The Relationship between Audit Quality and Artificial and Real Earnings Management

According to agency theory, managers have more information comparing to shareholders and it is possible to make decisions that do not maximize interests of shareholders. Audit process is an important approach to reduce agency conflicts and opportunistic behavior of managers. This paper aims to study an aspect of economic consequences of audit services in Iran by investigating the relationship between audit quality and artificial and real earnings management of listed firms in Tehran Stock Exchange. In this regard, 100 firms were selected as sample of research for the period 2007-2012. We used modified Jones (1995) model for determining artificial earnings management and Roychowdhury (2006) model, for measuring real earnings management. Also, we used two proxies for determining audit quality, including auditor industry specialization and auditor reputation. results show that there is a negative significant relationship between audit quality and artificial earnings management. Also, findings suggest there is a positive significant relationship between audit quality and real earnings management.