Audit Firm |
Large audit firms tend to be more conservative, limiting extreme accruals (MYERS, J.; MYERS, L.; OMER, 2003MYERS, James N.; MYERS, Linda A.; OMER, Thomas C. Exploring the term of the auditor-client relationship and the quality of earnings: A case for mandatory auditor rotation? The Accounting Review, [S.l.], v. 78, n. 3, p. 779-799, 2003.). |
Dummy. Takes value 1 if the company is audited by a Big Four firm, and 0 otherwise. |
Tenure |
It controls the effect of the relationship time between the audit firm and the company. |
Number of consecutive years in which the company maintained the same audit firm. |
Size |
Larger companies tend to perform more predictable and stable operations and, therefore, earnings management and estimation errors should occur less frequently (DECHOW; DICHEV, 2002DECHOW, Patricia M.; DICHEV, Ilia D. The quality of accruals and earnings: The role of accrual estimation errors. The Accounting Review, [S.l.], v. 77, n. s-1, p. 35-59, 2002.). |
Log of total assets. |
Age |
Older companies tend to be more stable (GHOSH; MOON, 2005GHOSH, Aloke; MOON, Doocheol. Auditor tenure and perceptions of audit quality. The Accounting Review, [S.l.], v. 80, n. 2, p. 585-612, 2005.). |
Number of years in which it has been listed on the stock exchange. |
ROA |
Controls potential changes in company performance (JOHNSON; KHURANA; REYNOLD, 2002JOHNSON, Van E.; KHURANA, Inder K.; REYNOLDS, J. Kenneth. Audit Firm Tenure and the Quality of Financial Reports. Contemporary Accounting Research, [S.l.], v. 19, n. 4, p. 637-660, 2002.). It is believed that the change in the earnings quality is associated to the change in the company's performance (BAXTER; COTTER, 2009BAXTER, Peter; COTTER, Julie. Audit committees and earnings quality. Accounting & Finance, [S.l.], v. 49, n. 2, p. 267-290, 2009.). |
Net profitt / Total Assetst-1
|
Leverage |
The financial situation of the company can increase the incentive to manage companies in difficulty (JOHNSON; KHURANA; REYNOLD, 2002JOHNSON, Van E.; KHURANA, Inder K.; REYNOLDS, J. Kenneth. Audit Firm Tenure and the Quality of Financial Reports. Contemporary Accounting Research, [S.l.], v. 19, n. 4, p. 637-660, 2002.). |
(C Liabilitiest + LT Liabilitiest) / Total Assetst
|
Cash flow |
Companies with high operating cash flow are more likely to perform better and because, on average, accruals and cash flow are negatively related (MYERS, J.; MYERS, L.; OMER, 2003MYERS, James N.; MYERS, Linda A.; OMER, Thomas C. Exploring the term of the auditor-client relationship and the quality of earnings: A case for mandatory auditor rotation? The Accounting Review, [S.l.], v. 78, n. 3, p. 779-799, 2003.). |
Operational Cash Flowt / Average Total Assetst
|
Growth |
It captures the possible difference in the behavior of accruals between companies with high and low growth (GUL; FUNG; JAGGI, 2009GUL, Ferdinand A.; FUNG, Simon Yu Kit; JAGGI, Bikki. Earnings quality: Some evidence on the role of auditor tenure and auditors' industry expertise. Journal of Accounting and Economics, [S.l.], v. 47, n. 3, p. 265-287, 2009.). |
Net operating Revenuet / Net operating Revenuet-1 -1 |
Loss |
Controlled by companies with financial difficulties, once these companies are more likely to use discretionary accruals (KIM; LEE, LEE, 2015KIM, Hakwoon; LEE, Hyoik; LEE, Jong Eun. Mandatory audit firm rotation and audit quality. Journal of Applied Business Research, [S.l.], v. 31, n. 3, p. 1089-1106, 2015.) |
Dummy. Takes value 1 if the company presented a loss in the period, and 0 otherwise. |
Gross margin |
Used as a measure of competitiveness. |
Gross Profitt / Net operating Revenuet
|
Operational Cycle |
Longer operating cycles indicate more uncertainties, more estimates and estimation errors, and, thus, lower earnings quality (DECHOW; DICHEV, 2002DECHOW, Patricia M.; DICHEV, Ilia D. The quality of accruals and earnings: The role of accrual estimation errors. The Accounting Review, [S.l.], v. 77, n. s-1, p. 35-59, 2002.). |
Log of operational cycle. |
Sector |
The characteristics of each sector differ, and these characteristics can influence the measure of the earnings quality. |
Dummy. 19 sectors according to the sector classification of Economática. |