External audit quality and ownership structure: interaction and impact on earnings management of industrial and commercial Tunisian sectors/Calidad de la auditoria externa y la estructura propietaria: interaction e impacto sobre la gestion de los ingresos en los sectores industriales y comerciales tunecinos.
| Autor | Kouaib, Amel |
| Cargo | Article |
-
Introduction
Under the agency theory, the relationship between managers and shareholders is such a conflictive relation. The separation of the property functions and control engenders agency conflicts that materialize in a context of asymmetric information by an opportunistic manager's behavior. Indeed, the need for shareholders to control the managers is positively related to the organization complexity. This can be explained by a more and more important number of hierarchical levels which establishes a limit for shareholders to monitor managers' activities (Bonazzi & Islam, 2007; Kesten, 2013; Massimo, Annalisa, & Samuele, 2014). In front of this organization complexity and the decision function diffusion, we can assist an increase in agency problems and the associated costs, the firm owners are in front of the difficulty of controlling and observing the efforts of their agents. Taking advantage of this asymmetric information, managers can adopt opportunistic behavior against proprietary interests while trying to maximize their own utilities (Jensen, 1993).
As governance mechanisms, the fundamental role of audit as well as ownership structure is to reduce asymmetric information between managers and shareholders (Jones, 2011; Usman, 2013). We expect that an effective control exercised by these two governance mechanisms is associated with lower levels of earnings management (Johnson & Waidi, 2013; Anis, 2014). The mechanisms of control are interrelated and the relationship between these variables is based on agency theory (Jensen & Meckling, 1976). In order not to be limited to assessing the effectiveness of a mechanism in isolation, it becomes favorable to study the effect of their interactions on the accounting manipulations and check the sense of different mechanisms, used in conjunction, on the earnings management (Kathleen, Emre, & Jin, 2014; Domenico & Ray, 2014). In this framework, the failure of a potential mechanism may possibly be offset by the action of an alternative mechanism (Brav & Mathews, 2011; Kee-Hong, Jae-Seung, Jun-Koo, & Wei-Lin, 2012; Paul et al., 2014).
We think that it would be of great interest to conduct this article for many reasons. First, most research about governance mechanisms are conducted in the context of developed countries. Even if there are few studies focused on exploring the impact of governance mechanisms on earnings management, conducted in the context of a developing country such as Tunisia (Zgarni, Hlioui, & Zehri, 2012), they are interested in studying the influence of these mechanisms one by one (separately and not jointly). This paper, to the authors' best knowledge, is the first to investigate the specificities and uniqueness of the combination's effect of external audit quality (particularly auditor reputation and auditor-audited relationship seniority) and ownership structure (specifically capital concentration and institutional property) on earnings reported by listed and unlisted Tunisian firms. So, this article contributes to extent existing empirical work on emerging markets by examining a new database given by the case of the Tunisian industrial and commercial sectors. This led us to identify if the empirical results concerning other market hold for the Tunisian Stock Exchange. Second, the context of a developing country is novel. It would be interesting to provide a contribution to the literature by releasing new ultimate ownership data for firms' sample listed and unlisted on pure agency market such as the Tunisian Stock Exchange (TSE). The value of the findings may, however, be extended to other similar countries. This is important given the role that can generate the functioning in joint title of governance mechanisms in limiting managerial discretion. Finally, the findings may be helpful for managers to understand the influence of the governance mechanisms' interaction and for market participants, especially for institutional investors, to adopt optimal regulatory policies and choose efficient mechanisms' combinations.
According to the aforementioned, the questions that are necessary to highlight are: what is the impact of audit quality on accounting manipulation level in a context of concentrated ownership within Tunisian companies? What is the impact of sector affiliation on the relevance of the results found between the set of audit and ownership structure variables and earnings management?
In this particular framework, our aim is to empirically examine within a Tunisian perspective, the impact of synergy, between some variables related to the external audit quality and the ownership structure, on discretionary managerial discretion exercised through earnings management. The results suggest that institutional investors have no influence on earnings management. Therefore, they do not influence the leaders of the selected companies.
Specifically, it comes to examine the interaction between the following variables: the belonging of the external auditor to a "Big 4" (1), the external auditor seniority, the capital concentration and the presence of institutional investors out in the presence of other factors affecting this phenomenon, which are the firm size and the debt ratio.
The remainder of this paper is organized as follows: section 2 provides theoretical background, section 3 carries about literature review and hypotheses for the study, section 4 describes the methodology used, section 5 reports the results of the empirical study and section 6 concludes.
-
Theoretical framework
The inability of traditional research to explain the phenomenon of earnings management was behind the formulation of a positive theory based primarily on the paradigm of accounting information's contractual utility (Watts & Zimmerman, 1978). This theory seeks to explain and predict the behavior of both producers and users of accounting information with the ultimate aim to clarify the genesis of the financial statements. To do this, it borrows its models to the agency theory and the economic theory of regulation.
The neoclassical agency theory defines the firm as a "legal fiction" which serves as a nexus for contracting relationships among agents and principals, whose ultimate aim is to maximize their interests (Jensen & Meckling, 1976). This theory postulates that the firm activity arises on delegation and on mandate relationships (implicit or explicit) which necessarily lead to "principal-agent" problem, and face to the asymmetric information, it becomes necessary to establish incentive or limitative clauses to reduce such divergences and therefore limit earnings management.
The economic theory of regulation (Posner, 1974) apprehends the political process as a competition between individuals to maximize their interests. It postulates that the purpose of the regulations is to make wealth transfers. Accounting numbers, particularly the accounting income and the equity, are used as technical arguments from the politicians voters.
Entrenchment theory stems from the two aforementioned theories, but unlike these two theories which assume that the leader is in confrontational relationship with the shareholder and is therefore opportunistic behavior, the Entrenchment theory considers that the leader has an active behavior. This theory begins from the observation that control mechanisms and incentives to increase efficiency of leaders' management are not always enough to constrain leaders to manage the company in accordance with shareholders interests. The primary objectives of leaders, according to this theory, are to make costly their replacement for the firm, allowing them to increase their authorities and their discretionary spaces. Leader's entrenchment logic aims to preserve and to broaden managerial discretion which can be proof of opportunism. Indeed, leaders give priority to their personal interests, they seek to maximize their income while enjoying their informational advantages in order to appropriate from rents and placing the firm value maximization in a second plane, which is prejudicial to the company.
-
Literature review and hypotheses development
The term of "earnings management" is often considered as a "deliberate intervention in the process of preparing financial statements in order to derive private gain". Although this definition is the most widely cited in the literature, it has been the subject of some criticism and recent developments emphasizing the remarkable difficulty in clearly defining this concept (Jeanjean, 2002).
3.1. External audit quality: a control mechanism
Several criteria of audit quality and ownership structure have received attention in previous studies in corporate governance; will also be examined in this article. These criteria are: the auditor reputation, the auditor-audited relationship seniority, the capital concentration and the institutional property (Kamel & Elbanna, 2010; Lord, 2011 ; Jones, 2011 ; Rodriguez & Alegria, 2012; Kimberly, Mark, & Brian, 2013).
3.1.1. External auditor reputation and earnings management
McNair (1991) states that, the issuing of an audit value judgment is based on the firm's reputation, which will serve as his substitute. Various variables measuring the auditor reputation have been expressed by several researchers, such as the litigation rate proposed by Palmrose (1988), the membership of the audit firm to an international network (DeFond, 1992) and the size as well as the level of the fees prescribed by Moizer (1997).
Jiraporn, Miller, Yoon, & Kim (2008) mentioned that the recent scandals at Enron, WorldCom and Elsewhere have generated a public perception that earnings management is utilized opportunistically by firm managers for their own private benefits rather than for the benefits of the stockholders. Kim, Chung, & Firth (2003) noted that >. Therefore, this type of auditor is able to monitor and detect opportunistic managerial behavior (Memis & Jetenak, 2012; Brian et al., 2013).
...
Para continuar leyendo
Solicita tu pruebaCOPYRIGHT GALE, Cengage Learning. All rights reserved.
