Firm ownership type, earnings management and auditor relationships: evidence from India

Abstract

Purpose

Using data on Indian listed companies for 2005, the purpose of this paper is to examine how firm ownership relates to auditor choice. More specifically, the author tests several hypotheses about the links between firm ownership, auditor relationships and earnings management.

Design/methodology/approach

Several econometric techniques were employed including ordinary least squares, logit regression, ordered logit regression, Poisson and negative binomial regression to test the association between firm ownership and auditors.

Findings

The results indicate that firms having high discretionary accruals are less likely to be audited by domestic entities. The analysis also suggests that domestic auditors are less likely to be preferred by both foreign and Indian private corporations. In addition, the analysis indicates that audit fees are higher for firms with higher earnings opacity.

Research limitations/implications

Driven by data availability, the paper relies on cross‐sectional data.

Practical implications

The results demonstrate that firm ownership is an important consideration for firm auditor relationships. Thus, policymakers should not worry if firms persistently choose to do business with the same auditor. Second, the results are a pointer to the fact that given the differences in their governance structures, the role of domestic and foreign auditors in servicing business groups and state‐owned corporations is distinctly different. Finally, the evidence suggests that the choice of multiple auditors is more to address the complexities involved in multiple business lines, as opposed to curtailing audit fees.

Originality/value

To the author's knowledge, this is perhaps the first study for an emerging economy and more certainly for India to examine the firm ownership‐auditor nexus.

Citation

Ghosh, S. (2011), "Firm ownership type, earnings management and auditor relationships: evidence from India", Managerial Auditing Journal, Vol. 26 No. 4, pp. 350-369. https://doi.org/10.1108/02686901111124666