Earnings management and auditing

This chapter provides a survey of earnings quality measures that have been used in the auditing literature to examine the relation between auditors and earnings management. The chapter considers five types of measures, i.e., measures related to accruals, target beating, stock returns, specific events, and real activities. For each measure, implementation issues are discussed along with an evaluation of the measure’s advantages and disadvantages. Examples of studies using each measure are provided. The ability of auditors to constrain earnings management through year-end adjustments is also discussed.