The role of auditors in detecting creative accounting: Singaporean and Australian evidence

Abstract

This study examines the association between the magnitude of earnings management and two characteristics of auditor value - auditor independence and auditor quality. As earnings management, auditor independence and auditor quality are unobservable the study uses absolute discretionary accruals, the ratio of non-audit to total fees and auditor industry specialisation as respective proxies. This study finds no empirical evidence that non-audit services are associated with firms' discretionary accruals. This result suggests that the provision of non-audit services by the incumbent auditor does not compromise independence. This study presents evidence of a negative association between auditor specialisation and the earnings management indicator. This finding infers that the magnitude of earnings management amongst firms engaging the services of a specialist is significantly lower than firms purchasing audit services from a non-specialist auditor.