2
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    References listed on IDEAS

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    Cited by:

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    2. Yi-Hsing Liao & Hua Lee & Chao-Jung Chen, 2023. "The informational role of audit partner industry specialization," Review of Quantitative Finance and Accounting, Springer, vol. 60(1), pages 69-109, January.
    3. Audrey Wen-Hsin Hsu & Chih-Hsien Liao, 2023. "Auditor industry specialization and real earnings management," Review of Quantitative Finance and Accounting, Springer, vol. 60(2), pages 607-641, February.

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    More about this item

    Keywords

    Real earnings management; Accrual-based earnings management; Engagement partner signature requirement; UK; PCAOB;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation

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