Earnings management and auditor conservatism: effects of SEC enforcement actions

Outlines previous research into the factors influencing managers’ choice of accounting procedures and auditors’ acceptance of them, including regulatory action by the US Securities and Exchange Commission (SEC). Studies data from 1980‐1996 SEC enforcement actions against big five accounting firms or their staff to investigate the levels of discretionary accruals made by the relevant clients during the period of investigation. Explains how the discretionary accruals are estimated over various time frames and shows that clients have more income decreasing accruals as the investigation takes place. Considers possible reasons for this and concludes that it is due to the auditors becoming more conservative.