Earnings Management, Board Independence And Audit Fees Considering The Firm’s Profitability Level – Hypotheses development

Earnings Management, Board Independence And Audit Fees Considering The Firm’s Profitability Level - Hypotheses developmentHypothesis 2: There is a meaningful relationship between board independence and audit fees.
Audit research studies have found a significant relation between firm profitability and audit fees (e.g., Simunic, 1980; Wallace, 1984). Joshi and AL-Bastaki showed that audit fees have a significant and positive relation with profitability and highly profitable firms pay more audit fees. They argued that highly profitable firms usually pay more fees in view of the fact that higher profits may require rigorous auditing testing of the validity for the recognition of revenue and expenses, which requires more audit time. Therefore, the third hypothesis is stated as follows:
Hypothesis 3: There is a meaningful difference between audit fees in different firms concerning the level of firm profitability.
The main purpose of the study is to test the relation between earnings management, board independence and audit fees considering the firms profitability level in accepted corporations in Tehran’s Stock Exchange (TSE). We use the financial statements information of the accepted corporations in Tehran Stock Exchange organization during 2003 to 2009 to test the relation between earnings management, board independence and audit fees concerning the level of firm profitability. The data of 57 firms are used in the study for analysis. itat on
Model development and variables calculation
The basic research approach which relies on the regression model of audit fees in this study is similar to that used in the majority of previous studies of audit fees. The dependent variable is audit fees and we use a logarithm of audit fees paid to the auditor. The proxy for earnings management (ACA) is the widely-used cross-sectional Jones model, as modified by Francis et al., in order to extract the discretionary or abnormal current accruals.
The absolute value of discretionary or abnormal current accruals from equation is our measure for earnings management.
Board independence is being calculated by the ratio of independent directors to the total number of directors in the board. Firm size (SIZE) has been suggested and empirically found to be the strongest explanatory variable (Simunic, 1980; Francis, 1984; Cobbin, 2002). We calculate firm size by natural logarithm of total sales. Type of auditor has been suggested to proxy audit quality (DeAngelo, 1981b; Francis, 1984) and we measure type of auditor by the dummy variable that is equal to 1 if audit organization audits the firms and 0 otherwise. Listing AGE is calculated by the number of fiscal years from the initial listing. Remarks refer to the number of qualifications in the audit report. Leverage is being calculated by dividing book value of long term debt to total equity. Current ratio (CUR) is calculated by dividing current assets to total equity. Loss is a dummy variable that is equal to 1 if a firm had loss in prior fiscal year, otherwise 0. Return on assets (ROA) is calculated by dividing profit before interest and tax to total assets. To test the hypothesis, we estimated a linear regression model, using the ordinary least squares (OLS) technique. The next section, presents the analysis results.

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