Does Big 5 Audit Company Detects Earnings Management and Reports it on the Audit Opinion? Empirical Evidence from the Italian non-listed Firms

Abstract

Audit quality is considered one of the factors affecting the reliability of financial information. Theoretical arguments and research findings suggest that audit quality constrains earnings management. This paper contributes to the recent literature on financial reporting quality in non-listed firms (Ball and Shivakumar, 2005; Burgstahler et al., 2006; Rusmin, 2010; Gerayli, 2011; Yasar, 2013) by examining whether in these types of firms Big 5 audit firms, as high quality auditors, provide a constraint on earnings management. Given that auditor’s incentives to provide high quality audit is rather limited in non-listed firms (their financial statements is not well scrutinized by the financial institutions), the argument suggesting audit quality constrains the earnings management is likely to be questioned. The aim of this study is, therefore, to assess the effect of audit quality on earnings management by focusing on Italian case, where auditor’s incentives to provide high quality audit is limited in non-listed firms.