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Do audit firm and audit costs/fees influence earnings management in Swedish municipalities?

Journal article
Authors Pierre Donatella
Mattias Haraldsson
Torbjörn Tagesson
Published in International Review of Administrative Sciences
Volume 85
Issue 4
Pages 673-691
ISSN 0020-8523
Publication year 2019
Published at School of Public Administration
Pages 673-691
Language en
Links https://doi.org/10.1177/00208523177...
Keywords Audit cost, audit fee, audit firm, earnings management, municipality
Subject categories Public Administration Studies, Business Administration

Abstract

Previous research on the private sector shows that auditors and auditing firms are important actors in ensuring high-quality reporting based on accrual accounting. The aim of this study is to explore whether audit firms and audit costs/fees influence municipalities’ probability of applying earnings management in their annual accounts. The empirical data, which covered the financial years 2011–13, were handpicked from annual reports or retrieved from other sources. In general, our study shows that the probability of earnings management increased if audit costs/fees increased. However, there were differences regarding the probability of earnings management relating to which audit firm was engaged. This implies that audit quality is a factor that affects the probability of earnings management in Swedish municipalities. The study also indicates that different audit firms make different trade-offs between professional versus com- mercial logics, and that this is reflected in the clients’ propensity to engage in earnings management.

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