Accrual‐based earnings is considered superior to cash flows. Accruals allow managers to communicate their private and inside information and thereby improve the ability of earnings to reflect underlying economic value. However, managers could engage in aggressive reporting of accruals that would seriously undermine the informativeness of reported earnings. Since outsiders cannot directly observe earnings, high‐accrual firms face greater agency costs relative to low‐accrual firms. Auditing plays an important role in mitigating these agency costs by constraining opportunistic management of accruals. This study examines whether there is a linkage between audit quality and pricing of discretionary accruals. The findings indicate that the association between stock returns and discretionary accruals is greater for firms audited by Big 6 auditors than for firms audited by non‐Big 6 auditors. Further, discretionary accruals of clients of Big 6 auditors have a greater association with future profitability than discretionary accruals of clients of non‐Big 6 auditors.
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1 March 2003
Research Article|
March 01 2003
Audit Quality and the Pricing of Discretionary Accruals
Gopal V. Krishnan, Associate Professor
Gopal V. Krishnan, Associate Professor
City University of Hong Kong.
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Online ISSN: 1558-7991
Print ISSN: 0278-0380
American Accounting Association
2003
AUDITING: A Journal of Practice & Theory (2003) 22 (1): 109–126.
Citation
Gopal V. Krishnan; Audit Quality and the Pricing of Discretionary Accruals. AUDITING: A Journal of Practice & Theory 1 March 2003; 22 (1): 109–126. https://doi.org/10.2308/aud.2003.22.1.109
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