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Firm ownership type, earnings management and auditor relationships: evidence from India

Author

Listed:
  • Saibal Ghosh
Abstract
Purpose - Using data on Indian listed companies for 2005, the purpose of this paper is to examine how firm ownership relates to auditor choice. More specifically, the author tests several hypotheses about the links between firm ownership, auditor relationships and earnings management. Design/methodology/approach - Several econometric techniques were employed including ordinary least squares, logit regression, ordered logit regression, Poisson and negative binomial regression to test the association between firm ownership and auditors. Findings - The results indicate that firms having high discretionary accruals are less likely to be audited by domestic entities. The analysis also suggests that domestic auditors are less likely to be preferred by both foreign and Indian private corporations. In addition, the analysis indicates that audit fees are higher for firms with higher earnings opacity. Research limitations/implications - Driven by data availability, the paper relies on cross‐sectional data. Practical implications - The results demonstrate that firm ownership is an important consideration for firm auditor relationships. Thus, policymakers should not worry if firms persistently choose to do business with the same auditor. Second, the results are a pointer to the fact that given the differences in their governance structures, the role of domestic and foreign auditors in servicing business groups and state‐owned corporations is distinctly different. Finally, the evidence suggests that the choice of multiple auditors is more to address the complexities involved in multiple business lines, as opposed to curtailing audit fees. Originality/value - To the author's knowledge, this is perhaps the first study for an emerging economy and more certainly for India to examine the firm ownership‐auditor nexus.

Suggested Citation

  • Saibal Ghosh, 2011. "Firm ownership type, earnings management and auditor relationships: evidence from India," Managerial Auditing Journal, Emerald Group Publishing Limited, vol. 26(4), pages 350-369, April.
    • Handle: RePEc:eme:majpps:02686901111124666
    DOI: 10.1108/02686901111124666
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    References listed on IDEAS

    as
    1. Ghosh, Saibal, 2007. "External Auditing, Managerial Monitoring and Firm Valuation: An Empirical Analysis for India," MPRA Paper 17142, University Library of Munich, Germany.
    2. Yuan Ding & Hua Zhang & Junxi Zhang, 2007. "Private vs State Ownership and Earnings Management: evidence from Chinese listed companies," Corporate Governance: An International Review, Wiley Blackwell, vol. 15(2), pages 223-238, March.
    3. Craswell, Allen & Stokes, Donald J. & Laughton, Janet, 2002. "Auditor independence and fee dependence," Journal of Accounting and Economics, Elsevier, vol. 33(2), pages 253-275, June.
    4. Chaney, Paul K. & Faccio, Mara & Parsley, David, 2011. "The quality of accounting information in politically connected firms," Journal of Accounting and Economics, Elsevier, vol. 51(1-2), pages 58-76, February.
    5. Mara Faccio, 2006. "Politically Connected Firms," American Economic Review, American Economic Association, vol. 96(1), pages 369-386, March.
    6. Francis, Jere R., 1984. "The effect of audit firm size on audit prices : A study of the Australian Market," Journal of Accounting and Economics, Elsevier, vol. 6(2), pages 133-151, August.
    7. Joseph P. H. Fan & T. J. Wong, 2005. "Do External Auditors Perform a Corporate Governance Role in Emerging Markets? Evidence from East Asia," Journal of Accounting Research, Wiley Blackwell, vol. 43(1), pages 35-72, March.
    8. Ali, Ashiq & Chen, Tai-Yuan & Radhakrishnan, Suresh, 2007. "Corporate disclosures by family firms," Journal of Accounting and Economics, Elsevier, vol. 44(1-2), pages 238-286, September.
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    Cited by:

    1. Ramesh Chandra Das & Chandra Sekhar Mishra & Prabina Rajib, 2018. "Firm-specific Parameters and Earnings Management: A Study in the Indian Context," Global Business Review, International Management Institute, vol. 19(5), pages 1240-1260, October.
    2. Manasi Gokhale & Deepa Pillai, 2024. "Firm level and country level determinants of earnings management in emerging economies: a systematic framework-based review," Future Business Journal, Springer, vol. 10(1), pages 1-16, December.

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    More about this item

    Keywords

    India; External auditing; Corporate ownership; Auditors; Organizational earnings; Corporate governance;
    All these keywords.

    JEL classification:

    • C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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