31-05-2013, 03:00 PM
Effect of discretionary accruals and corporation size on auditor's opinion
ABSTRACT
This research aims to examine the effect of income manipulation and size of corporations on audit
opinion. The corporations under study include the ones registered in the Tehran Stock Exchange for
the period of 2006 to 2011. The logistic regression statistical method and the Wald test have been used
to test the research hypotheses. The corporations have been selected by the systematic random
sampling. The results indicate that in all the studied corporations, the income figures have been
manipulated and auditor's opinion is unqualified opinion with explanatory paragraphs. The effect of
manipulating income figures on auditor's opinion was negative and significant and in corporations with
higher income manipulation, the auditor's opinion was qualified opinion. Furthermore, the impact of the
size of corporations on auditor's opinion has been confirmed as being positive. In corporations with
bigger size, the independent auditors have modified their opinion and they have mostly expressed
unqualified opinions.
INTRODUCTION
Considering the importance of the effect of financial
figures on performance assessment, earnings management
is focused mainly by the public and legislation
authorities also pay great attention to this issue and have
made several legal modifications to it (Scott, 1997).
Calculation and report of net income is usually the center
of attention. Managers manipulate earnings in their use of
different accounting procedures and estimations. Their
incentives are to advance their careers and to be
rewarded, etc. Thus, they always attempt to show the
corporation status as profitable and consistent.
RESEARCH BACKGROUND AND HYPOTHESIS
DEVELOPMENT
Janjani (2011) showed that corporations with earnings
management have had weaker performances in the level
of operational income and gross profit, compared with
those without it; they have reported higher increase in the
level of income before tax and net income and they have
greater divided ratio in the level of earnings per share.
Ghorbani and Golmohammadi (2010) stated in their
investigation that the audit quality affects smoothing the
income at all three levels. Namazi et al. (2010) found out
that there is a positively weak relationship between audit
size and time of auditing, and the earnings management.
In their research on corporations active in Tehran Stock
Exchange (TSE), Nonahal et al. (2010) concluded that
stability ratio of discretionary accruals is higher in
corporations with more qualified independent auditors.
Thus, there is a higher reliability for their discretionary
accruals. Ebrahimi (2001) provided further evidences for
the effect of auditing quality on earnings management
behavior; the results are indicative of positive impact of
auditors' control on the process effectiveness and the
improvement of performance in informing the auditor by
other auditors. Furthermore, these results did not
provided any evidence showing that a major client may
affect the independence of auditor or auditors may
authorize the major clients to have further authority in
income report.
Hypothesis testing
Table 1 shows data related to the first hypothesis of the
variables entered into the model and the results achieved
through Wald test. Considering Wald statistics and the
sig. ratio which is less than 5%, earnings management
variable is significant in 5% error rate level and the
negative slope coefficient of earnings management is
inactive of its negative relationship with auditor's opinion;
as the earnings management index increases, the
probability of unqualified opinion increases. Column Exp
(B) indicates the rate of changes in the predicted
probability for the qualified opinion per unit change in
earnings management variable.
CONCLUSION AND SUGGESTION
In accordance with conceptual framework and the results
of prior researches, it is expected that the independent
auditor's opinion is not affected by external variables and
the corporation size does not affect their professional
behavior. However, the results of the present study show
that in spite of the expectations in bigger corporations,
auditors often provide qualified opinions and consider
how their own opinion, especially its general aspects,
would affect the extension of their agreement with
corporation. Bigger corporations are expected to be
under more control on their performance and financial
reports and their profit and dividend to be followed with
more caution because the number of their shareholders
is greater and their managers are exposed to more
political and public pressures. Thus, auditors are under
such pressures and in case of rejection of corporations
for their opinion, they may not be selected as the
corporation auditor.