Fargo, N.D. — William "Bud" Bowlin, professor of accounting and department head of accounting, finance and information systems at NDSU; Tom Dowdell, associate professor of accounting; and David Herda, assistant professor of accounting, had their manuscript, “Auditor Response to Earnings Management Through Real Transactions,” accepted for publication in Journal of Theoretical Accounting Research.
The authors said real earnings management is management actions that deviate from normal business practices and are undertaken to meet certain earnings thresholds. Prior research asserts that real earnings management does not result in increased scrutiny from regulators and auditors and cites this as an explanation for the switch from accrual-based to real earnings management after the Sarbanes-Oxley Act.
In the paper, the authors investigate whether auditors respond to real earnings management by increasing engagement risk. Using a sample of 131 auditors at two accounting firms, they found that auditors would respond to real earnings management by raising risk, which indicates that auditors are concerned with such actions.