• Earnings Management of the Affiliated Business Groups: The Effect of Whether Being Audited by the Same CPA Firm

Abstract

Owing to their unique capital and organizational structures, the affiliated business groups tend to have more activities of earnings management. If they hire different CPA firms to audit their affiliated companies, their earnings management behavior may not be easily detected. The main purpose of the study is to examine whether or not earnings management behavior differs between companies with affiliated business groups audited by the same CPA firm and those audited by different CPA firms. Empirical results show that companies with affiliated business groups have higher scores in earnings management, compared to companies with no affiliated business groups. Furthermore, among companies with affiliated business groups, those audited by different big CPA firms show significantly more earnings management than those with no affiliated business groups audited by big CPA firms. Affiliated companies audited by the same CPA firm have significantly less upward earnings management than those audited by different CPA firms; however, this result only applies to big CPA firms. Findings of this study not only make incremental contributions to the existing documents in earnings management study on the affiliated business groups but also provide reference to the “main auditing CPA system” for the affiliated business groups proposed recently by the Financial Supervisory Commission of the Executive Yuan.

Keywords: Affiliated business groups, Earnings management, Main auditing CPA system