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External auditor type, discretionary accruals and investors’ reactions

External auditor type, discretionary accruals and investors’ reactions The purpose of this paper is to investigate, in an Egyptian context, the external auditor type (Big 4 vs local) implications on reporting quality proxied by discretionary accruals (DA) and also examine whether auditor type impacts the market’s pricing of DA, where pricing is considered a proxy for the perceived DA quality.Design/methodology/approachThe sample period is 2012–2015, that is meant to be post the Egyptian revolution financial crisis; all Egyptian stock exchange (EGX) listed firms (except banks and financial institutions) are considered. DA are estimated using modified Dichev and Dechow’s (2002) model (McNicholas, 2002). Ordinary least squares regression tests are used to investigate the external auditor type implications on DA level and the related EGX investors’ pricing.FindingsThe findings generally show the external auditor’s minimal role in mitigating DA. Moreover, the findings reflect the EGX investors’ negligence and/or lack of confidence in regards to DA and external auditor type factors in stock pricing.Practical implicationsThe paper findings highlight to regulators the need for effective monitoring of audit firms earnings management mitigation performance to help reinforce investor confidence in financial reporting quality.Originality/valueThis paper is the first that investigates the external auditor monitoring mechanism implications on investors’ perceptions of earnings quality in Egypt. The paper findings would provide important contributions, particularly post the Egyptian revolution crisis, where the EGX market is trying to restore the investors’ confidence. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Accounting in Emerging Economies Emerald Publishing

External auditor type, discretionary accruals and investors’ reactions

Journal of Accounting in Emerging Economies , Volume 8 (3): 17 – Aug 3, 2018

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Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
2042-1168
DOI
10.1108/jaee-10-2017-0098
Publisher site
See Article on Publisher Site

Abstract

The purpose of this paper is to investigate, in an Egyptian context, the external auditor type (Big 4 vs local) implications on reporting quality proxied by discretionary accruals (DA) and also examine whether auditor type impacts the market’s pricing of DA, where pricing is considered a proxy for the perceived DA quality.Design/methodology/approachThe sample period is 2012–2015, that is meant to be post the Egyptian revolution financial crisis; all Egyptian stock exchange (EGX) listed firms (except banks and financial institutions) are considered. DA are estimated using modified Dichev and Dechow’s (2002) model (McNicholas, 2002). Ordinary least squares regression tests are used to investigate the external auditor type implications on DA level and the related EGX investors’ pricing.FindingsThe findings generally show the external auditor’s minimal role in mitigating DA. Moreover, the findings reflect the EGX investors’ negligence and/or lack of confidence in regards to DA and external auditor type factors in stock pricing.Practical implicationsThe paper findings highlight to regulators the need for effective monitoring of audit firms earnings management mitigation performance to help reinforce investor confidence in financial reporting quality.Originality/valueThis paper is the first that investigates the external auditor monitoring mechanism implications on investors’ perceptions of earnings quality in Egypt. The paper findings would provide important contributions, particularly post the Egyptian revolution crisis, where the EGX market is trying to restore the investors’ confidence.

Journal

Journal of Accounting in Emerging EconomiesEmerald Publishing

Published: Aug 3, 2018

Keywords: External auditor; Discretionary accruals; EGX market; Investors’ pricing

References