Auditing and earnings management: an empirical studies in publicly-traded companies audited by the big four and other auditing firms

Abstract

This paper investigates the relations between auditing firms and their ability to mitigate earnings management. In this context, we analyze if discretionary accruals of publicly-traded companies audited by the "Big Four" (Deloitte Touche Tohmatsu, Ernst & Young, KPMG and PricewaterhouseCoopers) and other auditing firms are statistically different. The final sample consists of 1,414 observations collected from the 1999-2005 period: 897 observations for publicly-traded companies audited by the "Big Four" and 517 representing other publicly-traded companies audited by other firms. The information content in the database was obtained from Economatica software and "Divulgação Externa" available at the BOVESPA website to obtain information from auditing firms. We used KS model with instruments and non-parametric tests to verify the difference in discretionary accruals between these groups of firms. The results indicate that companies audited by the "Big Four" have a lower level of discretionary accruals than companies audited by other auditing firms, suggesting the capacity to mitigate earnings management. Additionally, we verified that there is little research in this subject in Brazil.