Research On The Influence Of Real Activities Earnings Management Of Listed Company On Audit Fees

Along with the perfection of accounting standard and regulatory system, real activities earnings management has been replacing accrual earnings management and will become the main means of earnings manipulation of Chinese listed companies. Because real act of manipulation is difficult to be distinguished with normal trading activities and does not belong to the scope of mandatory information disclosure, the investors are usually unable to grasp the extent of real activities earnings management. However, real activities earnings management with sacrifice of the shareholders’ benefits not only will change the operating achievement and cash flow of listed companies, but also easily lead to the business failure of listed companies.According to the "deep pocket" theory, accounting firms with abundance of wealth will usually be given the role of "security". When the failure of operating happens to listed companies, accounting firms will be required to make economic compensation by the users of financial statement. Based on the principle of reverse the burden of proof, certified public accountants have to pay the extra audit cost to respond to the lawsuit. Therefore, when determining the audit fees, the accounting firm should consider the expected losses, which may be brought by the real activities earnings management behavior of listed companies.The goals of this research are to help investors in the capital market to find out the reference for judging the extent of real earnings management of listed companies and to investigate whether certified public accountants are qualified for identifying the act of real earnings management of their clients in the process of auditing. Refer to Simunic model, this research establishes the multiple linear regression model and carries out the empirical test on the data from Shanghai and Shenzhen stock markets in China. As the results shown, there is a positive correlation between the audit fees and the extent of real activities earnings management of the listed companies, which have not changed the accounting firms this year. So is it between their audit fees and the extent of expenses manipulation by them. However, there is not a positive correlation between the audit fees and the extent of real activities earnings management of listed companies,which have changed the accounting firms this year. So are they between their audit fees and the extent of sales manipulation, product manipulation and expense manipulation by them. Therefore, there are three recommendations that decreasing the extent of real earnings management of listed companies, intensifying the qualification and independence of certified public accountants and strengthening the supervision over listed companies which have changed their accounting firms.