Real Activities Manipulation and Auditors' Client-Retention Decisions

• 成果类型: Article
• 署名作者: Kim, Yongtae; Park, Myung Seok
• 署名单位: Santa Clara University; Virginia Commonwealth University; Sungkyunkwan University (SKKU)
• 刊物名称: ACCOUNTING REVIEW
• ISSN/ISSBN: 0001-4826
• DOI: 10.2308/accr-50586
• 发表日期: 2014
• 页码: 367-401
• 关键词: research-and-development; earnings management; INTERACTION TERMS; LITIGATION RISK; QUALITY; MARKET; resignations; bankruptcy; investors; accruals

摘要

In this study, we examine the effect of clients' real activities manipulation (RAM) on auditors' client-retention decisions. We find that, with the exception of RAM through overproduction, clients' opportunistic operating decisions are positively associated with the likelihood of auditor resignations. We also provide evidence that auditors are especially sensitive to clients' RAM to just meet or beat earnings benchmarks in their client-retention decisions. In addition, we find that clients whose auditors resign from engagements tend to hire smaller auditors and these clients engage in RAM more aggressively. Our additional analysis shows that, with the exception of RAM through overproduction, clients' abnormal operating decisions are significantly associated with litigation risk against auditors. Overall, our evidence suggests that auditors drop clients with aggressive RAM to avoid excessive risk.