The Impact of Management with Working Experience of CPA Firms on Earnings Management

The collapse of Enron Corporation has brought the “revolving door” into sharp focus. In Taiwan, corporations often employ a former employer at an accounting firm as a director or a financial officer. This practice can have an impact on auditor independence and the quality of financial statements.

This study investigates whether the management of companies with working experience of the present auditor engages in earnings management more easily because of the impairment of auditor independence. In addition, the study examines whether the management of companies with working experience of the other CPA firms engages in earnings management more easily because of the individual’s accounting expertise.

Using the Modified Jones Model (Dechow, 1995) to calculate discretionary accruals from 2003 to 2005, the result indicates that, the management with working experience of the other CPA firms reported larger positive discretionary accruals. However, we found the management with working experience of the CPA firms reported less negative discretionary accruals.