DO AUDITORS MITIGATE EARNINGS MANAGEMENT IN AUDITING PROCESS?

This study uses a new measure, “aggregate audit adjustment (AAA), ” of audit quality to reexamine the relation between audit quality and earnings management. The AAA is defined as the difference between pre-audited earning and post-audited earning, which represents an objective measure of the auditors ’ ability at detecting errors and irregularities in the pre-audited financial statements, and then credibly making necessary adjustments. We predict that there is a negative effect of aggregate audit adjustment on earnings management (measured by discretionary accruals). The result indicates that even in the case of controlling the auditor type (Big 5 vs. Non-Big 5), this relation still holds. This means that higher quality auditors can not only report a lower degree of discretionary accruals but also adjust a larger amount/magnitude of errors (or perhaps unwarranted accruals) included in their client’s pre-audited earnings. This finding complements and reinforces the findings of prior research, in particular those provided in Becker et al. (1998)