Auditors’ view on acceptability of clients’ earnings management practices

Abstract

The purpose of this paper is to assess the views of auditors on earnings management in Malaysia. This study uses a questionnaire designed by Merchant and Rockness (1994), which consists of thirteen (13) short scenarios. Each scenario describes a potentially questionable earnings management activity undertaken by the general manager. The respondents were asked to judge the acceptability of each of the scenarios using a five-point (5) Likert scale. Based on responses, this study finds that acceptability varies with the type of earnings management. The auditors believe that discretionary accrual manipulation is more unethical than real activities manipulation, while the consistency with MFRS and the direction of effect on earnings management do not seem to be an issue to the respondents regarding the acceptability of earnings management