SUMMARY AND DISCUSSION Proceeding E Book 4A Turky

1879 1992 when audit committees may not have had relatively significant oversight responsibility for financial reporting and audit. Consistent with Carcello et al. 2002 however the variable for board meetings in our model has a significant positive association with audit fees. We also find that ACCS audit committee chair holding shares, lnTA company size, lnSubs number of subsidiaries, and auditor type Big4 all have a significant positive association with AF. Consistent with Firth‘s 1λλ7 findings, NSH5 number of shareholders owning 5 or more shares has a significantly negative association with AF which may suggest that large shareholders may use different methods to monitor managerial actions as opposed to heavily relying on the audit and so defused shareholding companies relied more on external audit function. The negative relationship of leverage seems to contradict the findings in Parkash Venable 1993 and Firth 1997 where audit fees were seen to increase with higher leverage. This is interesting and provides an area for further investigation as many studies on audit fees have found leverage to be positively associated with audit fees Hay et al. 2006b. We undertook a number of additional tests relating to our hypotheses concerning the influence of ACE on audit and NAS fees. We replaced ACE in the NAS fee model lnNAS with the individual components of ACE, i.e. with ACI, ACX and ACM. The adjusted R 2 is unaffected and the model is still significant at 1. However, we find that only audit committee financial expertise ACX is significant suggesting that an audit committee‘s financial expert contributes positively to greater monitoring. Audit committee independence ACI is negative, but not significant. Contrary to our expectations, audit committee meetings ACM has a positive, but not significant, association with NAS fees. When testing the NAS fee model using the individual components of ACE the control variables which were found to be significant and positive in the composite ACE model still remain positive and significant. Similarly, we also tested our AF model, replacing ACE with its individual components. The 1880 results are unchanged, except that only audit committee independence ACI and audit committee meetings ACM components have a positive significant association with AF. Results from the individual analyses of ACE components do not change our overall conclusions regarding the influence of ACE on audit and NAS fees. Our initial models of audit and NAS fees did not take into consideration the possible joint determination of auditor remuneration. To test for this we included the standardised residuals 1 m  of lnNAS Model 1 as one of the independent variables for lnAF Model 2. We also included lnAF as dependent variable in our model of NAS fees results not reported in table. We found that AF have a positive significant association with level of NAS fees. Our results with respect to the significance of ACE are largely unchanged – ACE is still significant and negative and the adjusted R 2 marginally increases from 21 to 23. When lnNAS is included as an additional independent variable in our model of audit fees results not reported in table, we find that lnNAS has a significant positive association with AF. ACE however, as expected, still remains significant. To summarise, this paper aimed to examine the influence of corporate governance quality on auditor remuneration. It provided evidence of audit committee effectiveness ACE having a positive significant effect on AF after controlling for board of director characteristics. Thus in contrast to the prior findings of Carcello et al 2002 for the US and Goodwin-Stewart and Kent 2006 for Australia, this paper has shown that audit committee quality does make a difference, even after controlling for board characteristics. Additionally the paper also provided evidence of the audit committee effectiveness ACE having a significant negative association with levels of NAS fees. Overall the results in the paper 1881 provide evidence that effective audit committees, as measured by ACE, protect audit quality by exerting a positive influence on the scope of the audit and restraining the purchase of NAS. Although in contrast to Carcello et al 2002 this paper has demonstrated the significance of ACE , further research is needed to better understand the factors which contribute to audit committee effectiveness in different regulatory and institutional contexts. Our findings are also relevant to regulators in other countries who are considering adopting measures to enhance corporate governance, particularly the effectiveness of audit committees. References Abbott, δ.J., and S. Parker β000, ‗Auditor Selection and Audit Committee Characteristics‘, Auditing: A Journal of Practice and Theory , Vol. 19, No. 2, pp.47-66. Abbott, δ.J., S. Parker, G.F. Peters, and K. Raghunandan β00γa, ‗An Empirical Investigation of Audit Fees, Non- Audit Fees, and Audit Committees‘, Contemporary Accounting Research , Vol. 20, No. 2 Summer, pp.215-234. Abbott, δ.J., S. Parker, G.F. Peters and K. Raghunandan β00γb, ‗The Association Between Audit Committee Chara cteristics and Audit Fees‘, Auditing: A Journal of Practice Theory, Vol. 22, No. 2 September, pp.17-32. Beattie, V., S. Fearnley and R. Brandt 1λλλ, ‗Perceptions of Auditor Independenceμ UK Evidence‘, Journal of International Accounting, Auditing and Taxation, Vol. 8, No. 1, pp.67-107. Carcello, J.V. and T.δ. Neal β000, ‗Audit Committee Composition and Auditor Reporting‘, The Accounting Review , Vol. 75, No. 4 October, pp.453-467. Carcello, J.V. and T.δ. Neal β00γ, ‗Audit Committee Characteristics and Auditor Dismissals Following ―New‖ Going-Concern Reports‘, The Accounting Review, Vol. 78, No. 1 January, pp.95-117. Carcello, J.V., D.R. Hermanson, T.δ. Neal and R. A. Riley Jr. β00β, ‗Board Characteristics and Audit Fees‘, Contemporary Accounting Research, Vol. 9, No. 3 Fall, pp.365- 384. Collier, P and ε. Zaman β005, ‗Convergence in European Corporate Governance‘, Corporate Governance: An International Review, Vol. 13, No. 6, pp. 753-768. Collier, P. and A. Gregory 1λλ6, ‗Audit Committee Effectiveness and the Audit Fee‘, The European Accounting Review , Vol. 5, Issue 2, pp. 177-198. 1882 DeZoort, F.T., D.R. Hermanson, D.S. Archambeault and S.A. Reed β00β, ‗Audit committee effectivenessμ a synthesis of the empirical audit committee literature‘, Journal of Accounting Literature, Vol. 21, pp. 38-75. Firth, ε.A. 1λλ7, ‗The Provision of Nonaudit Services by Accounting Firms to their Audit Clients‘, Contemporary Accounting Research, Vol. 14, Issue 2, Summer. pp.1-21. FRC 2003 Combined Code on Corporate Governance, July, Financial Reporting Council, London. Goodwin- Stewart, J. And P. Kent β006, ‗Relation between external audit fees, audit committee characteristics and internal audit‘, Accounting and Finance, Vol. 46, pp.387-404. Hay, D., Knechel , R. and V. δi β006a, ‗Non-audit services and auditor independence: New Zealand evidence‘, Journal of Business Finance and Accounting, Vol. 33, Nos. 5 6, pp.715-734. Hay, D., W.R. Knechel and N. Wong β006b, ‗Audit Feesμ A εeta-Analysis of the Effects of Supply and Demand Attributes‘, Contemporary Accounting Research, Vol. 23, No. 1, pp.141-191. εenon, K. and J.D. Williams 1λλ4, ‗The Use of Audit Committees for εonitoring‘, Journal of Accounting and Public Policy , Vol. 13, pp.121-139. O‘Sullivan, N. β000, ‗The Impact of Board Composition and Ownership on Audit Qualityμ Evidence from δarge UK Companies,‘ British Accounting Review, Vol. 32, pp.397- 414. Parkash, ε. and C.F. Venable 1λλγ, ‗Auditee Incentives for Auditor Independenceμ The Case of Non- Audit Services‘, The Accounting Review, Vol. 68, No. 1 January, pp.113-133. Smith Report 2003 Audit Committees Combined Code of Guidance, Financial Reporting Council, January, London. Turley, S. and ε. Zaman β004, ‗The Corporate Governance Effects of Audit Committees‘, Journal of Management and Governance , Vol. 8, pp.305-332. Turley, S. and ε. Zaman β007, ‗Audit committee effectivenessμ informal processes and behavioural effects‘, Accounting, Auditing and Accountability Journal, Vol. 20, No. 5, pp.765-788. Young, S. β000, ‗The increasing use of non-executive directors: its impact on UK board structure and governance arrangements‘, Journal of Business Finance and Accounting, Vol. 27, Nos. 910, pp.1311-1342. 1883 Table 1: Descriptive Statistics Variables Min. Max. Mean Std. Dev. Std. Skew Std. Kurtosis Panel A : continuos variables ACS 2 6 3.30 .828 .44 .03 ACM 2 8 2.96 .90 1.52 5.2 TAD 5 1.62 1.33 .72 -.25 BM 4 19 8.7 2.61 .23 .155 PNEDB .22 .83 .53 .122 -.26 -.136 lnSubs .00 4.47 2.32 .88 -.55 .127 lnAF 9.80 13.91 11.94 .81 -.51 .277 lnNAS .00 14.88 11.31 2.22 -3.34 14.871 NSH5 1 13 5.85 2.24 .59 .185 lnTA 15.75 20.56 18.56 .93 -.24 .211 Leverage .00 .73 .16 .173 1.42 1.600 Panel B: dichotomous variables ACX 1 .72 .45 -.96 -1.08 ACI 1 .97 .17 -5.58 29.39 ACE 1 .51 .50 -.03 -2.01 Duality 1 .08 .27 3.21 8.4 B4 1 .92 .28 -3.00 7.07 Loss 1 .34 .48 .66 -1.58 Acq 1 .46 .50 .15 -1.99 ACCS 1 .81 .4 -1.55 .41 Table 2: Correlations matrix ACE ACS ACM lnAF lnNAS TAD BM PNEDB lnSubs NSH5 lnTA ACE 1 ACS -.010 1 ACM .527 .029 1 lnAF .176 .146 .160 1 lnNAS .088 .223 .118 .514 1 TAD -.189 -.049 .008 -.034 .042 1 BM .057 -.151 .073 .068 .080 -.087 1 PNEDB .020 .527 -.008 .077 .202 .071 -.113 1 lnSubs -.103 .001 -.070 .568 .186 -.018 -.216 -.117 1 NSH5 .100 -.115 .024 -.092 -.095 -.069 .053 -.236 .116 1 lnTA .188 .189 .147 .696 .452 -.028 .034 .157 .379 -.028 1 Leverage .233 .039 .174 .222 .203 -.103 .130 .073 .029 -.005 .425 Notes Correlation is significant at the 0.01 level 2-tailed. Correlation is significant at the 0.05 level 2-tailed. 1885 Table 3: OLS regression of NAS fees on ACE and control variables Model 1: dependent variable: lnNAS Model 1a Model 1b Model 1c R 2 Adj. R 2 Std. Error F value 0.258 0.215 1.972 5.925 p=0.00 0.270 0.217 1.970 5.047 p=0.00 0.274 0.228 1.956 5.927 p=0.00 Constant 0.386 1.903 3.001 ACCS 0.158 0.164 -0.786 BM 0.108 0.108 0.104 PNEDB 1.196 1.326 0.907 Duality 1.395 1.219 1.444 NSH5 -0.091 -0.103 -0.068 lnTA 0.356 0.356 0.235 Leverage 1.401 1.302 1.548 lnSubs 0.007 -0.030 0.032 B4 2.948 3.161 3.303 Acq 0.130 0.178 0.214 Loss 0.249 0.165 0.149 TAD 0.144 ACCXD -0.116 -0.019 ACCnXD 0.140 0.150 ACE -0.535 ACM 0.113 ACX -0.632 ACI -1.667 Refined.ACE -1.826 Notes: indicates significant relationship at 1 p0.01 indicates significant relationship at 5 p0.05 1886 Table 4: OLS regression of audit fees on ACE and control variables Model 2: dependent variable: lnAF Model2a Model2b Model2c R 2 Adj. R 2 Std. Error F value 0.687 0.669 0.468 37.394 p=0.00 0.703 0.681 0.46 32.256 p=0.00 0.678 0.657 0.477 33.04 p=0.00 Constant 2.065 1.622 2.116 ACCS 0.171 0.148 0.088 BM 0.052 0.050 0.049 PNEDB -0.042 0.100 -0.131 Duality -0.247 -0.051 -0.186 NSH5 -0.055 -0.053 -0.048 lnTA 0.451 0.422 0.463 Leverage -0.481 -0.388 -0.321 lnSubs 0.396 0.412 0.366 B4 0.330 0.165 0.405 Acq 0.031 0.034 0.036 Loss -0.072 -0.068 -0.068 1 m  0.077 0.078 0.07 TAD 0.013 ACCXD -0.031 -0.118 ACCnXD 0.023 0.004 ACE 0.237 ACM 0.089 ACX 0.103 ACI 0.840 Refined.ACE -0.154 Notes: indicates significant relationship at 1 p0.01 indicates significant relationship at 5 p0.05 1887 MEASUREMENT OF AUDIT QUALITY THROUGH REAL-ACTIVITY EARNINGS MANAGEMENT Hyuk Shawn, Syngkyunkwan University Hyoik Lee, Syngkyunkwan University Sanghyuk Moon, Yeungnam University

1. Introduction

Net income consists of cash flows from operating activities hereafter, CFO and accruals. Because accruals match the timing of the accounting recognition with the timing of the economic benefits, with accrual-based earnings we can measure firm performance better Dechow and Dichev, 2002. However, accruals are mainly based on assumptions and estimates that, if wrong, must be corrected for the future earnings Dechow and Dichev, 2002. In particular, discretionary accruals can be used for the means of managers earnings management. Therefore, to raise reliability of financial reporting, auditors are needed to detect discretionary accruals and recommend managers to correct their financial reports according to the materiality. From these viewpoints, prior researches used discretionary accruals as proxies for the audit quality. Meanwhile, there is a view of CFO used in earnings management in addition to accruals. As mentioned above, CFO as well as accruals is included in net income. Manager can use various means for earnings management. CFO is also one of the means. Traditionally, there were a lot of studies about discretionary accrual earnings management hereafter, DAM. However, after Bugstahler and Dichev 1997 who maintain that CFO can be the means of earnings management as well, studies on earnings management by the means of affecting CFO have proceeded actively. Especially, Roychowdhury 2006 defined the earnings management through affecting CFO as real- 1888 activity earnings management hereafter, RAM, measured by combining three elements, i.e. costs of goods sold hereafter COGS, production costs, and discretionary expenses. The recent researches focus on the relationship between DAM and RAM, and report that due to several factors which make it difficult to use DAM for the earnings management for example, regulations by Sarbanes-Oxley Act, etc., managers use RAM more than DAM Cohen, 2008. Most of prior researches about RAM hold that managers use RAM so frequently that auditors have difficulties to detect earnings management as policies, such as SOX, have increased auditors assurance responsibility. If auditors conduct audits of high quality according to the auditing standards, RAM as well as DAM will decrease. In this way, auditors would improve audit quality by supplying reliable information, solving uncertainty by reducing earnings management, in any case of DAM or RAM. This implies that RAM just like DAM can be a proxy for audit quality. Therefore, this study investigates the relation between the audit quality and the abnormality of RAM, and analyzes whether RAM can be a suitable proxy for audit quality. We organize the paper as follows: Section 2 reviews existing literature on earnings management and audit quality. Section 3 develops arguments for our hypothesis, and discusses our methodology. In Section 4, we present descriptive statistics and the results of the empirical test. Section 5 deals with the conclusion and discusses the contribution and limitation of the results in this paper.

2. Hypothetical Backgrounds