Auditor independence and earnings management

Abstract. This research paper investigates the auditor’s independence especially in today’s modern age where the role of auditor is becoming more and more important as businesses are developing and more and more use of technology, on one hand limits the use of personnel but on the other hand hides the possible effects of human error makes the job even more difficult. So, this paper investigates that how independent the auditors are in today’s world and what are the factors that can affect their independence like non-audit services and what sort of affects, auditor independence can have on earnings management and some suggestions that how the auditors can actually be independent instead of hiding behind the image of being independent when actually they are just a dummy in the hands of the management. I have examined the independence of the auditor by the provision of non-audit services and to what extent auditors independence can allow management to do earnings management or window dressing in Finnish markets by taking the data of the Finnish listed companies. I have used three hypotheses to prove that either the provision of non-audit services does affect the independence or not and to what extent earnings management can be linked with loss of auditor independence. I have used yearly regression model initially and tested the same models with pooled regression models. The yearly tests which I have used suggest that there is a positive relationship between audit and non-audit fees. Though I couldn’t find significant results for either of relationship between audit fees and discretionary accruals or non-audit fees and discretionary accruals, a measure of earnings management. When I used pooled regression model, I do find positive relationship between audit and non-audit fees. I also found positive relationship between audit fees and discretionary accruals, when the results were insignificant in yearly regression model. The pooled regression results for relation between non-audit fees and discretionary accruals were insignificant though. So, my findings were not enough to prove that auditors do lose their independence because of provision of non-audit services and that to what extent auditors independence can give room to management for earnings management