DO CORPORATE GOVERNANCE SPECIAL LISTING SEGMENTS AND AUDITING CURB REAL AND ACCRUAL-BASED EARNINGS MANAGEMENT? EVIDENCE FROM BRAZIL

Abstract

This article examines whether enhanced corporate governance practices, auditing by one of the Big Four and qualified auditors’ opinions, are associated with the propensity to engage in earnings management through accounting choices or operational decisions in Brazil. Although there are some studies on earnings management by Brazilian companies, very few have examined the presence of operational decisions in this practice and none has addressed how to minimize this. In order to infer earnings manipulation by accounting choices and operational decisions, we investigate if firms that manage earnings through discretionary accruals also make operational decisions for the same purpose. The evidence from a sample of Brazilian firms suggests that listing on the São Paulo Stock Exchange´s Corporate Governance Special Listing Segments, which requires enhanced corporate governance practices, among other requirements, and auditing by one of the Big Four firms reduce in general earnings management by accounting choices, and that qualified opinion from auditor  is an indicator of earnings management. However, except in special cases, listing in the Corporate Governance Special Listing Segments and auditing by the Big Four do not assure less earnings management by operational decisions.