Research On The Relationship Between Quality Of Independent Audit And Earnings Management

In recent years, as the financial scandals at home and abroad caused by the profit manipulation are exposed, the problem of earnings management is becoming the hot topic in society, which is more serious in our non-mature capital market environment. American Enron, Chinese Yinguangxia, Zhengbaiwen and so on, have great relations with the invalid audit of Certified Public Accountants and corruption of managers. These incidents caused that extensive investors, financial institutions, securities regulators would take the earnings management as the important tool to judge the independent audit quality. Therefore, the research on the relationship between earnings management and quality of independent audit is of great important to enhance our independent audit quality and improve the reality of profit manipulation in China.This paper attempts to take the earnings management as the research subject, and makes use of the relation between earnings management and the audit opinion to test the audit quality of CPA. The main idea is: first, this article firstly reviews previous research on the relationship between earnings management and quality of independent audit, and summarize the advantages and disadvantages of former work. Secondly, based on the summary of previous research methods and results, the paper put forward the idea that managers self-select not only external auditors (big four or non-big four), but the discretionary accruals direction (positive and negative) also, using the two stage"treatment effects"model, an innovative method. Finally, we select data in 2005 as vertical data and data in 2003, 2004 and 2005 as horizontal data to do empirical study on the relationship of independent audit quality and earnings management.Structurally, this paper is divided into five parts. The first chapter discusses the definition of summarize the research about earnings management and independent audit quality; Chapter two analyze various measures methods and models of earnings management. Chapters three is the research on the relationship of earnings management and the independent audit quality, based on the vertical data; Chapter four is the research on the relationship of earnings management and the independent audit quality, based on the horizontal data; Final chapter is the conclusion and summary of the whole paper.The main contribution of this artical lies in: the re-definition of earnings management, which has an important practical significance and practical value to the empirical study of earnings management. With the degree of earnings management, we use the financial data of public listed companies to analyze the independent audit quality of big four and non-big four, filling the domestic vacancy of analysis on the audit quality of big four and non-big four. Finally, the paper put forward the idea that managers self-select not only external auditors (big four or non-big four), but the discretionary accruals direction (positive and negative) also, using the two stage"treatment effects"model, an innovative method. Also, sensitivity analysis to the research results is done, making the research results more objective.