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Title: IFRS reporting, audit firm tenure, auditor fees and earnings management
Author: El-Guindy, Medhat Naguib Khela
ISNI:       0000 0004 2740 2907
Awarding Body: University of Leeds
Current Institution: University of Leeds
Date of Award: 2011
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This thesis aims to investigate the effectiveness of three recent policy changes which have been implemented in the UK or under discussion for future implementation and their association with earnings management. The three policy changes are the adoption of IFRS for UK listed firms, the potential mandatory rotation of audit firms, and the enhanced disclosure requirements of the different categories of auditor fees in the UK. The thesis contains three empirical chapters addressing the three mentioned issues. As to the first study, I investigate the effect of reporting under IFRS versus reporting under UK GAAP on earnings management in the UK. Prior studies find mixed evidence regarding the effect of voluntary and mandatory adoption of IFRS on earnings quality. I test whether the effect of reporting under IFRS on earnings management IS sufficient to overcome earnings management incentives. Furthermore, I test whether the effect of IFRS reporting is conditional on audit quality surrogated by audit firm size. I build my analysis on measures of discretionary accruals and earnings benchmark tests. I find evidence that reporting under IFRS generally reduces levels of earnings management measured by discretionary accruals and measures of managing earnings towards a target. Furthermore, the mitigating effect of IFRS is stronger for income decreasing than for income increasing earnings management. In addition, I find that audit quality plays a key role in IFRS reporting, with only firms audited by big four auditors having a significant IFRS reporting effect. In terms of the second study, using UK data, I investigate the association between audit firm tenure and earnings management and whether it is conditional on using the same set of accounting standards and audit firm size. UK data allows the examination of the impact of changing accounting standards because one group of firms continually reported under UK GAAP whereas another group of firms changed its accounting standards from UK GAAP to IFRS. I find, in accordance with prior studies, a negative association between audit firm tenure and earnings management for a pooled UK sample. However, I find that this negative association is only valid for those firms which had not changed their accounting standards; I also find that the significant, negative association is only valid for firms audited by big four audit firms. One possible explanation for both the accounting standards and audit firm size results is that auditors need a stable and strong learning environment if they are to mitigate earnings management. As for the third study, I revisit a controversial issue of whether auditor fees might compromise auditor independence which may result in relatively higher earnings management levels. Using data from the UK, it was possible to conduct separate tests for the components of non audit services fees (tax advice and other non audit fees). In addition, I test the effect of client importance (the ratio of each type of auditor fees to total audit firm revenue) on earnings management. Furthermore, I develop a number of relative client importance measures (ratios of each type of fees as a percentage of audit firm revenue generated from that specific type of service). The results suggest a potential compromise of auditor independence in cases of relatively high total auditor, total non audit, and-other non audit fees. The results suggest also that the potential compromise of auditor independence is stronger in cases of income increasing earnings management. Finally, the results conclude no potential effect of any of audit fees or tax advice fees on earnings " management levels. The results of the thesis have some key implications for policy makers and regulators. Firstly, the empirical results suggest that reporting under IFRS generally leads to better earnings quality than reporting under UK GAAP. Therefore, it is worth considering mandating IFRS for all firms. Secondly, the results of this thesis argue against mandatory rotation of audit firms which is currently under discussion in the UK and worldwide. The results suggest that longer tenure is better due to learning factors and leads to lower levels of earnings management. Finally, regulators were, to some extent, successful in mandating enhanced detailed disclosure of auditor fees. However, investors, among other stakeholders, need to assess the risks of potential compromise of auditor independence in cases of higher total, non audit, and other non audit fees especially where the fees represent a significant proportion of the audit firm revenues. A potential improvement in this regard for regulators is to make audit firms responsible for disclosing their fees as a percentage of their total revenues and revenues from the specific type of fees or to prevent auditors from providing some of the non audit services as is the case in the US.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available