1. PhD Candidate Imen BENSLIMENE Audit quality and real activities manipulation in Europe 8th Annual Graduate Student Conference Dissertation Supervisor Pr. Pascal DUMONTIER 1

2. PRESENTATION OUTLINE INTRODUCTION RESEARCH QUESTION RESEARCH OBJECTIVE LITERATURE REVIEW HYPOTHESES RESEARCH DESIGN CONCLUSION 2

3. INTRODUCTION Audit Quality Earnings Management Information asymmetry Managers Stakeholders Stock price Accounting Numbers 3

4. Earnings management DeAngelo (1986) ; Jones (1991) ; Dechow et al.(1995) ; Dechow et al. (2003) ;Piot et al.( 2005) 4 Acounting-based earnings management Acounting-based earnings management Real earnings management Discretionary accruals Real activities manipulation Real activities manipulation And /Or Roychowdhury (2006), Zang (2007), Gunny ( 2005 – 2009), Cohen et al. ( 2010) Healy and Whalen, 1999

5. RESEARCH QUESTION 5 What is the impact of audit quality on strategy choice for earnings management (accruals and / or real activities manipulation)?

6. RESEARCH OBJECTIVE To investigate whether constraints imposed on accounting-based earnings management by audit quality indirectly increases real activities manipulation in Europe 6

7. 7 Audit quality and Accounting based earnings management Piot and Janin (2004)/(2008) Francis et al. (1999) Becker et al. (1998) Subramanyam et al. (1998 ) Ben Othman and Zeghal (2006) High quality auditing constrains accounting –based earning management High quality auditing does not constrain accounting –based earning management Mrad (2004) Ehrabim (2001) LITERATURE REVIEW

8. 8 Clients of high quality auditors engage in less accounting based earnings management Hypothesis 1

9. 9 Audit quality and real activities manipulation Gunny (2005) Cohen et al. (2007) Graham et al. (2005) Yu ( 2008) Accrual constraints exerted by high quality audits can motivate managers to switch to REM LITERATURE REVIEW

10. 10 Clients of high quality auditors engage in more real activities manipulation Hypothesis 2

11. RESEARCH DESIGN Initial sample consists of all listed firms in original 15 European Union countries Sample 2007 to 2010 Period OSIRIS and Thomson Financial Databases 11

12. 12 Measures of accrual-based earnings management (Modified Jones model) Total accruals Normal accruals Discretionary accruals ACCT = EBXI – operating CFO ACCD t = ACCT /TA t-1 – ACCND i ACCND t /TA t-1=  1(1/ TA t-1) +  2 (Δ CA/ TA t-1) +  3 (Immob. t/ TA t-1)

13. Reduction of discretionary Reduction of discretionary expenses Over- production 13 Sales manipulation Acceleration of the timing of sales through increased price discounts or more lenient credit terms Decreases in discretionary expenses including advertising, R&D, and SG&A expenses Reporting of lower cost of goods sold through increased production Real Activities Manipulation (Roychowdhury, 2006)

14. Measures of Real Activities Manipulation (Roychowdhury, 2006) 14 Step 1 Normal levels of CFO, discretionary expenses, and production costs (Dechow et al.,1998; Roychowdhury, 2006) Step 2 Abnormal CFO (ab_CFO), (ab_PROD) and (ab_DISX) are computed as the difference between actual values and normal levels Step 3 RM combines the three individual measures of RAM

15. AUDIT QUALITY MESURES 15 Big 4 /N Big 4Audit fees Industry specialization

16. RESEARCH MODEL 16 Legal attributes (La Porta et al., 1998, Leuz et al., 2003) Specific regulation of the national audit market Institutional factors AEM REM EM Audit fees Industry specialization Big 4/ N Big 4 Audit quality H2 H1 Size of firm Leverage ROA ABS ACCRUALS MTB Control

17. 17 Analyze the behavior of earnings management in Europe Analyse the role of audit quality on trade off between REM and AM INTEREST OF RESEARCH    Examine the effects of member state audit environment on one hand and earnings management on the other

18. Research Agenda / Difficulties Research Agenda Continue running the model Start writing results Difficulties Database: certain variables are un-available (changed to available variables) 18

19. 19 THANK YOU FOR YOUR ATTENTION