Auditor Reputation, Audit Opinion, and Earnings Management: Evidence From French Banking Industry

Abstract

The aim of this research is to study the impact of auditor reputation and audit opinion on earnings management in French banks. This article used a sample of 162 French banks over the period from 2005 to 2012. By using three different tests (loss-avoidance, just-meeting-or-beating prior year’s earnings, and abnormal loan loss provision), the findings of this paper show that both high auditor reputation and qualified audit opinion constrain earnings management to avoid loss or to just meet or beat prior year’s earnings in banks. In separate tests related to earnings management through abnormal loan loss provisions, the paper also finds that high auditor reputation constrains earnings management. Qualified audit opinion has a negative but non-significant effect on abnormal loan loss provisions.