Real Activities Manipulation and Auditors' Client-Retention Decisions

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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.
Publisher
AMER ACCOUNTING ASSOC
Issue Date
2014-01
Language
English
Article Type
Article
Keywords

RESEARCH-AND-DEVELOPMENT; EARNINGS MANAGEMENT; INTERACTION TERMS; LITIGATION RISK; QUALITY; MARKET; RESIGNATIONS; BANKRUPTCY; INVESTORS; ACCRUALS

Citation

ACCOUNTING REVIEW, v.89, no.1, pp.367 - 401

ISSN
0001-4826
DOI
10.2308/accr-50586
URI
http://hdl.handle.net/10203/244362
Appears in Collection
MT-Journal Papers(저널논문)
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