The Effect of Audit Quality on Earnings Management: Evidence from Iran

More audit quality improves the accuracy of the information presented by the managers and reduces their opportunistic behaviors and allows investors to acquire more accurate estimate from the value of the company. Therefore, the main purpose of this study is to investigate the effect of service quality of independent auditors on earnings management of listed companies in Tehran Stock Exchange. For this purpose, a sample of 840 firm-years during the years 2006-2011 were studied and tested. In this study, the audit firm size is used as an indicator for audit quality and the absolute value of discretionary accruals is used as an indicator for earnings management. The results indicate that there is no significant relationship between audit quality and earnings management. Also, test results of the control variable showed that there is significant and positive relationship between variables of financial leverage and return on assets with earnings management. But it was not observed any significant relationship between the firm size and discretionary accruals.

audit quality, audit firm size, earnings management, discretionary accruals