Are Auditors Looking the Other Way on Earnings Manipulation?

Summary

This study examines whether auditors tolerate management’s efforts to lower reported earnings before companies announce their first executive stock option (ESO) plans. Using a unique Chinese dataset that captures both pre-audit and post-audit earnings, the researchers analyzed 9,404 firm-year observations from 2006–2012. This allowed them to directly observe audit adjustments and assess whether auditors challenged managers who may have been understating earnings to secure more favorable stock option pricing.