Profitability regulation, earnings management, and modified audit opinions : evidence from China
Document Type
Journal article
Source Publication
Auditing
Publication Date
9-1-2001
Volume
20
Issue
2
First Page
X
Last Page
30
Keywords
Accounting regulations, Modified audit opinions, Target profit levels
Abstract
This study, using data from the Chinese stock market, investigates the relationship between earnings management induced by profitability regulation and modified audit opinions (MAOs). We review recent developments in the accounting profession and in independent auditing to foster an understanding of the environment in which Chinese auditing operates. Based on annual reports published by listed companies from 1995 to 1997, we analyze the underlying reasons for MAOs. Our test results show a significant association between receiving MAOs and reporting profits marginally above the target levels specified in stock de-listing and rights offering regulations. Our findings are consistent with the notion that asymmetric profitability requirements exacerbate managers' propensity to engage in earnings management, which in turn is positively associated with receiving MAOs. Though based on Chinese data, our findings are of general interest because they address a fundamental issue of trade-offs between expected costs and expected benefits in deciding whether to avoid MAOs in a transitional economy.
Print ISSN
02780380
Publisher Statement
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Full-text Version
Publisher’s Version
Language
English