Earnings management and institutional differences : Belgian evidence and audit quality as a constraint on earnings management

摘要

This study reports the results of an exploratory study on earnings management in a continental European institutional environment, i.e. Belgium. The far majority of the literature (both analytical and empirical) focuses on the Anglo-Saxon context. However, major differences exist between Anglo-Saxon and continental European countries. This might result in differences in the importance of various incentives for and constraints on earnings management. For a pooled sample of 486 firm-year observations of privately held companies in the Belgian textile and paper industries, we tested whether a higher quality audit constrains earnings management more than a lower quality audit. We used the dichotomous variable big6/non-big6 auditor as a measure for audit quality and discretionary accruals as a measure of earnings management. Discretionary accruals were estimated using a cross-sectional version of the Jones' model that was slightly adapted to fit the Belgian context. We performed a univariate as well as a multivariate analysis. In the multivariate analysis, we adapted the control variables to the continental European context. In addition we also tested whether the income smoothing hypothesis holds in Belgium.Our findings do not support the hypothesis that higher audit quality constrains earnings management more than lower audit quality. This result contrasts those of prior Anglo-Saxon studies (Becker et al., 1998; Francis et al., 1997). The results do however support the income smoothing hypothesis. This finding is (1) consistent with institutional differences being important in earnings management research and (2) the results from a prior Belgian study on earnings management (Branson and Loits, 1997).