Keywords

internal audit, management experience, earnings management, real earnings management, accruals-based earnings management

Abstract

We examine whether firms with managers that have prior internal audit experience are less likely to manage earnings. This examination is important because the internal audit function is uniquely positioned to provide experiences that could influence future managerial behavior, including limiting the potential negative repercussions of earnings management. We find that firms with managers that have internal audit experience are associated with lower real earnings management but not accruals-based earnings management. Effects are strongest when managers with internal audit experience have greater power or currently hold financial roles, or when there are a greater number of managers with internal audit experience. The results are robust to including firm fixed effects, using entropy-balancing and performance-matching approaches, using a subsample of firm-years required to have an internal audit function, using a subsample of firms for which we can measure internal audit function quality, and measuring internal audit experience at a previous employer. These results point to an important benefit of manager internal audit experience, as research suggests that real earnings management is common, difficult to detect, not always within the scope of financial reporting regulators, and detrimental to future performance.

Original Publication Citation

Ege, M. S., T. A. Seidel, M. Sterin, and D. A. Wood. 2022. The influence of management’s internal audit experience on earnings management. Contemporary Accounting Research, 39 (3): 1,834-1,870. DOI: 10.1111/1911-3846.12770.

Document Type

Peer-Reviewed Article

Publication Date

2022

Publisher

Contemporary Accounting Research

Language

English

College

Marriott School of Business

Department

Accountancy

University Standing at Time of Publication

Full Professor

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Accounting Commons

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