Corporate Strategy and Earnings Management Choice——Concurrent Discussion on the Governance Effect of Audit

Abstract

Abstract: Based on the perspective of audit governance, using the data of listed companies in China to investigate how corporate strategy affects the choice of earnings management path, this paper reaches the following conclusions. (1) Companies that adopt aggressive corporate strategy tend to choose accruals earnings management, and companies that adopt conservative strategy tend to choose real earnings management. This conclusion remains the same after corporate strategies are further divided into offensive, defensive and analysis types. (2) Audit experts have external governance effect, who can restrain a company with aggressive strategy from choosing accruals earnings management. However, audit experts have a weak inhibitory effect on companies with conservative strategy of real earnings management. Therefore, companies with aggressive strategy are unwilling to employ audit experts. (3) The governance effect of audit experts is restricted by different factors, such as audit tenure and the nature of corporate property rights. Consequently, investors and regulators should pay attention to the impact of company strategic position on financial behavior and its consequences, and make full use of the important function of external audit to participate in corporate governance.

Key words: corporate strategy, earnings management choice, audit expert, governance effect

Yan Huanmin, Wei Shanshan, Zhang Liang. Corporate Strategy and Earnings Management Choice——Concurrent Discussion on the Governance Effect of Audit[J]. Management Review, 2020, 32(6): 292-306.

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