Big 4 auditing companies, earnings manipulation and earnings conservatism: evidence from an emerging market

  • Published March 31, 2017
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  • Article Info
    Volume 14 2017, Issue #1, pp. 35-45
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    7 articles

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This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License

This study focuses on South African listed companies and investigates the relation between Big 4 auditing companies, earnings management and earnings conservatism. It shows that companies audited by a Big 4 auditor leads to a more timely recognition of large losses and to lower levels of earnings manipulation and higher conditional conservatism. The findings report that the conditional form of conservatism is negatively related to unconditional conservatism. Higher conservatism is also reported for firms with high leverage and those that convey bad news. The opposite has been found for firms with high growth. The findings, in general support the notion that the new Companies’ Act in South Africa and the King III are effective corporate governance tools and the observed cases of corporate failure may be due to other factors, including management hubris.

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    • Table 1. Descriptive statistics
    • Table 2. Discretionary accruals and Big 4 auditing (equation 1)
    • Table 3. Conservatism and Big 4 auditing (equation 3)
    • Table 4. Conditional and unconditional conservatism
    • Table 5a. Earnings sensitivity and conservatism
    • Table 5b. Earnings sensitivity and conservatism