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Earnings Management and Big Auditors: The Influence of Legal and Political Institutions
Jim Wang,
The Hong Kong Polytechnic University
ABSTRACT. In this paper, I investigate the nature of big auditors’ incentives to constrain earnings management created by an economy’s institutional structures. I document that in strong legal/judicial systems, big auditors (high quality auditors) have incentives to monitor clients’ earnings management. Also, both strong private and public enforcement aspects of securities laws provide incentives for big auditors to make effort to reduce client’s earnings management. Regarding political economy, in countries with stable political environment, low level of state involvement in the economy, low level of government corruption, governments less likely to expropriate enterprises and repudiate contracts and low degree of proportional political election system, big auditors are demanded to curb clients’ earnings management. Finally, big auditors in countries with high tax burden have incentives to constrain clients’ earnings management.
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