Choice of auditors and earnings management during the Asian financial crisis

This study sets out to examine the effect of the choice of auditors in constraining earnings management within a rule‐based reporting framework during the Asian financial crisis.

Using the iterative seemingly unrelated regression methodology, 383 firm‐observations of service‐oriented listed companies in Singapore are analysed.

The results show that service‐oriented companies engage in income decreasing earnings management during the crisis period. More importantly, the results indicate that only the Big‐6 firms are able to significantly constrain the earnings management of managers of such companies.

The ability of Big‐6 firms to constrain earnings management is perceived to add credibility to the quality of reported earnings, and hence contributes to the competitive advantage of the Big‐6 firms in the market for auditing services.

The evidence contributes to the literature on corporate governance and the competitiveness of the market for audit services in the context of an economy‐wide financial crisis from an Asian perspective.