Examining the Association between Audit Quality and Discretionary Accruals in Highly-Valued Equity

The purpose of this paper is to examining the association between discretionary accruals as measure of earning management in highly valued equity as client that its price-to-earnings ratio is in the highest P/E quintile and audit quality measured by audit firm size and audit tenure variables. We categorized audit firms to large audit firms and other audit firms and categorized audit tenure to four years audit tenure and shorter than four years audit tenure. To test this assertion, we regress discretionary accruals on: controls, a highly valued equity indicator variable, indicator variables measures of audit quality, and interaction terms between the highly valued equity indicator variable and audit quality indicator variables for years 2008-2012. Results of tests show no significant coefficients for each of the highly-valued equity-audit quality interaction terms, suggesting that when a firm is highly valued, high quality auditors have not decreasing effect on accruals.