CONSULTING SERVICES BY INDEPENDENT AUDITORS AND EARNING MANAGEMENT IN BRAZILIAN FIRMS

Abstract

In the context of agency theory, the external audit has the mission to monitor the actions of managers, aiming its alignment with shareholder objectives. However, there are practices that can undermine the independence of the auditor, as the concomitant provision of consulting services to the client or the length of time of service. The literature also points out that the reputation, expertise and audit firm size are factors that can strengthen its monitoring capacity. The research objective was to verify if the external auditor may become economically tied to management of his client, reducing thus their monitoring capacity. Therefore, it was done adapting the Frankel, Johnson and Nelson model. The ratio between the fees paid for consulting services and the total paid to audit firms to discretionary accruals, was estimated using the modified Jones model and Kang e Sivaramakrishnan model, by Ordinary Least Squares. The results pointed that earnings management occurred to reduce earnings, given that it was observed a reduction in the value of negative discretionary accruals through the provision of concomitant non-audit services by the independent auditor in 2009, and still elevated total accumulations in 2008. In summary, the results indicate that there is no significant relationship between the provision of non-audit services by the independent auditors and earnings management by the audited firms. Moreover, it was found that firms that trade ADR’s have slightest practice of earnings management. Also, being audited by a "Big Four" was also not relevant to explain a greater or lesser incidence of the practice of earnings management in the audited firms.