Journal of Accounting and Economics ∎ (∎∎∎∎) ∎∎∎–∎∎∎
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Journal of Accounting and Economics
journal homepage: www.elsevier.com/locate/jae
The effect of audit adjustments on earnings quality: Evidence from China$
Clive Lennox a,n,XiWub, Tianyu Zhang c a Leventhal School of Accounting, University of Southern California, USA b School of Accountancy, Central University of Finance and Economics, China c CUHK Business School, The Chinese University of Hong Kong, China article info abstract
Article history: We examine how adjustments to earnings during year-end audits affect measures of Received 6 May 2014 earnings quality. There are four key findings. First, audit adjustments cause earnings to Received in revised form become smoother and more persistent. Second, the adjustments result in higher accrual 28 July 2015 quality. Third, audit adjustments have a larger negative effect on signed accruals than Accepted 19 August 2015 absolute accruals. Fourth, the adjustments do not reduce the discontinuity in the earnings distribution around zero. These findings are of interest to researchers who use earnings JEL Classificiation: properties as proxies for earnings quality and audit quality. However, we caution that our M41 findings for China may not generalize to other countries. M42 & 2015 Elsevier B.V. All rights reserved.
Keywords: Earnings quality Audit adjustments
1. Introduction
We study the adjustments that auditors require companies to make to their pre-audit earnings numbers during year-end audits. In particular, we are interested in how these year-end audit adjustments affect the following measures of earnings quality that are commonly used in the financial accounting and auditing literatures: