Managerial Auditing Journal

Emerald Article: Earnings management and the audit opinion: evidence from Malaysia Shireenjit Johl, Christine A. Jubb, Keith A. Houghton

Article information:
To cite this document: Shireenjit Johl, Christine A. Jubb, Keith A. Houghton, (2007),"Earnings management and the audit opinion: evidence from Malaysia", Managerial Auditing Journal, Vol. 22 Iss: 7 pp. 688 - 715 Permanent link to this document: http://dx.doi.org/10.1108/02686900710772591 Downloaded on: 05-10-2012 References: This document contains references to 43 other documents Citations: This document has been cited by 3 other documents To copy this document: permissions@emeraldinsight.com This document has been downloaded 2168 times since 2007. *

Users who downloaded this Article also downloaded: *

Bjrn Frank, Takao Enkawa, (2009),"Does economic growth enhance life satisfaction? The case of Germany", International Journal of Sociology and Social Policy, Vol. 29 Iss: 7 pp. 313 - 329 http://dx.doi.org/10.1108/01443330910975650 Charles Inskip, Andy MacFarlane, Pauline Rafferty, (2010),"Organising music for movies", Aslib Proceedings, Vol. 62 Iss: 4 pp. 489 - 501 http://dx.doi.org/10.1108/00012531011074726 James DeLisle, Terry Grissom, (2011),"Valuation procedure and cycles: an emphasis on down markets", Journal of Property Investment & Finance, Vol. 29 Iss: 4 pp. 384 - 427 http://dx.doi.org/10.1108/14635781111150312

Access to this document was granted through an Emerald subscription provided by UNIVERSITI KEBANGSAAN MALAYSIA For Authors: If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service. Information about how to choose which publication to write for and submission guidelines are available for all. Please visit www.emeraldinsight.com/authors for more information. About Emerald www.emeraldinsight.com With over forty years' experience, Emerald Group Publishing is a leading independent publisher of global research with impact in business, society, public policy and education. In total, Emerald publishes over 275 journals and more than 130 book series, as well as an extensive range of online products and services. Emerald is both COUNTER 3 and TRANSFER compliant. The organization is a partner of the Committee on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation.
*Related content and download information correct at time of download.

The current issue and full text archive of this journal is available at www.emeraldinsight.com/0268-6902.htm

MAJ 22,7

Earnings management and the audit opinion: evidence from Malaysia

Shireenjit Johl
School of Accounting and Law, RMIT University, Melbourne, Australia

688

Christine A. Jubb
Deakin Business School, Deakin University, Malvern, Australia, and

Keith A. Houghton
College of Business and Economics, Australian National University, Australian Capital Territory, Australia
Abstract
Purpose This study aims to examine auditor reporting behaviour in the presence of aggressive earnings management (EM) in the context of the Asian Economic Crisis as it affected Malaysia. In the vein of Bartov, Gul and Tsui, the interaction between discretionary or abnormal accruals and audit quality (AQ), as indicated by auditor size and auditor industry specialisation, is examined. Design/methodology/approach A logistic regression model adapted from various prior studies is utilised to test the hypotheses. Findings As per earlier ndings using Western data, Big 5 auditors in Malaysia appear to qualify more frequently than their non-Big 5 counterparts when high levels of abnormal accruals are present. However, the interaction between auditor industry specialisation and abnormal accruals is not signicant in predicting the incidence of qualication. Originality/value This study extends the current literature on AQ differentiation and specically it attempts to address the gaps in the literature with respect to auditor reporting behaviour in the presence of aggressive EM. In addition, this study provides additional evidence on Big 5/industry specialist quality differentiation in an emerging market (an under-researched area), Malaysia, arguably with less transparent and weaker governance structures than the developed economies such as the USA, UK, and Australia. Keywords Auditing, Earnings, Malaysia, Quality Paper type Research paper

Managerial Auditing Journal Vol. 22 No. 7, 2007 pp. 688-715 q Emerald Group Publishing Limited 0268-6902 DOI 10.1108/02686900710772591

Introduction Auditors play a vital role in ensuring the maintenance and issuance of high-quality nancial reports. The question of whether auditors adequately play this role in safeguarding accounting information by ensuring credible reporting has recently received much attention. This attention has focused on Asia and the 1997 Asian Crisis, and more recent (2001) very public collapses of two corporations, Enron in the USA and HIH in Australia. Against this backdrop, this paper investigates in the emerging market of Malaysia an aspect of audit quality (AQ) product differentiation in association with nancial reporting discretion audit outcome (audit opinion) and earnings management (EM). Auditors are usually placed under increased strain and public scrutiny during economic crises due to increased likelihood of corporate failure. During the Asian

Crisis, the World Bank questioned the quality of audits by Big 5 auditors operating in Asia, in that many East Asian corporations, having received clean audit reports from Big 5 auditors, subsequently demonstrated that those opinions might have not been appropriate (Accountancy, 1998a, b). Based on the notion of a differentiated audit product, the empirical issue examined in this paper is whether Big 5 auditors/industry specialist auditors more frequently issue qualied audit opinions as the level of aggressive abnormal accruals increases ceteris paribus, compared to other auditors. Specically, this paper argues that aggressively high levels of absolute abnormal accruals, as can be expected in periods of economic crisis and have been found to be present in the context of the Asian crisis (Johl et al., 2003), should be associated with audit opinion qualication, contingent on AQ. Although there are several published studies that examine audit opinions in various settings (e.g. auditor switching, audit-related litigation, nancial distress, etc.), few studies (Francis and Krishnan, 1999; Bartov et al., 2000; Bradshaw et al., 2001) examine the likelihood of a company receiving a qualied audit report in association with the level of accruals or abnormal accruals. These studies, all using US data, nd a positive association between abnormal (and total) accruals and qualications. However, only Bartov et al. (2000) examines Big 5 differential quality by including an interaction between Big 5 and abnormal accruals. The interaction variable is found not signicant and the authors attribute the result to the small number of sample companies with non-Big 5 auditors. This study tackles this problem by using a matched-pair sample matching amongst other things on auditor size. In Malaysia, the non-Big 5 audit a similar proportion of listed companies (about 20 per cent) to that featured in some US studies (e.g. about 17 per cent in Becker et al. (1998)) and so this setting is appropriate to compare with prior results. This study contributes to the literature by testing the issue in a different, emerging economy, institutional setting. In addition, given that both auditor and auditee take the others presence into account (Hansen and Watts, 1997), this study utilises two models the qualication (QUAL) model with audit opinion as the dependent variable, and the EM model with absolute abnormal accruals as the dependent variable, to test the relationship between each of audit opinion and abnormal accruals with AQ. The remainder of this paper is organised as follows. The next section discusses briey the Malaysian corporate and regulatory background, followed by discussion of the relevant audit literature and hypotheses development. The fourth and fth sections discuss the model development, the selection and measurement of variables and sample selection and information regarding data collection is discussed. Results are then reported with conclusions, implications, limitations and ideas for further research appearing in the last section. Background Malaysia is argued here to provide a setting less transparent with low levels of public scrutiny compared to the West, in which to test the propensity of auditors to issue a qualied audit opinion when EM is not constrained. It is a country where reporting and auditing practices are heavily inuenced by common-law sources given their historical inuence in the setting of International Financial Reporting Standards and International Standards on Auditing (ISAs), facilitating comparison with research results in the Western World. However, although there has been much emphasis on strengthening the accounting and disclosure standards in Malaysia, the same perhaps

Earnings management and the audit opinion 689

MAJ 22,7

690

cannot be said with respect to auditing practices (Thillainathan, 1999). Effort has been made by the International Federation of Accountants (IFAC) to improve the uniformity of auditing practices and related services throughout the world. This is evidenced by the formation of the IFAC Forum of Firms (FOF) and the Transnational Auditors Committee (TAC) in January 2001. The FOF is a voluntary body made up of international audit rms performing audits across national borders. These rms agree to meet certain requirements and undergo a global independent quality review[1]. TAC is an executive committee of IFAC devoted to representing and meeting the needs of the members of FOF. It plays a major role in encouraging member rms to meet high standards in the international practice of auditing. With respect to the market for audit services in Malaysia, as of 1998, 83 per cent of public companies were audited by the then Big 5. An important feature of the Big 5 operating in Malaysia is the existence of link-ups with local counterparts. It is important to note here, that for the purposes of this study, these local afliated rms are categorised as Big 5 auditors. The Financial Statements Review Committee established under the Malaysian Institute of Accountants (MIA) undertakes an annual review of published accounts to ensure compliance with legal and professional requirements. However, the work of this committee is said to be very limited with it reviewing no more than 25 annual reports in any one year (Tay, 1995). Further, the results of the review are not made public and so are without scrutiny by legal, nancial or public oversight. To date there are no reported cases of disciplinary action against members by the MIA (Tay, 1995). Also, there has been no litigation against auditors within Malaysia. Favere-Marchesi (2000) analyses AQ in ASEAN countries based on the legal environment faced by auditors in those countries. The study notes the existence of differential AQ among the ASEAN countries, with auditor independence seriously compromised in some countries (e.g. Brunei, Vietnam and Philippines) and the lack of a liability regime faced by auditors. With respect to Malaysia, the study notes improvements for statutory auditors are required, including the mandating of a prociency examination and the expansion of civil liability. Hence, reputational damage resulting from publicity with respect to either litigation or malpractice is not of the same importance in Malaysia as in Western countries. It is of importance to investigate whether Western indications that auditors issue deserved qualied audit opinions when abnormal EM is present, continue to hold given this lower external discipline and monitoring of auditors. Literature review and hypothesis development To date, there are limited published studies examining the association between EM measured by abnormal accruals and the issuance of audit qualications, Bartov et al., 2000, discussed earlier, is an important exception. Also of relevance are Francis and Krishnan (1999) and Bradshaw et al. (2001), which examine the relationship between total accruals and audit opinion. Francis and Krishnan (1999) argue that because accounting accruals are managers subjective estimates of future outcomes, and as such cannot be conrmed objectively pre-occurrence, audits of high-accruals auditees exhibit greater uncertainty than audits of low-accruals auditees. Given the underlying audit risk, auditors lower their issuance of a qualied opinion threshold for this high-accrual group of auditees. Consistent with their argument, Francis and Krishnan

in a US setting nd that high-absolute accruals auditees are more likely to receive a modied[2] audit report than low-absolute accruals auditees, with relative evidence of reporting conservatism by the then Big 6 auditors. Their evidence is strongest for companies with abnormally large negative accruals. On a similar issue, but with a slightly different rationale, Bradshaw et al. (2001) nd that high-positive accruals auditees are more likely to be subject to SEC enforcement for GAAP violations. Because auditors are expected to issue an opinion with respect to nancial statement conformity with GAAP, Bradshaw et al. (2001) argue that auditees reporting high (positive) accruals should more frequently receive modifying audit opinions than those with low-accruals. However, they hypothesise that because auditors are poor users of accruals information, they are not likely to issue modied audit opinions for auditees with high-levels of accruals. They nd support for their hypothesis and conclude that auditors fail to communicate to investors problems arising from high-accruals reporting with respect to future earnings. Because total accruals is a function of both actual (non-discretionary) and abnormal (discretionary) accruals, it can be inferred that high-total accruals should be associated with high-abnormal accruals an indirect inference to EM. However, this inference may not hold in all circumstances and therefore may not demonstrate the ability of auditors to constrain use of a technique most suited to measuring EM the level of abnormal accruals. Bartov et al.s (2000) objective is to evaluate the ability of the various accruals models to detect EM by examining the association between abnormal accruals and audit qualications. They assert that qualied audit reports are issued because of scope limitation and departures from GAAP and therefore are likely to be associated with EM, in that a positive relationship is expected between these phenomena but this is contingent on AQ. They nd a positive relationship (only two models exhibit signicant coefcients) between audit qualication and abnormal accruals, whilst the interaction term between abnormal accruals and Big 5 is not signicant in any of the models[3]. Regardless of the reason for the observance of abnormally high-abnormal accruals, ideally their presence should be accompanied by an audit qualication. Typically (at the time the data were collected for this paper) there were three forms of qualied opinion in Malaysia except for; adverse; and disclaimer opinions. These were issued, depending on materiality, on grounds such as: . limitation of scope of the audit; . disagreement with management regarding the nancial report (including inherent uncertainty not adequately disclosed); and . a limitation on the scope of the audit (ISA 700[4]), respectively. It is important to note here that although ISA 700 The Auditors Report on Financial Statements was issued in 1996, it was mandatory for all MIA members to observe with respect to audits commencing on or after July 1998. Prior to this date, there were four forms of qualied opinion subject to; except for; adverse; and disclaimer opinion arising from circumstances such as those mentioned earlier and inherent uncertainty (e.g. going concern). Emphasis of mater paragraphs can be included in any of these types of qualications, but do not, in themselves, constitute a qualication. It is acknowledged that companies with audit qualications may have a high level of abnormal accruals for justiable reasons such as company performance and

Earnings management and the audit opinion 691

MAJ 22,7

troubled-company incentives, reasons that are more relevant in the crisis and post-crisis periods of the study[5]. Notwithstanding this possible bias, and based on the notion of a differentiated audit product, it is expected that Big 5/industry specialist auditors will more frequently issue qualied audit opinions as the level of unjustiably high-abnormal accruals increases ceteris paribus, compared to other auditors. The foregoing discussion and rationale leads to the following hypothesis[6]: H1a. The level of absolute abnormal accruals and audit qualication incidence is positively associated, irrespective of the macroeconomic period in the crisis cycle, ceteris paribus. H1b. The level of absolute abnormal accruals and audit qualication incidence is associated in interaction with the Big 5 (industry specialist), irrespective of the macroeconomic period in the crisis cycle, ceteris paribus. Methodology Pre-requisite to the testing of hypotheses is the determination of the variable earnings management. This study utilises the modied (m) Jones (1991) (Dechow et al., 1995)[7] model in decomposing total accruals into non-discretionary (expected) and discretionary (unexpected or abnormal) accruals. Since, this study involves periods of economic upturn and downturn, it is likely that companies in the sample will experience extreme negative earnings in periods of downturn. The Jones (1991) model has reduced reliability in such a situation, so an alternative methodology for calculating abnormal accruals is used. In this alternative design, each non-Big 5 auditee is matched to a Big 5 auditee from the same year, industry, and with comparable earnings performance (return on sales). This approach is used by Teoh et al. (1998a, b) and with a slight variation, by Kothari et al. (2005). As with most prior research involving EM, this study, utilises the cross-sectional method rather than the time-series version of the Jones model (Francis et al., 1999; Becker et al., 1998; DeFond and Jiambalvo, 1994)[8]. Modied Jones model The cross-sectional version of the m-Jones (1991) model is estimated separately for all rms in each same industry. An advantage of using the cross-sectional approach, since the models are re-estimated each year, is that specic year changes in economic conditions affecting expected accruals are ltered out. This ltering is vital since the period of examination covers changes in rm and macroeconomic condition (Teoh et al., 1998a, b). The total accruals model, with company (i ) and year (t) subscripts, is:       TAit 1 {DREVit 2 DRECit } PPEit a 1 b1 b2 1it Ai;t21 Ai;t21 Ai;t21 Ai;t21 where, TAit total accruals at time t is calculated as: [(Dcurrent assetsit Dcashit) (Dcurrent liabilitiesit Dshort-term debtit) (depreciation and amortisation expenseit), where D denotes the change between t and t 2 1[9]; Ai,t2 1 lagged (one year) total assets; DREVit change in operating revenues between t and t 2 1; DRECit change in net receivables between t and t 2 1; PPEit gross property, plant and equipment; and 1it error term (known as discretionary, unexpected or abnormal accruals (DA)).

692

The model H1a and H1b investigate the issue of whether ceteris paribus, the presence of high-abnormal accruals is accompanied by an audit qualication and whether this outcome is contingent on the quality of the auditor. As such, the logistic regression model adapted from various prior studies (Bradshaw et al., 2001; Bartov et al., 2000; Monroe and Teh, 1993; Dopuch et al., 1987) is utilised to test H1. Most of these studies (Dopuch et al., 1987; Monroe and Teh, 1993) predict all types of uncertainty qualications (but exclude except for and adverse opinions), one study predicts all types of qualication (Bradshaw et al., 2001) and one study (Bartov et al., 2000) predicts only scope limitation and disagreement types of opinion. In addition, of all these studies, only two include a variable for either total accruals (Bradshaw et al., 2001) or abnormal accruals (Bartov et al., 2000). Like Bradshaw et al. (2001) this study does not attempt to discriminate between different types of audit qualications (going concern, scope limitation or disagreement). One possible limitation of taking all audit qualications into account is that the observance of an audit qualication, particularly a going concern qualication, may not be associated with EM. One way to overcome this identication problem would be to select observations with an audit qualication that arises from scope limitations and departures from GAAP. However, the number of opinions in the sample period citing such reasons is too small to draw any statistical inferences. Not withstanding this limitation, to the extent that nancial health is successfully controlled for, it is possible to investigate any differential propensity to render qualied opinions in the context of EM. The qualication model takes the following form: QUAL a b1 AQ1 b2i MKTCAP b3 BKMKTi b4 LOSSi b5 DEi b6 QUALGi b7 LASSETi b8 TIMEi b9 INVTAi b10 RECTAi b11 ABDAi b12 ABDA* AQi 1i where the variables are dened in Table I and explained in the next section.

Earnings management and the audit opinion 693

Selection and measurement of variables The QUAL model Dependent variable. Receipt of an audit QUAL by a rm is the dependent variable in testing H1a and H1b. QUAL is given a value of 1 if the auditee receives an audit qualication of any type in the current year and 0 otherwise (i.e. a clean or unqualied opinion is rendered). Hypothesis variables. Absolute abnormal accruals ABDA is the rst hypothesis variable for testing of H1a. It is expected that higher levels of absolute abnormal accruals are associated with an increased tendency for auditors to render a qualied audit opinion. This variable is the absolute value of the residual obtained from the m-Jones (1991) model and so is continuous. The second hypothesis variable of interest for testing H1b is the interaction term between absolute discretionary accruals and each of (separately) the two measures of AQ, (ABDA *BIG5/ABDA *INDSPEC). Similar to H1a, a positive relationship is

694

MAJ 22,7

Variable QUAL a dummy variable, 1 if the audit opinion is qualied and 0 otherwise

Dependent variable Audit opinion

Hypothesis variables (separately) Auditor characteristic Auditor size (BIG5) ^ 2 A dummy variable, 1 if the auditee is audited by one of the Big 5 (and afliates) rms, 0 otherwise INDSPEC industry specialist 1 if auditor industry specialist (15 per cent market share) exists in auditees industry, 0 otherwise B5NINDSP Big 5 industry non-specialist 1 if the industry non-specialist is a Big 5, and 0 otherwise ABDA *BIG5 interaction term ABDA *INDSPEC interaction term (separately)

Auditor industry specialisation

Interaction between absolute abnormal accruals (ABDA) and audit quality (BIG5/INDSPEC) Financial characteristics Operational complexity

Litigation risk Protability

Leverage Prior year opinion

Size Time listed Audit difculty Proportion inventory Proportion receivables Earnings management Abnormal accruals

Table I. Variables and predicted direction for audit qualication (QUAL) model Measurement Predicted direction MKTCAP market capitalisation log of market capitalisation as of year end BKMKT book to market ratio as of year-end LOSS current year loss 1 if loss is experienced in the current year, 0 otherwise DE long term debt to total assets QUALAG 1 if prior years opinion is qualied, 0 otherwise LASSET log of total assets TIME number of years listed on the KLSE INVASST inventory to assets RECASST receivables to total assets ABDA absolute abnormal accruals obtained from the m-Jones (1991) model

expected between QUAL and ABDA *AQ, in that a higher quality auditor is likely to be more conservative and thus more likely to qualify when EM is high. Audit quality. The ability to detect and willingness to report material manipulation/misstatements giving rise to material uncertainties or/and going concern problems is dependent on auditor quality. Consistent with previous audit qualication studies (Monroe and Teh, 1993; Mutchler et al, 1997; Lennox, 1999; Bartov et al., 2000; Bradshaw et al., 2001), AQ is included in the QUAL model to proxy for AQ and to account for differing levels of expertise and reputation. Two different proxies namely Big 5 and industry specialist are used. Given that Big 5 (or industry specialist auditors) are seen as being higher quality, these auditors are expected to qualify more frequently than the non-Big 5 (or non-industry specialist), ceteris paribus. Thus, it is expected that there is a positive relationship between AQ and QUAL. Control variables. Financial characteristics (MKTCAP, BKMKT, LOSS, DE, LASSET, QUALAG and TIME). Seven nancial characteristic variables market capitalisation (MKTCAP), book to market value (BKMKT), current year losses (LOSS), leverage (DE), total assets (LASSET), and number of years listed on the stock exchange (TIME) are included (Dopuch et al., 1987; Monroe and Teh, 1993; Bartov et al., 2000; Bradshaw et al., 2001). These nancial ratios reect the operational complexity, litigation risk, protability and nancial condition of the company. As in Bartov et al. (2000) MKTCAP is included in the QUAL model to reect the operational complexity of the company, whilst the BKMKT reects the companys litigation risk and growth options, and a positive relationship is expected for both of these variables with QUAL. DE, and LOSS variables are included as indicators of the auditees nancial health, and LASSET controls for size. DE reects the leverage of the company and is a measure of nancial risk and long-term solvency position of the rm. This variable was found important from an auditors point of view in Mutchlers (1985) study and Levitan and Knoblett (1985) and Carcello et al. (2000) found this variable signicant in models predicting audit qualication. Consistent with prior studies, DE is expected to have a positive relationship with QUAL indicating that as nancial risk increases, higher qualication rates are expected. Current year loss, LOSS, is said to indicate a possible sick company or poor nancial health (Monroe and Teh, 1993). LOSS was found signicant in Dopuch et al. (1987). LOSS is given a value of 1 if the auditee experiences a negative prot in the current year and a positive coefcient for this variable is predicted. LASSET is included in the QUAL model for the possibility of two conicting reasons. Lys and Watts (1994) argue that larger rms are assumed to produce more information asymmetries, which provide management with greater discretion over decisions that are inadequately captured by the organizations controls. Conversely, Monroe and Teh (1993) argues that size represents a rms nancial health and as such larger rms are generally seen to be healthy, making it more unlikely that a given uncertainty will be material. Owing to the possible above ambiguous relationship between audit qualication and size, the direction of the association is not predicted. Prior studies (Mutchler, 1985; Bell and Tabor, 1991; Monroe and Teh, 1993; Lennox, 1999) include QUALAG, nding that the prior years audit opinion is a useful decision tool in predicting current year opinion. Consistent with these studies, QUALAG is included and is given a value of 1 if a qualication of any type was given in the previous year, else 0. The coefcient for QUALAG is predicted to be positive indicating

Earnings management and the audit opinion 695

MAJ 22,7

696

that a rm receiving a qualied opinion in the previous year is likely to receive a qualied opinion in the current year. Time listed, TIME, is included to capture the probability of a rm remaining a going concern for the next 12 months (Mutchler, 1985; Dopuch et al., 1987) because younger rms are more likely to experience nancial distress and may struggle to survive (and are possibly more likely to indulge in EM). Consequently, it is expected these younger rms will receive qualied opinions more frequently (Dopuch et al., 1987; Monroe and Teh, 1993). The TIME variable is a continuous variable the number of years the company has been listed on the Kuala Lumpur Stock Exchange (KLSE). Audit difculty (RECTA and INVTA). Similar to prior studies (Bell and Tabor, 1991; Dopuch et al., 1987; Monroe and Teh, 1993), receivables as a proportion of total assets, RECTA, and inventory as a proportion of total assets, INVTA, are included to control for audit effort and risk. A positive relationship is predicted between these variables and QUAL.

Sample selection and data collection The data are primarily hand-collected from annual reports of companies listed on the KLSE[10] covering nancial periods between 1994 and 1999, where 1994-1996 is deemed the pre-crisis period, 1997-1998 the crisis, and 1999 post-crisis. Annual reports are available in the KLSE and the Securities Commission (SC) library. In addition, incomplete and other required data were supplemented from other sources including: . KLSE on disk. . KLSE Handbook. . Corporate Handbook. . KLSE-RIAM online database. . Worldscope database[11]. . Che Ahmad and Houghtons (2001) dataset[12]. . Investor Digest. The initial population from which the matched-pair sample is chosen comprises companies listed on the KLSE for years 1993-1999 since lagged variables are required. To be included companies had to report in Malaysian Ringgit, be audited by a Malaysian-based auditor; in an industry other than nance related and unit trust sectors[13]; in existence in all or any of the years 1993 through 1999 with all nancial report data including auditor data available; not newly listed (IPO) (since differential levels of EM are expected within these companies); and without a change in nancial year-end. From the initial 1,512 observations meeting the data requirements, 298 pairs (596 observations) are used for the performance matched-pair sample used in this study. The matching is performed rst on year, second on industry, third on auditor size (Big5/non-Big 5) and fourth on return on sales. The sample size at various stages of data collection is presented in Table II.

Selection criteria Approximate number of KLSE listed companies Less: nance/trust companies Less companies with incomplete nancial data and unavailable annual reportsb Less: IPO companies Less companies with change in nancial year end Usable sample (calculation of abnormal accruals) Less companies with incomplete auditor data Total sample Matched sample (by non-Big 5/Big 5, year, industry and return on sales)

1994 478 47 280 2 149 1 148 48

1995 529 47 285 11 1 185 2 183 60

No. of valid casesa 1996 1997 1998 1999 621 56 278 15 2 270 1 269 110 708 61 316 14 4 314 3 311 132 736 63 334 2 5 332 332 136 757 63 416 2 7 270 1 269 110

Total 3,351 290 1,478 46 19 1,520 8 1,512 596

Earnings management and the audit opinion 697

Notes: Complete data were also collected for year 1993 (151 observations) as some variables require lagged data. aIncludes both Main Board and Second Board of the KLSE with about 85 per cent of the observations being from the Main Board (companies on the Main Board are larger in size); bdue to late reporting for year 1999 and missing reports in the KLSE library

Table II. Sample selection criteria

Results Audit qualication summary Panel A of Table III presents the frequency of type of audit opinion rendered by auditors, Big 5 and non-Big 5 for the pooled years 1994 to 1999, whilst Panels B-D present the type of audit opinion frequencies by macroeconomic period pre-crisis, crisis and post-crisis. Although only the matched pair sample is used for hypotheses testing and for the multivariate analyses, descriptives are provided also for the total sample. The descriptive analyses from Table III provide three major ndings. First, only a fraction 4.22 per cent (4.82 per cent) of the matched pair (total) sample receive a qualied opinion over the seven years, and a substantial number of these qualied opinions are received during periods of economic/nancial distress the crisis and post-crisis periods. For example, during the pre-crisis period only 0.92 per cent (1.50 per cent) of the matched pair (total) opinions issued are qualied as opposed to 6.36 per cent (7.43 per cent) post-crisis and 6.02 per cent (6.83 per cent) crisis. As one would expect, the frequency of the matched pair (total) except for/subject to type opinion is greater than the adverse or disclaimer type opinion. Second, auditees with Big 5 auditors receive qualied opinions more frequently than non-Big 5 auditees. Big 5 auditors issued 72 per cent of the matched pair qualied opinions over the seven years. In addition, of all opinions rendered, 6.06 per cent (5.46 per cent) of the matched pair (total) Big 5 auditees had a qualied opinion compared with 2.36 per cent (2.29 per cent) for their non-Big 5 counterparts (and the test of proportion shows a signicance of z , 0.01). This nding is consistent for both crisis and post-crisis periods, in that 9.09 per cent (9.02 per cent) of the matched pair Big 5 clients had a qualied opinion compared to 3.64 per cent (3.01 per cent) of the non-Big 5 auditees post-crisis (crisis). Third, there appears frequent use of emphasis of matter unqualied opinions, especially in the crisis (1998) and post-crisis periods. For example, 2.35 per cent of the matched pair opinions rendered over the seven-year period are related to emphasis of matter type of opinion.

698

MAJ 22,7

Opinion type

Panel A: Overall frequency of type of audit opinion (1994-1999) Not material and pervasive (except for/subject to) 45 (2.97) 38 (3.15) 7 (2.29) 18 (3.04) 11 (3.70) 7 (2.36) Material and pervasive (adverse/disclaimer) 28 (1.85) 28 (2.32) 0 (0.00) 7 (1.18) 7 (2.36) 0 (0.00) Total qualied 73 (4.82) 66 (5.46) 7 (2.29) 25 (4.22) 18 (6.06) 7 (2.36) Unqualied: emphasis of matter 46 (3.04) 37 (3.06) 9 (2.94) 14 (2.35) 6 (2.01) 8 (2.68) Total unqualied 1,441 (95.18) 1,142 (94.54) 299 (97.71) 568 (95.78) 279 (93.94) 289 (97.64) Overall total (N) 1,514 1,208 306 593 297 296 4.656 (0.000) 5.316 6.990 4.355 30.724 (0.000) (0.000) (0.000) (0.000) 2.654 2.223 2 0.538 2 0.580 (0.008) (0.026) (0.591) (0.562) 0.950 (0.342)

Panel B: Pre-crisis frequency of type of audit opinion (1994-1996) Not material and pervasive (except for/subject to) 7 (1.16) 6 (1.23) 1 (0.88) 2 (0.92) 1 (0.92) 1 (0.93) Material and pervasive (adverse/disclaimer) 2 (0.32) 2 (0.41) 0 (0.00) 0 (0.00) 0 (0.00) 0 (0.00) Total qualied 9 (1.50) 8 (1.64) 1 (0.88) 2 (0.92) 1 (0.92) 1 (0.93) Unqualied: emphasis of matter 4 (0.67) 4 (0.82) 0 (0.00) 0 (0.00) 0 (0.00) 0 (0.00) Total unqualied 592 (98.50) 479 (98.36) 113 (99.12) 215 (99.08) 108 (99.08) 107 (99.07) Overall total (N) 601 487 114 217 109 108 audit opinion (1999) 9 (3.35) 11 (4.09) 20 (7.43) 20 (7.43) 11 (5.24) 18 (8.57) 13 (6.19) 0 (0.00) 2 (3.39) 7 (11.86) 3 (2.73) 7 (6.36) 9 (8.18) 7 (3.33) 2 (3.39) 4 (3.64) 2 (3.64) 3 (5.45) 5 (9.09) 3 (5.45) 2 (3.64) 0 (0.00) 2 (3.64) 6 (10.91)

Panel C: Post-crisis frequency of type of Not material and pervasive (except for/subject to) Material and pervasive (adverse/disclaimer) Total qualied Unqualied: emphasis of matter

Table III. Audit qualication frequencies Total (per cent) Total sample Big 5 Non-Big 5 (per cent) (per cent) Matched pair sample Test of proportion (z-value) Total Big-5 Non-Big 5 Matched pair (per cent) (per cent) (per cent) Total sample sample 1.895 (0.058) 1.415 (0.157) 2.342 (0.019) N/A 21.121 (0.000) 0.000 (1.000) N/A 0.000 (1.000) N/A 0.096 (0.924) 1.681 (0.093) 3.351 (0.000) 3.646 (0.000) 1.635 (0.102) 0.000 (1.000) 1.744 (0.081) 1.152 (0.249) 2 1.021 (0.307) (continued)

Opinion type 249 (92.57) 269 192 (91.43) 210 57 (96.61) 103 (93.64) 59 110 50 (90.91) 55 53 (96.36) 55 11.827 (0.000) 20.405 (0.685)

Total (per cent)

Total sample Big 5 Non-Big 5 (per cent) (per cent)

Matched pair sample Test of proportion (z-value) Total Big-5 Non-Big 5 Matched pair (per cent) (per cent) (per cent) Total sample sample

Total unqualied Overall total (N)

3.944 (0.000) 3.896 5.522 3.871 19.074 (0.000) (0.000) (0.000) (0.000)

1.168 (0.242) 2.008 2.031 0.449 20.693 (0.045) (0.042) (0.653) (0.488)

Panel D: Crisis frequency of type of audit opinion (1997-1998) Not material and pervasive (except for/subject to) 29 (4.50) 25 (4.89) 4 (3.01) 12 (4.51) 8 (6.02) 4 (3.01) Material and pervasive (adverse/disclaimer) 15 (2.33) 15 (2.94) 0 (0.00) 4 (1.50) 4 (3.01) 0 (0.00) Total qualied 44 (6.83) 40 (7.83) 4 (3.01) 16 (6.02) 12 (9.02) 4 (3.01) Unqualied: emphasis of matter 22 (3.42) 20 (3.91) 2 (1.50) 5 (1.87) 3 (2.24) 2 (1.49) Total unqualied 600 (93.17) 471 (92.17) 129 (96.99) 250 (93.98) 121 (90.98) 129 (96.99) Overall total (N) 644 511 133 266 133 133

Notes: Of the qualied opinions 88.88 per cent (95.89 per cent), from the matched-pair (total) sample is inherent uncertainty going concern type of qualication

Earnings management and the audit opinion 699

Table III.

MAJ 22,7

700

Panel A of Table IV provides an overall descriptive summary in relation to abnormal accruals by type of audit qualication for the matched-pair sample. Panels B-D of the table present the same categories of descriptives based on macroeconomic periods. Analysis from Table IV provides ve main ndings. First, overall, on average, the absolute abnormal accruals (deated by total assets) for observations receiving a qualied opinion is 0.185, being higher than for those with unqualied opinions (0.114). Although not so for the pre-crisis, this nding is evident also in both the crisis and post-crisis periods. Second, the gross/signed abnormal accruals for qualied opinions is negative (2 0.131), whilst positive (0.014) for unqualied opinions pooled across the seven years of study. Examining by macroeconomic period, both the post and crisis periods display negative abnormal accruals as opposed to positive abnormal accruals for the unqualied sample. These ndings seem to indicate that qualied opinions issued during the post and crisis periods are largely associated with negative abnormal accruals indicating possible big-bath activity that is most likely to be nancial distress/performance related. Third, with regards to differential AQ, Big 5 auditees (0.214) receiving qualied opinions have higher, and weakly signicant ( p , 0.10) absolute abnormal accruals compared to non-Big 5 qualied auditees (0.109). For unqualied opinions rendered, clients of Big 5 auditors (0.105) have lower absolute abnormal accruals compared to clients of non-Big 5 auditors (0.124), and the difference in the mean between these two type of opinions is signicant at p , 0.10 level on a one-tailed test. A similar result is observed during the pre-crisis (caution is needed because only two observations are qualied), crisis (but insignicant) and post-crisis (signicant at p , 0.05 level) periods. Taken together, the ndings indicate a differential level of AQ displayed by auditors contingent on auditor size. Fourth, of the total number of qualied opinions issued over the period of study, 64 per cent are related to observations for which debt restructuring subsequently occurred. The Malayasian Government put in place aid mechanisms post-crisis through the national asset management companies, Danaharta and CDRC, to ease the effect of the crisis. Of the total debt-restructuring observations, 37 per cent receive a qualied opinion. Similar to the earlier point, this result likely indicates going-concern qualied opinions systematically rendered to companies experiencing debt-related problems. Of the debt-restructuring Big 5 clients, 44 per cent had qualied audit opinions compared with 20 per cent of their non-Big 5 debt-restructuring counterparts, again indicating differential AQ (signicant at z , 0.01 on a one-tail test). Fifth, politically linked companies receive a qualied audit opinion less frequently than non-politically linked companies. Politically linked companies comprise a group of privileged companies having signicant, tight links with the Malaysian Government via political parties and are deemed to be those identied by Johnson and Mitton (2003). Only 4 per cent of the politically linked companies receive a qualied opinion over the period of study. One possible reason for such an observation is that managers of politically linked companies are more likely to succeed in avoiding a qualication due to their political inuence during the auditor-client interaction/negotiation. However, within the qualied politically linked audit opinions rendered, 75 per cent of Big 5 clients receive a qualied opinion compared with 25 per cent for their non-Big 5 counterparts (only signicant at z , 0.10 on a one-tail test).

Total (per cent) Qualied Unqualied Qualied (N 25) 0.185 20.131 16 (0.64) 4 (0.16) 11 (44) 3 (0.12) 5 (0.20) 1 (0.04) 27 (0.05) 93 (0.16) 10 (0.02) 59 (0.10) 17 (0.03) 34 (0.06) 2.121 (0.033) 1.414 (0.157) 2 1.905 (0.057) 3.667 (0.000) 0.214 2 0.155 0.109 2 0.071 0.114 0.014 0.105 0.012 0.124 0.015 Test of means or proportion) ( p (or z) -value) 2 1.402 (0.174) 1.646 (0.100) 0.860 (0.399) 0.1971 (0.844) Unqualied (N 568)

Big 5 (per cent)

Non-Big 5 Total Big 5 Non-Big 5 (per cent) (per cent) (per cent) (per cent)

Panel A: Overall (1994-1999)

ABDA (mean) DA (mean) Observations with debt restructuring exercise (frequency) Politically linked observations (frequency)

Panel B: Pre-crisis (1994-1996) Qualied (N 2) 0.047 0.049 0.045 0.002 0.049 2 0.045 0 (0.00) 0 (0.00) 0 (0.00) 0 (0.00) 0 (0.00) 0 (0.00) 0 (0.00) 43 (0.20) 0 (0.00) 14 (0.06) 0 (0.00) 29 (0.13) N/A N/A Unqualied (N 215) 0.141 0.125 0.158 0.023 0.011 0.035 Test of means or proportion) ( p (or z) -value) N/A 1.378 (0.170) N/A 0.801 (0.424) N/A 3.235 (0.001) (continued)

ABDA (mean) DA (mean) Observations with debt restructuring exercise (frequency) Politically linked observations (frequency)

Earnings management and the audit opinion 701

Table IV. Descriptive summary of abnormal accruals by type of audit qualication

702

MAJ 22,7

Panel C: Post-crisis (1999) Qualied (N 7) 0.396 20.396 6 (0.86) 1 (0.14) 4 (0.57) 1 (0.14) 2 (0.29) 0 (0.00) 14 (0.13) 15 (0.15) 6 ((0.06) 8 (0.08) 8 (0.08) 7 (0.07) 1.155 (0.248) N/A 0.479 2 0.479 0.187 2 0.187 0.102 0.014 0.094 0.002 0.108 0.025 Unqualied (N 103) Test of means or proportion) ( p (or z) -value) 2 2.982 (0.031) 0.689 (0.492) 2.982 (0.031) 0.771 (0.442) 2 0.756 (0.450) 0.365 (0.715)

ABDA (mean) DA (mean) Observations with debt restructuring exercise (frequency) Politically linked observations (frequency)

Panel D: Crisis (1997-1998) Qualied (N 16) 0.109 0.117 0.086 20.032 2 0.036 2 0.019 10 (0.40) 3 (0.12) 7 (0.28) 2 (0.08) 3 (0.12) 1 (0.04) 13 (0.05) 35 (0.14) 4 (0.02) 22 (0.09) 9 (0.04) 13 (0.05) Unqualied (N 250) 0.096 0.091 0.101 0.006 0.019 20.005 Test of means or proportion) ( p (or z) -value) 2 0.752 (0.464) 0.769 (0.442) 0.219 (0.829) 2 1.313 (0.190) 1.789 (0.074) 0.816 (0.414) 2 1.961 (0.050) 2.151 (0.031)

ABDA (mean) DA (mean) Observations with debt restructuring exercise (frequency) Politically linked observations (frequency)

Notes: ABDA absolute abnormal accruals; DA gross/signed abnormal accruals and is calculated using the m-Jones (1991) model (see Chapters 6 and 7 for details and results of applying this method)

Table IV. Total (per cent) Qualied Unqualied Big 5 (per cent) Non-Big 5 Total Big 5 Non-Big 5 (per cent) (per cent) (per cent) (per cent)

Panels A-D of Table V present an overall and period specic Big 5/non-Big 5 comparative summary of abnormal accruals, debt-restructuring and politically linked observations with regards to emphasis of matter unqualied audit opinions versus non-emphasis of matter unqualied opinions. Five main ndings can be derived from the analyses. First, in contrast to qualied audit opinions, auditees receiving an emphasis of matter type of unqualied audit opinion report lower absolute abnormal accruals than non-emphasis of matter unqualied opinion auditees. At rst glance, the result seems strange, as one would have expected otherwise. However, examining by net abnormal accruals shows that clients receiving an emphasis of matter opinion report negative abnormal accruals compared to non-emphasis of matter opinion clients, which tend to report positive net abnormal accruals. Taking the magnitudes into account, as expected the emphasis of matter unqualied opinion abnormal accruals (0.038) are larger than for the non-emphasis of matter unqualied opinions (0.015). Thus, it is likely that the negative signed abnormal accruals pertaining to an emphasis of matter unqualied opinions are associated with economic uncertainty debt-related problems. Second, 64.29 per cent of the emphasis of matter unqualied opinions are rendered to debt-restructuring companies. Third, similar to the earlier ndings, but to a lesser extent, differential AQ is observed in that 83.33 per cent of the debt-restructuring Big 5 auditees receive an emphasis of matter unqualied audit opinion compared with 50 per cent for their debt-restructuring non-Big 5 counterparts. However, after partitioning across the macroeconomic period the Big 5 effect appears to dissipate, in that during the post-crisis period there appears no difference between the Big 5 and non-Big 5 auditees receiving an emphasis of matter opinion, whilst a marginally stronger Big 5/non-Big 5 difference is noted during the crisis period. A similar nding is also observed between the Big5 and non-Big 5 politically linked companies. Fourth, with regards to politically linked companies, only 14.29 per cent of the emphasis of matter opinions relate to politically linked companies, indicating a possible liberality amongst auditees due to political inuence/pressure. Multivariate results Table VI presents the descriptive statistics and correlations for variables included in the QUAL model. From the table, the highest correlation is 0.715 between MKTCAP and LASSET[14]. Table VII reports the overall (pooled over the period of study) results for the logistic analyses that regresses the audit opinion on absolute values of abnormal accruals, Big 5 (or industry specialist) (and interaction between abnormal accruals and AQ) and other control variables. To test the hypotheses by macroeconomic condition, the model is analysed separately for each period. Owing to insufcient opinion data variability, the logistic model is unable to perform the regression in the pre-crisis period (only two observations are qualied). For the post-crisis period, the logistic regression also cannot be performed because absolute abnormal accruals above 0.291 predicts the outcome perfectly. From Table VII using the pooled sample for the whole period, the variable of interest for H1a, ABDA is shown to be signicantly associated (albeit weak) with audit qualication ( p , 0.10) after controlling for auditor, audit difculty and nancial characteristics. The positive relationship between QUAL and ABDA, indicates that, as expected, auditors consider EM when formulating opinions.

Earnings management and the audit opinion 703

704

MAJ 22,7

Panel A: Overall (1994-1999) Emphasis of matter N 14 0.068 0.032 0.095 2 0.038 0.006 20.070 9 (64.29) 2(14.29) Emphasis of matter N0 N/A N/A N/A N/A N/A N/A N/A 0 (0.00) 0 (0.00) 0 (0.00) 46 (21.10) 31 (28.44) N/A N/A N/A N/A N/A 15 (13.76) Non-emphasis of matter N 218 0.106 0.124 0.156 0.017 0.011 0.034 2 (33.33) 0 (0.00) 91 (16.43) 57 (20.88) 34 (12.10) 5 (83.33) 4 (50.00) 18 (0.06) 5 (1.83) 13 (4.63) 0.471 (0.637) 2.000 (0.046) Non-emphasis of matter N 554 0.116 0.106 0.125 0.015 0.013 0.017 Test of means or proportion) ( p (or z)-value) 1.455 (0.171) 0.9434 (0.346) 2 1.421 (0.181) 0.881 (0.379) 2 2.667 (0.008) 3.410 (0.001)

ABDA (mean) DA (mean) Observations with debt restructuring exercise (frequency per cent) Politically linked observations (frequency per cent)

Panel B: Pre-crisis (1994-1996) Test of means or proportion) ( p (or z)-value) N/A 1.3750 (0.171) N/A 0.7729 (0.440) N/A N/A N/A 2 2.6875 (0.0078) (continued)

ABDA (mean) DA (mean) Observations with debt restructuring exercise (frequency) Politically linked observations (frequency per cent)

Table V. Descriptive summary of abnormal accruals by type of unqualied opinion (emphasis of matter vs non-emphasis of matter) Total Big 5 Non-Big 5 Total Big 5 Non-Big 5 Emphasis of matter Non-emphasis of matter

Total

Big 5

Non-Big 5

Total

Big 5

Non-Big 5

Emphasis of matter

Non-emphasis of matter

Panel C: Post-crisis (1999) Emphasis of matter N9 0.060 0.037 0.072 2 0.016 0.028 20.038 6 (66.67) 1 (11.11) Emphasis of matter N5 0.082 0.027 0.165 2 0.076 2 0.017 20.165 3 (60) 1 (20) 1 (33.33) 0 (0.00) 34 (13.88) 21 (17.80) 13 (10.24) 2 (66.67) 1 (50.00) 10 (4.08) 2 (1.69) 8 (6.30) 0.816 (0.414) N/A Non-emphasis of matter N 263 0.097 0.092 0.101 0.008 0.020 20.003 1 (33.33) 0 (0.00) 14 (14.89) 7 (14.89) 7 (14.89) N/A 3 (50.00) 3 (50.00) 8 (8.51) 3 (6.38) 5 (10.64) 0.000 (1.000) 2 1.000 (0.317) 0.000 (1.000) Non-emphasis of matter N 101 0.106 0.098 0.113 0.017 0.001 0.033 Test of means or proportion) ( p (or z)-value) 0.736 (0.485) 2 0.648 (0.518) 2 1.060 (0.324) 1.897 (0.061)

ABDA (mean) DA (mean) Observations with debt restructuring exercise (frequency per cent) Politically linked observations (frequency per cent) Test of means or proportion) ( p (or z)-value) 1.450 (0.243) 0.365 (0.715) 2 1.526 (0.224) 2 0.989 (0.323) 2 2.683 (0.007) 1.940 (0.052)

Panel D: Crisis (1997-1998)

ABDA (mean) DA (mean) Observations with debt restructuring exercise (frequency per cent) Politically linked observations (frequency per cent)

Notes: Most of the emphasis of matter type of unqualied opinions relate to uncertainty over the going concern status of the company due to economic uncertainty; ABDA absolute abnormal accruals; DA gross/signed abnormal accruals and is calculated using the m-Jones (1991) model

Earnings management and the audit opinion

Table V.

705

706

MAJ 22,7

Table VI. Descriptive statistics and correlations for audit qualication model variables
SD 0.201 0.500 0.412 0.451 0.571 0.502 0.430 0.130 0.108 1.282 10.817 0.264 0.140 0.138 0.103 0.070 1 0.522 0.632 0.059 0.001 0.021 2 0.073 0.096 0.042 0.146 0.013 0.105 2 0.069 0.549 0.319 1 2 0.331 0.139 0.008 0.012 2 0.009 0.184 0.137 0.104 0.054 0.019 2 0.073 0.235 0.612 1 2 0.061 2 0.005 0.012 2 0.073 2 0.061 2 0.078 0.067 2 0.034 0.099 2 0.010 0.394 2 0.203 1 2 0.556 2 0.352 0.090 2 0.082 0.715 0.247 2 0.091 2 0.266 2 0.044 2 0.046 0.001 1 0.322 0.036 0.178 20.086 0.067 0.089 0.012 20.046 0.017 0.076 1 0.095 0.131 20.157 20.007 0.084 0.088 0.060 0.033 0.078 1 20.013 0.325 20.044 0.026 20.124 20.041 20.117 20.065 1 20.048 0.072 0.012 0.047 0.053 0.137 0.252 1 0.232 20.113 20.221 20.134 20.076 20.008 1 20.050 20.210 20.132 0.007 20.008 1 0.084 0.016 20.004 0.029 1 0.191 0.173 0.107 1 0.458 0.253 1 0.117 0.088 0.049 2 0.157 0.277 0.288 2 0.031 0.288 2 0.066 0.147 0.010 0.070 0.064 0.170 0.163 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 1 0.563 1

Mean

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

QUAL BIG5 INDSPEC B5NINDSP MKTCAP BKMKT LOSS DE QUALAG LASSET TIME INVASST RECASST ABDA ABDA *BIG5 ABDA *INDSPEC

593 596 596 596 561 549 596 594 596 596 596 594 596 596 596 596

0.042 0.500 0.216 0.284 5.558 0.502 0.245 0.123 0.012 13.243 13.490 0.158 0.193 0.117 0.056 0.022

Note: Refer to Table I for summary of variables

Dependent variable: QUAL za 0.640 21.490 0.550 3.440 * 20.300 1.730 * * 0.420 3.930 * 20.280 1.120 20.140 1.440 * * * 48.164 1.070 545 56.19 0.000 2 51.164 0.403 17.837 545 56.44 0.000 2 50.866 0.407 3.773 3.187 0.229 1.250 11.186 0.433 5.589 1.157 1.103 0.480 6.433 6.180 2.555 3.092 0.216 1.201 10.784 0.402 5.027 1.191 1.108 0.379 6.783 4.279 2.391 2.268 0.198 0.587 7.635 1.008 5.303 0.402 0.029 1.014 16.134 6.153 1.000 1.540 * * * 21.670 * * 0.380 3.360 * 20.360 1.530 * * * 0.520 3.900 * 20.360 0.800 1.010 3.000 2.348 0.209 0.596 7.912 1.068 6.111 0.391 0.028 1.088 15.294 7.975 1.670 * * 1.570 * * * 21.610 * * 0.470 3.410 * 20.340 1.570 * * * 0.430 3.850 * 20.320 0.780 1.410 * * * 2.303 21.600 * * 0.490 3.440 * 20.360 1.830 * * 0.430 3.810 * 20.290 0.790 1.420 * * * 0.265 1.281 12.006 0.508 5.445 1.152 1.108 0.477 11.600 0.660 174.989 545 57.46 0.000 250.075 0.416 0.236 0.581 8.682 1.142 5.331 0.384 0.029 1.264 25.397 1.978 628.895 1.780 * * 1.614 1.207

Big 5/non-Big 5 1 (No interaction) 2 (Interaction) ODDS R. SE za ODDS R. SE

Industry specialist/industry non-specialist 3 (No interaction) 4 (Interaction) ODDS R. SE za ODDS R. SE za

BIG5 3.375 INDSPEC B5NINDSP MKTCAP 0.233 BKMKT 1.257 LOSS 11.053 DE 0.419 QUALAG 6.239 LASSETb 1.154 TIME 1.102 INVASST 0.509 RECASST 6.426 ABDA 6.164 ABDA *BIG5 ABDA *INDSPEC N 545 x2 56.84 PROB . x 2 0.000 Log likelihood 251.194 Pseudo R 2 0.403

0.212 0.592 7.719 1.026 6.235 0.388 0.028 1.176 15.200 7.902

Notes: Classication accuracy: unqualied 99.8 per cent, qualied 35 per cent, overall 97.43 per cent. Refer to Table I for summary of variables. a One-tailed test except for those variables (with (b)) where direction is not predicted. *Signicant at 0.01 level; * *signicant at 0.05 level; * * *signicant at 0.10 level

Earnings management and the audit opinion 707

Table VII. Multivariate result H1a and H1b Logistic regression qualication model (pooled 1994-1999)

MAJ 22,7

708

The interaction term ABDA *BIG5 included to test H1b captures the interaction between Big 5 auditors and the absolute level of abnormal accruals and is signicantly (again albeit weak p , 0.10) associated with qualication (regression 2). However, this association is insignicant when the interaction term ABDA *INDSPEC is used (regression 4) implying that industry specialisation make no difference to the rate of qualication in the presence of abnormal accruals. One possible reason for the nding is the limited number of observations where ABDA *INDSPEC is greater than zero. The positive coefcient found for the interaction term in regression 2 (ABDA *BIG5) indicates that, as expected, the likelihood of a client receiving a qualied opinion increases when a Big 5 auditor is confronted with abnormal accruals. In regressions without the interaction terms (regressions 1 and 3) as expected both the AQ variable coefcients are positive and signicant at p , 0.05 level. The association indicates that Big 5 auditors more frequently than other auditors qualify audit opinions, ceteris paribus, thus implying differentiated AQ. In regression 3, the industry specialist auditor (INDSPEC) coefcient is more strongly signicant than Big 5 non-specialist (signicant only at p , 0.10 level), implying that only a segment of Big 5 auditees seem to more frequently than other auditees receive an audit qualication. Other control variables found signicant are MKTCAP, LOSS, QUALAG and TIME at conventional levels of p , 0.01, p , 0.05 and p , 0.10 level (see Table VII for details of the respective variable signicance levels) for all four regressions. The coefcients for MKTCAP, LOSS, TIME, QUALAG are positive as predicted. Robust (White (1980) sandwich estimator) logistic regression is used to adjust the standard errors. The mean VIF, maximum and minimum variance ination factors for the regressions show multicollinearity is below problematic limits. The models for regressions 1 and 3 are signicant (Wald x 2 56 and prob . x 2 p 0.00) with a Pseudo R 2 of approximately 40 per cent, classifying correctly 97 per cent of the 545 observations in terms of the audit opinion rendered by an auditor. Similar to regressions 1 and 3, the models for regressions 2 and 4 are signicant with a Pseudo R 2 of approximately 41 per cent. The Pearson x 2 and the Hosmer-Lemeshow goodness-of-t tests for regressions 2 and 4 also suggest that the model is an adequate t. The nding for the crisis and post-crisis periods supports the notion of AQ differentiation as theorised by DeAngelo (1981). However, the auditor conservatism rationale (DeFond and Subramanyam, 1998; DeFond and Jiambalvo, 1994) may also be in place due to the possibility of heightened litigation risk post-crisis (although in Malaysia none of the auditors has been litigated against) and international pressure associated with distressed companies as observed during the crisis and post-crisis periods. To untangle which of the two notions is driving the result is difcult, but the fact that the interaction term between opinion and Big 5 (albeit weakly) is signicant indicates a greater level of auditor conservatism observed for the Big 5 which, in itself, implies a differential level of audit qualify exhibited by top-tier auditors. Further tests Since, most of the qualied audit opinions are going concern related, it is expected that managers have incentive to indulge in big bath activity in order to enhance their case for debt-restructuring and signal to lenders that they acknowledge their difculties and are willing to take action. Following this scenario, companies receiving a qualied opinion should report large negative abnormal accruals. The results in the previous

section analyse the abnormal accruals in absolute terms (ignoring the sign of both positive and negative abnormal accruals), which removes the directional effect and concentrates on the magnitude. Thus, this section attempts to provide some insight as to whether the observance of high-abnormal accruals together with the issuance of a qualied audit opinion is driven by EM and/or distress. Table VIII provides descriptives of abnormal accruals, operating cash ow, leverage, size, total accruals, audit qualication, Big 5, non-Big 5, qualication *Big 5, qualication *non-Big 5, loss and the presence of debt-restructuring by percentile of abnormal accruals (directional). As expected, the table conrms MIA that most qualied opinions fall at the rst decile with abnormal accruals of 2 0.303, 2 0.340 and 2 0.265 for the overall, post-crisis and crisis periods, respectively. In addition the recipients of qualied opinions display high leverage, losses, negative return on assets, large negative accruals and tend to subsequently undertake some form of debt-restructuring, which is strikingly evident in the crisis and post-crisis periods (see table for details). Taking these results together, although it is apparent that distress is likely to be the main reason driving the issuance of audit qualications, it is equally apparent that these qualied companies indulge in what might be construed as big-bath activity (have large negative DA). Although the proportion of Big 5 and non-Big 5 auditees is relatively the same within the rst decile of abnormal accruals, the proportion of Big 5 auditees receiving an audit qualication is much higher than for the non-Big 5 auditees, a reconrmation of the presence of a differentiated audit ` product vis-a-vis differential auditor conservatism. Conclusions, limitations and further research This paper seeks to provide evidence of AQ differentiation by testing one of the observable outcomes of auditing, the audit opinion. It is argued that high levels of abnormal accruals should be associated with an audit qualication. In other words, the question investigated here is whether in situations where EM is not constrained, there is an accompanying qualied audit opinion. In addition, because Big 5 auditors arguably supply higher quality audits, it is hypothesised that this group of auditors will issue qualied opinions more frequently than the non-Big 5 when abnormal accruals are high. Based on the matched pair sample of companies listed on the KLSE, consistent with Bartov et al. (2000), the results provide support for the hypotheses, in that high EM proxied by absolute abnormal accruals is positively associated with qualication. In addition, contrary to Bartov et al. (2000), the absolute level of abnormal accruals is positively and signicantly associated with qualications in the presence of a Big 5 auditor. One possible reason for the contrary results is that the sample in Bartov et al. is not matched by type of auditor (Big 5 non-Big 5) as is done in this study. Partitioning by macroeconomic period suggests that the issuance of audit qualication is more frequent in crisis and post-crisis than the pre-crisis and this is not surprising. One possible major concern with the validity of the results is with respect to possibility that the issuance of these qualications is related to going concerns problems of the company rather than EM per se. However, distress is controlled for and the results show high negative abnormal accruals (indicative of big bath activity) being associated with the issuance of audit qualications, particularly in the presence of a Big 5 auditor,

Earnings management and the audit opinion 709

710

MAJ 22,7

CENTILE of DA N LOSS 27 14 19 20 18 14 10 3 11 10 3 3 1 5 0 1 2 0 2 3 0.074 0.055 0.062 0.045 0.067 0.085 0.028 0.075 0.062 0.073 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A 2 0.126 0.384 0.000 0.011 0.164 0.033 0.034 0.047 0.039 0.068 14 2 8 3 4 3 3 1 4 1 19 6 15 7 7 7 5 12 10 13 4 3 4 3 1 3 2 5 3 9 (continued) ROA Debt rest Debt rest1 0.871 0.265 0.382 0.297 0.302 0.329 0.265 0.265 0.283 0.336 0.229 0.220 0.253 0.229 0.215 0.323 0.288 0.218 0.282 0.353 12.859 13.083 13.548 13.259 13.845 13.154 13.297 13.239 12.949 13.283 0.113 0.074 0.046 0.028 0.028 0.036 0.046 0.056 0.095 0.197 0 0 0 1 0 0 1 0 0 0 10 16 11 9 8 11 5 11 11 17 10 14 12 16 9 6 8 10 9 15 0 0 0 0 0 0 1 0 0 0 0 0 0 1 0 0 0 0 0 0 12.731 13.049 13.279 13.377 13.604 13.367 13.444 13.300 13.267 13.004 0.314 0.104 0.107 0.055 0.045 0.029 0.028 0.051 0.077 0.217 9 2 3 3 1 0 2 3 1 1 30 34 30 22 27 31 32 30 32 30 29 27 28 39 32 29 28 29 28 29 8 1 2 1 1 0 2 1 1 1 1 1 1 2 0 0 0 2 0 0

Panel A: Overall (1994-1999) 1 59 20.303 0.047 2 61 20.129 0.116 3 58 20.071 0.037 4 61 20.038 0.065 5 59 20.011 0.042 6 60 0.015 0.026 7 60 0.043 0.018 8 59 0.073 20.001 9 60 0.142 20.038 10 59 0.354 20.182

Panel B: Pre-crisis (1994-1996) 1 20 20.317 0.128 2 30 20.124 0.096 3 23 20.069 0.080 4 25 20.039 0.063 5 17 20.012 0.071 6 17 0.015 0.032 7 13 0.042 20.004 8 21 0.073 0.010 9 20 0.149 20.045 10 32 0.389 20.158

Table VIII. Qualication frequency and variable descriptives by percentiles based on directional abnormal accruals QUAL * BIG5 QUAL * Non-Big5

DA

OCF LEV LASSET ABTA QUAL Big5 Non-Big5

CENTILE of DA N LOSS 12 2 6 3 7 2 4 0 3 2 12 9 12 12 11 11 4 3 6 5 2 0.406 0.053 2 0.071 0.017 2 0.039 2 0.022 0.034 0.066 0.054 0.109 6 2 4 2 1 3 1 1 3 0 7 3 7 3 3 4 1 7 6 3 2 0.097 0.016 2 0.029 2 0.022 0.004 0.003 0.037 0.014 0.014 0.048 8 0 4 1 3 0 2 0 1 1 8 0 4 1 3 0 2 0 1 1 ROA Debt rest Debt rest1 2.486 0.235 0.701 0.265 0.494 0.384 0.294 0.239 0.168 0.138 12.897 12.897 12.937 13.448 13.517 13.260 13.561 13.328 13.724 12.731 0.267 0.129 0.101 0.069 0.044 0.025 0.024 0.053 0.078 0.252 3 2 2 2 1 0 1 3 1 1 12 18 13 11 17 15 12 12 14 10 11 8 12 16 17 17 16 13 13 11 3 1 2 1 1 0 1 1 1 1 0 1 0 1 0 0 0 2 0 0 12.332 13.636 13.513 13.491 13.458 14.009 13.372 13.344 12.809 12.479 0.634 0.159 0.261 0.090 0.083 0.031 0.022 0.037 0.049 0.199 6 0 1 0 0 0 0 0 0 0 8 0 6 2 2 5 15 7 7 3 8 5 4 7 6 6 4 6 6 3 5 0 0 0 0 0 0 0 0 0 1 0 1 0 0 0 0 0 0 0

DA

OCF LEV LASSET ABTA QUAL Big5 Non-Big5

QUAL * BIG5

QUAL * Non-Big5

Panel C: Post-crisis (1999) 1 16 20.340 20.129 2 5 20.138 0.224 3 10 20.072 20.112 4 9 20.041 0.112 5 8 20.007 0.007 6 11 0.014 0.046 7 19 0.045 0.043 8 13 0.070 0.051 9 13 0.145 0.025 10 6 0.357 20.097

Panel D: Crisis (1996-1997) 1 23 20.265 0.100 0.353 2 26 20.134 0.118 0.322 3 25 20.072 0.057 0.372 4 27 20.037 0.052 0.371 5 34 20.010 0.035 0.299 6 32 0.015 0.016 0.314 7 28 0.042 0.011 0.237 8 25 0.074 20.038 0.317 9 27 0.136 20.063 0.339 10 21 0.299 20.242 0.349

Notes: Refer to Tables I and II for summary of variables; ROA Return on Asset; DEBREST debt restructurers (1998 and 1999); DEBTREST1 debt restructurers (1994-1999); N/A not applicable because debt restructurers are not identied prior to1998

Earnings management and the audit opinion 711

Table VIII.

MAJ 22,7

712

thus providing additional support to the notion of a differentiated audit product vis a vis differential auditor conservatism. The results of this study need to be interpreted with its limitations in mind. First, all qualications are included with insufcient sub-sample sizes to examine by type of qualication. Second, the matched pair sample, although creating a rigorous calculation of discretionary accruals, tends to be smaller on average than the total population since the size of non-Big 5 auditees, to which were matched Big 5 auditees, is smaller on average than Big 5 auditees. Several opportunities for further research arise from this study. Further investigation of the debt-restructuring and politically linked auditees, that appear to have differential rates of qualication, needs to take place. The incentives in terms of EM are different for these auditees and insights may be provided by examining the behaviour of the discretionary accruals for these groups of auditees in association with the behaviour of their auditors. Overall, the results of this study support the ndings of similar studies performed on data from the West. In the Malyasian setting and in the context of the Asian Economic Crisis, the Big 5 do appear to qualify more frequently in the presence of aggressive abnormal accruals than their non-Big 5 counterparts. However, no such evidence was found for industry specialist auditors. The study extends the current literature on AQ differentiation and specically it attempts to address the gaps in the literature with respect to auditor reporting behaviour in the presence of aggressive EM. In addition this study provides additional evidence on Big 5/industry specialist quality differentiation in an emerging market (an under-researched area), Malaysia, arguably with less transparent and weaker governance structures than the developed economies such as USA, UK, and Australia. This study is expected to provide insights to the auditing and accounting profession, and to regulators with respect to the debate on EM, AQ and the audit opinion formation process.
Notes 1. The founder member rms are Andersen, BDO, Deloitte Touche, Ernst & Young, Grant Thornton, KPMG and PricewaterhouseCoopers. 2. The USA use the term modied for audit reports that are other than unqualied, whereas Malaysia uses the term qualied. In the USA, the term qualied is reserved for except for opinions. Malaysian auditing standards permit emphasis of matter paragraphs in relation to going concern uncertainties. 3. They attribute the statistical insignicance to be a result of the small number of companies with non-Big 6 auditors. 4. ISA are issued by the International Auditing Practice Committee (renamed as International Auditing and Assurance Standards Board beginning 1 April 2002) of the IFAC. 5. Thus, it is possible that the observance of a qualied opinion in relation to rm performance (going concern problems) may not be related to earnings management. Thus, ideally one way to overcome this identication problem would be to select only observations with audit opinions that arise from scope limitation and departures from GAAP for investigation. However, because the number of qualications resulting from such reasons is too small to draw statistical inference, this study, not withstanding the mentioned limitation, utilises all

6. 7.

8.

9.

10. 11.

12. 13.

14.

forms of opinion in its analyses. However, it controls carefully for nancial health and to the extent this is successful, results can be interpreted for the earnings management variable. An argument exists that both the level of abnormal accruals and the content of the audit report are jointly determined (Hansen and Watts, 1997). The m-Jones (1991) (refer Dechow et al., 1995) in comparison to the original Jones (1991) model differs with respect to the explanatory variable change in sales. The Jones (1991) model utilises change in sales, whilst Dechow et al. (1995) modies this variable by adjusting for change in receivables. This is done since the time series approach requires at least eight years of data and the current study has available to it limited data for the crisis and especially post-crisis periods, making the time series version not feasible. Total accruals are not derived from cash ows because IAS 7 Cash Flow Statement was adopted only in 1996. Given the use of this indirect balance sheet approach, it is possible that the computations for the abnormal accruals are erroneous (Hribar and Collins, 2002) and as such may lead biasness with respect to existence of earnings management. Nevertheless, due to data constrains this study acknowledges this limitation. As of 23 December 1999, 757 companies were listed on the KLSE, while a total of 413 companies were listed in the year 1993. The authors would like to thank Prof. Kulwant Singh, Head of the Management Department and the library at the National University of Singapore for their assistance in allowing the use of the database. The authors would like to thank Ayoib Che Ahmad for the use of his data. Previous studies on earnings management have excluded nancial institutions and utility companies because the existing accruals model may not be able to capture the differences in the accrual process of nancial companies and different incentives to manage earnings may exist for utility companies. It is expected both these arguments hold within the Malaysian context, and thus nancial institutions and utility companies are excluded from the sample. Leaving out either MKTCAP or LASSET does not change the signicance of the results.

Earnings management and the audit opinion 713

References Accountancy (1998a), Barking at the watchdogs, Accountancy, Vol. 122, pp. 6-7. Accountancy (1998b), Big Fives key role, Accountancy, Vol. 122, p. 10. Bartov, E., Gul, F.A. and Tsui, J.S. (2000), Discretionary-accruals models and audit qualication, Journal of Accounting and Economics, Vol. 30, pp. 421-52. Becker, C.L., DeFond, M.L., Jiambalvo, J. and Subramanyam, K.R. (1998), The effect of audit quality on earnings management, Contemporary Accounting Research, Vol. 15 No. 1, pp. 1-24. Bell, T.B. and Tabor, R.H. (1991), Empirical analysis of audit uncertainty qualications, Journal of Accounting Research, Vol. 29, pp. 350-70. Bradshaw, M.T., Richardson, S.A. and Sloan, R.G. (2001), Do analysts and auditors use information in accruals?, Journal of Accounting Research, Vol. 39 No. 1, pp. 45-73. Carcello, J.V., Hermanson, R.H. and Huss, H.F. (2000), Going-concern opinions: the effects of partner compensation plans and client size, Auditing: A Journal of Practice & Theory, Vol. 19 No. 1, pp. 67-77. Che Ahmad, A. and Houghton, A. (2001), Audit Markets: The Effects of Ethnicity on Pricing, Working Paper, University of Melbourne, Melbourne.

MAJ 22,7

714

DeAngelo, L.E. (1981), Auditor size and audit quality, Journal of Accounting and Economics, Vol. 3, pp. 183-99. DeFond, M.L. and Jiambalvo, J. (1994), Debt covenant violation and manipulation of accruals, Journal of Accounting and Economics 17, pp. 145-76. DeFond, M.L. and Subramanyam, K.R. (1998), Auditor changes and discretionary accruals, Journal of Accounting and Economics, Vol. 25, pp. 35-67. Dechow, P., Sloan, R. and Sweeney, A. (1995), Detecting earnings management, The Accounting Review, Vol. 70 No. 2, pp. 193-225. Dopuch, N., Holthausen, R.W. and Leftwich, R.W. (1987), Predicting audit qualications with nancial and market variables, The Accounting Review, Vol. 62 No. 3, pp. 431-54. Favere-Marchesi, M. (2000), Audit quality in ASEAN, The International Journal of Accounting, Vol. 35, pp. 121-49. Francis, J.R. and Krishnan, J. (1999), Accounting accruals and auditor reporting conservatism, Contemporary Accounting Research, Vol. 16, pp. 135-65. Francis, J.R., Maydew, E.L. and Sparks, H.C. (1999), The role of big 6 auditors in the credible reporting of accruals, Auditing: A Journal of Practice & Theory, Vol. 18, pp. 17-34. Hansen, S.L. and Watts, J.S. (1997), Two models of the auditor-client interaction: tests with United Kingdom data, Contemporary Accounting Research, Vol. 14 No. 2, pp. 23-50. Hribar, P. and Collins, D.W. (2002), Errors in estimating accruals: implications for empirical research, Journal of Accounting Research, Vol. 40 No. 1, pp. 105-34. Johl, S.K., Jubb, C.A. and Houghton, K.A. (2003), Audit quality: earnings management in the context of the Asian crisis, Working Paper, paper presented in the American Accounting Association Annual Conference, Honolulu, HI, 3-6 June. Johnson, S. and Mitton, T. (2003), Cronyism and capital controls: evidence from Malaysia, Journal of Financial Economics, Vol. 67 No. 2, pp. 351-82. Jones, J. (1991), Earnings management during import relief investigations, Journal of Accounting Research, Vol. 29, pp. 193-228. Kothari, S.P., Leone, A.J. and Wasley, C.E. (2005), Performance matched discretionary accruals, Journal of Accounting & Economics, Vol. 39 No. 1, pp. 163-97. Lennox, C.S. (1999), The accuracy and incremental information content of audit reports in predicting Bankruptcy, Journal of Business Finance & Accounting., Vol. 26 Nos 5/6, pp. 757-78. Levitan, A.S. and Knoblett, J.A. (1985), Indicators of exceptions to the going concern assumptions, Auditing: A Journal of Practice & Theory, Vol. 5 No. 1, pp. 26-39. Lys, T. and Watts, R.L. (1994), Lawsuits against auditors, Journal of Accounting Research, Vol. 32, pp. 65-93. Monroe, G.S. and Teh, S.T. (1993), Predicting uncertainty audit qualications in Australia using publicly available information, Accounting and Finance, Vol. 32, pp. 79-106. Mutchler, J. (1985), A multivariate analysis of the auditors going-concern opinion decision, Journal of Accounting Research, Vol. 23 No. 2, pp. 668-82. Mutchler, J., Hopwood, W. and McKeown, J. C. (1997), The inuence of contrary information and mitigating factors on audit opinion decisions on bankrupt companies, Journal of Accounting Research, pp. 295-310, Autumn. Tay, J. (1995), The regulation of nancial reporting and quality of information: a comparative analysis of Singapore, Malaysia and Thailand, in Pang, H.Y. (Ed.), Contemporary Issues in Accounting, Addison-Wesley, Singapore.

Teoh, S.H., Welch, I. and Wong, T.J. (1998a), Earnings management and the long-term market performance of initial public offerings, Journal of Finance, Vol. LIII, pp. 1935-74. Teoh, S.H., Wong, T.J. and Rao, G.R. (1998b), Are accruals during initial public offerings opportunistic?, Review of Accounting Studies, Vol. 3, pp. 175-208. Thillainathan, R. (1999), Corporate governance and restructuring in Malaysia a review of markets, mechanisms, agents and the legal infrastructure, working paper, World Bank/OECD Survey of Corporate Governance. White, H. (1980), A heteroscedasticity-consistent covariance-matrix estimator and a direct test for heteroscedasticity, Econometrica, Vol. 48 No. 4, pp. 817-38. Further reading Ball, R., Kothari, S.P. and Robin, A. (2000), The effect of international institutional factors on properties of accounting earnings, Journal of Accounting and Economics, Vol. 29, pp. 1-51. Bayless, R., Cochrane, J., Harris, T., Leisenring, J., McLaughlin, J. and Wirtz, J.P. (1996), International access to US capital markets An AAA forum on accounting policy, Accounting Horizons, Vol. 10 No. 1, pp. 75-94. Beneish, M.D. (1998), Discussion of are accruals during initial public offerings opportunistic?, Review of Accounting Studies, Vol. 3, pp. 175-208. Craswell, A.T., Francis, J.R. and Taylor, S.L. (1995), Auditor brand name reputations and industry specializations, Journal of Accounting and Economics, Vol. 20, pp. 297-322. Gramling, A. and Stone, D.N. (2001), Audit rm industry expertise: a review and synthesis of the archival literature, Journal of Accounting Literature, Vol. 20, pp. 1-29. Palmrose, Z. (1984), The demand for quality-differentiated audit services in an agency-cost setting: an empirical investigation, paper presented at: Auditing Research Symposium, University of Illinois, Urbana, IL, pp. 229-52. Press, E. and Weintrop, J. (1990), Accounting-based constraints in public and private debt agreements: their association with leverage and impact on accounting choice, Journal of Accounting and Economics, Vol. 12, pp. 65-95. Rangan, S. (1998), Earnings management and the performance of seasoned equity offerings, Journal of Financial Economics, Vol. 50, pp. 101-22. Ravlic, T. (1999), Japan looks to higher standards, Australian CPA, November, pp. 48-9. Scott, W.R. (1997), Discussion of two models of auditor-client interaction: test with United Kingdom data, Contemporary Accounting Research, Vol. 14 No. 2, pp. 51-3. Corresponding author Shireenjit Johl can be contacted at: shireenjit.johl@rmit.edu.au

Earnings management and the audit opinion 715

To purchase reprints of this article please e-mail: reprints@emeraldinsight.com Or visit our web site for further details: www.emeraldinsight.com/reprints