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PhD CandidateImen BENSLIMENE

Audit quality and real activities manipulation in Europe8th Annual Graduate Student

Conference

Dissertation SupervisorPr. Pascal DUMONTIER

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PRESENTATION OUTLINE

INTRODUCTION

RESEARCH QUESTION

RESEARCH OBJECTIVE

LITERATURE REVIEW

HYPOTHESES

RESEARCH DESIGN

CONCLUSION

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INTRODUCTION

Audit Quality

Earnings Management

Stock price Accounting Numbers

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Earnings management

DeAngelo (1986) ; Jones (1991) ; Dechow et al.(1995) ; Dechow et al. (2003) ;Piot et al.

( 2005)

Acounting-based earnings management

Real earnings management

Discretionary accruals

Real activitiesmanipulation

And /Or

Roychowdhury (2006), Zang (2007) , Gunny ( 2005 – 2009), Cohen et al. ( 2010)

Healy and Whalen, 1999

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RESEARCH QUESTION

What is the impact of audit quality on strategy choice for earnings management

(accruals and / or real activities manipulation)?

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RESEARCH OBJECTIVE

To investigate whether constraints imposed on accounting-based earnings management

by audit quality indirectly increases real activities manipulation in Europe

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Audit quality and Accounting

based earnings management

Piot and Janin (2004)/(2008)

Francis et al.(1999)

Becker et al. (1998)

Subramanyam et al. (1998 )

Ben Othman and Zeghal (2006)

High quality auditing constrains accounting –based

earning management

High quality auditing does not

constrain accounting –based

earning management

Mrad (2004)

Ehrabim (2001)

LITERATURE REVIEW

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Audit quality and real activities

manipulation

Gunny (2005)

Cohen et al. (2007)

Graham et al. (2005)

Yu ( 2008)

Accrual constraints exerted

by high quality audits can motivate managers to switch to REM

LITERATURE REVIEW

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RESEARCH DESIGN

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Measures of accrual-based earnings management (Modified Jones model)

Total accruals

Normal accruals

Discretionary accruals

ACCT = EBXI – operating CFO

ACCD t = ACCT /TA t-1 – ACCND i

ACCND t /TA t-1= 1(1/ TA t-1) + 2 (Δ CA/ TA t-1) +3 (Immob. t/ TA t-1)

Reduction of discretionary

expenses

Over-production

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Sales manipulation

Acceleration of the timing of sales through increased price discounts or more lenient

credit terms

Decreases in discretionary expenses including advertising, R&D, and SG&A

expenses

Reporting of lower cost of goods sold through increased production

Real Activities Manipulation (Roychowdhury, 2006)

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Measures of Real Activities Manipulation (Roychowdhury, 2006)

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AUDIT QUALITY MESURES

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RESEARCH MODEL

H2

H1

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Analyze the behavior of earnings management in Europe

Analyse the role of audit quality on trade off

between REM and AM

 INTEREST  OF RESEARCH

Examine the effects of member state audit

environment on one hand and earnings management

on the other

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Research Agenda / Difficulties

• Research Agenda Continue running the modelStart writing results

• DifficultiesDatabase: certain variables are un-available

(changed to available variables)

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THANK YOU FOR YOUR ATTENTION