This paper examines the field of Earnings Management in relation to internal controls and external audit. The research is conducted as a literature review of the existing knowledge in the academic accounting and auditing journals, books, etc.
The paper sets out to answer four research questions, the first being to define Earnings Management and conclude whether the phenomenon has a negative social impact on e.g. resource allocation. We define Earnings Management as having both negative and positive outcomes, although this study mainly focuses on the negative impact on society. Secondly, we conduct a thorough examination of the existing knowledge regarding the role of internal controls and external audit in relation to Earnings Management. Thirdly, we investigate whether the knowledge obtained in the literature review is embedded in the European regulation of auditing. We conclude that some areas are regulated sufficiently while there are room for improvement on others. The fourth and last section puts forward specific proposals for improving the regulation of the auditors’: risk assessment, tenure, alma mater-relations, resignation and inauguration, and audit of accounting estimates. In addition, based on the findings in the literature review, we propose an alternative to the current sector-specific regulation strategy. Perspectives for further research are identified as: 1st and 2nd line of defence, partner tenure impact on quality, quality of audit work performed preceding auditor leaving firm to work for client, and lastly, impact from change of auditors on audit quality. In general, the research into causal links concerning Earnings Management is underdeveloped and should be researched further.
|Educations||MSc in Auditing, (Graduate Programme) Final Thesis|
|Number of pages||119|
|Supervisors||Kim Klarskov Jeppesen|