International Journal of Islamic and Middle Eastern Finance and

Management
The impact of auditor conservatism on accruals and going concern opinion:
Iranian angle
Mahdi Salehi, Hossein Tarighi, Haydar Sahebkar,
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Impact of
The impact of auditor auditor
conservatism on accruals and going conservatism

concern opinion: Iranian angle

Mahdi Salehi
Ferdowsi University of Mashhad, Mashhad, Iran, and
Received 29 December 2015
Hossein Tarighi and Haydar Sahebkar Revised 12 June 2016
22 February 2017
Attar Institute of Higher Education, Masshad, Iran 19 August 2017
25 December 2017
30 April 2018
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Accepted 2 May 2018

Abstract
Purpose – The purpose of this study is to examine high-quality auditors’ conservatism in Iran market
based on the classification of Tehran Stock Exchange (TSE) in terms of their reaction to client’s earnings
management behavior and their limitations to issue the going concern opinions (GCOs) over an eight-year
period from 2009 to 2016.
Design/methodology/approach – The study population consists of 1,376 observations and 172
companies listed on the TSE during the years 2009-2016. Following the prior studies, the authors used the
modified Jones model to measure discretionary accruals as a proxy for earnings management.
Findings – The results witnessed a negative relationship between the size of the audit firm and
discretionary accruals; besides, the relationship between abnormal accruals and GCO on companies audited
by high-quality audit firms is higher than other companies. In other words, firms with GCO, which were
audited by the Iranian large auditors, report negative abnormal accruals less than those audited by non-large
auditors. In short, in spite of the special features of Iran market because of economic sanctions, this paper
extends prior literature clarifying that auditors’ conservatism induces accrual reversals when auditors issue
GCOs. One interpretation of this result is that the existence of such association is because of not only auditor
conservatism but also financially distressed firms.
Practical implications – The outcomes of this paper will help to fill the knowledge gap related to this
issue between developing and developed countries because this investigation exposed more than ever the
vital role of the auditor as an observer on the financial statements. Without any exaggeration, this research
will make investors and stakeholders aware of this fact that auditor conservatism will be effective in reducing
the manipulation of financial reporting and agency problems in emerging markets, particularly those markets
facing with economic sanctions like Iran.
Originality/value – Because of Iran’s dire economic situation during the period under consideration, this
is one of the most comprehensive research among the countries of the Middle East that surveys the impact of
auditor conservatism on accruals and GCO in an emerging market, namely, Iran.
Keywords Auditor reputation, Accruals, Going concern opinion
Paper type Research paper

1. Introduction
Based on Generally Accepted Auditing Standards, going concern is defined as a
fundamental assumption in accounting, and auditors have the accountability to evaluate the
going concern status of each of their clients (Kaplan and Williams, 2012). Going concern
shows that the business segment would continue its operation in the foreseeable future. As International Journal of Islamic
far as we know, this assumption has been controversial, as well as consequential. In and Middle Eastern Finance and
Management
instances when there is a substantial doubt about the continuation of the business operation, © Emerald Publishing Limited
1753-8394
continuation of measurements, classification of assets and debts based on the assumption of DOI 10.1108/IMEFM-12-2015-0158
 IMEFM going concern may mislead the users of financial statements in their estimations of the
firms. Nogler (1995) mentioned the importance of going concern from the standpoint of
auditing as below:
[. . .] going concern in the process of gathering evidence and also preparing the audit report is
always considered as an assumption, but first of all, the auditor should pay attention to this issue
in relation to gathering evidence. In other words, GC is considered as an auditing principle, hence
what has been true about the firms investigated in the past would be true in future in case of the
absence of documents to prove it wrong.
Acceptance of the going concern assumption creates important limitations for auditor’s
responsibility scope, and it is a basis to reduce the level of the commitment to predict the
future. It would make it possible for others to judge this issue more precisely. In the case of
ambiguity in relation to the going concern of the business unit, the issue must be carefully
investigated and revealed. With the analyses performed, if no clear horizon is seen for the
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future of the business segment’s earnings, financial reporting must be done under the
premise of business interruption.
With respect to the accrual basis, it can be stated that all revenues (expenses) related to a
financial period must be considered in the same period regardless of the real receipt
(payment) of cash. By these means, the effects of business units’ continuous business
transactions are recorded in the fiscal period in which they happen instead of only in periods
in which cash is received through the business unit (IASB, 2008). On the other hand,
managers are able to make opportunities for earnings management by means of discretion.
Nevertheless, accruals can easily be exploited by executives. In fact, managers might change
earnings between periods in a manner that does not reveal the fundamental economic
performance of companies.
It is the point where the credibility roles of the auditors are increasingly important and as
an observer on the financial statements always have to pay attention to going concern
assumption in the business entity’s operation. Hence, auditor’s conservatism as an
unresolved mystery is still open to dispute. Under International Financial Reporting
Standards (IFRS), conservatism may raise two problems, i.e. during an economic upturn,
profits are artificially depressed and investors might miss out on a good investment
opportunity; and during the downswing of the economic cycle, where hidden reserves can be
used to artificially increase an entity’s earnings (Hoogervorst, 2012). According to market
rules of Iran, the IFRS map of the SEO states that after 21 March 2016 all banks, insurance
companies, listed financial institutes and all listed companies with registered capital of more
than 10tn Iranian rials must prepare two sets of financial statements – one in accordance
with IFRS and one in accordance with Iran GAAP. Both the sets of financial statements
must be audited. All other listed companies are expected to present IFRS financial
statements in 2018. Thus, our study was conducted between 2009 and 2016 and it was only
in accordance with Iran GAAP. In other words, the above requirement has not taken place in
this paper. Previous studies have investigated the difference in audit conservatism based on
audit firm size (Butler et al., 2004; Muramiya and Takada, 2010; Hadriche, 2015). It is
obvious that all auditors are conservative to some extent, but more famous audit firms are
probably more conservative than small ones because of having human resources with
higher expertise or the probability of losing their credibility (Rusmin, 2010). Besides that,
prior scholars like Cahan and Zhang (2006) and Fargher and Jiang (2008) have mentioned
that litigation risk and public investigation are effective in increasing the auditor’s
conservatism. Now, the question is whether there is a significant difference between
developed countries such as the USA and Japan and developing countries like Iran? In
relation to Iran context, it can be observed that the majority of the shareholders of Iranian
 publicly firms listed on Tehran Stock Exchange (TSE) are protesters in their opposition to Impact of
large salaries, based-earnings bonuses and share options granted to prominent managers. auditor
Moreover, the executive compensation paid by most firms listed on the TSE as compared to
US firms are modest with base salary and limited incentives (Salehi et al., 2018). Another
conservatism
point about Iran context is that because Iran market was faced with severe economic
sanctions during the study period between 2009 and 2016, the majority of Iranian firms had
financial distress. Undoubtedly, in such economic environment, managers have a strong
motivation for manipulating the accounting figures in financial statements so as to mask the
poor financial performance of their own companies (Rosner, 2003; Salehi et al., 2018). It is
anticipatable that the audit risk for Iranian audit firms is not as similar as the US audit
firms. The reason why authors investigate the Iranian big auditors’ conservatism from two
perspectives (in terms of their reaction to the clients’ earnings management behavior and
their limitation to issue the going concern opinions [GCO]) is that this study is going to
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clarify the association between auditors’ reputation and abnormal accruals in an emerging
market in which firms have financial problems. In this paper, we are going to know if
Iranian famous auditors have a lower sense of issuing the GCO to the financially distressed
firms compared to non-big auditors. Do the financial problems of companies cause well-
known auditors to refuse to accept such clients? Hence, because of the presence of such
features in Iran market, our paper contributes to the literature that investigates the effect of
auditor conservatism in an emerging market.
The remainder of this study proceeds as follow. Section 2 presents a theoretical
framework, hypothesis development and a literature review. Section 3 provides the research
methodology and outlines where data are obtained and the sample selection procedure.
Section 4 describes the main results and statistical analyses. Finally, Section 5 provides the
conclusion.

2. The theoretical framework, hypothesis development and literature

Our paper offers essential contributions to the audit markets and literature related to
discretionary accruals, as well as going concern reporting. It is worth bearing in mind that
auditor’s conservatism is an important issue that there has been still ambiguity about it.
Several studies in many developed countries such as Spain, Australia and France have been
done by various researchers that their outcomes are completely different from each other.
For example, the results of Lee et al. (2006) and Cano-Rodríguez (2010) presented that Big 4
auditors are more conservative than others, whereas, in France, the findings of Piot and
Janin (2007) were not similar. The question one should ask is, “Do Iranian well-known
auditors react to clients’ earnings management behavior?”. Accordingly, the present study
attempts to fill the gap and extend the current line of research on auditor conservatism,
abnormal accruals and going concern reporting in developed and developing markets. This
study argues that bigger audit firms are more conservative than smaller ones; therefore,
auditor conservatism is examined with the help of the firm size. In this study, auditor’s
conservatism is evaluated from two perspectives. One is from the viewpoint of auditors’
reaction to clients’ earnings management behavior, and the second is from the viewpoint of
the limitations of external auditors for issuing the GCOs.
Financial Accounting Standards Board (1978) noted that financial statements should
provide the required information for investors and creditors to help them for determining
the amount, timing and the certainty of expected cash flows. Because accrual is more
subjective realism, it is used as a tool for earnings management; consequently, when the
number of accruals is higher, the quality of earnings will be less (Dechow and Dichev, 2002).
However, Etheridge and Hsu (2011) and Mirzaei et al. (2012) proved that accruals have the
 IMEFM fundamental concept of information for users of financial statements. Actually, when the
reliability of accruals is higher, the prediction of future cash flow will be further (Khansalar,
2012). In addition, most scholars in the area of auditing have used discretionary accruals as
an indicator for measuring the audit quality (Chung and Kallapur, 2003; Myers et al., 2003;
Carey and Simnett, 2006; Reichelt and Wang, 2010; Muramiya and Takada, 2010; Kolsi and
Grassa, 2017). In fact, all of them were of the opinion that an unusual level of the
discretionary accruals shows a low level of audit quality. Therefore, it is assumed that if
high-quality auditors are conservative and prevent the clients’ earnings management
behavior, discretionary accruals reported in these companies are probably less than the
companies whose auditing has been done by other audit firms (Muramiya and Takada,
2010). Clearly, bigger audit firms and firms with more famous trademark than other ones
have higher audit qualities. In this regard, Laey (2010) believes that most companies with
higher investment opportunities have more discretionary accruals; however, when they are
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audited by big auditors, this probability is diminished. Auditor’s high-quality and using the
Sarbanes–Oxley Act increases the reliability of accruals (Chambers and Payne, 2008).
Corporate accounting bombs and supervisory procedures that led to the enactment of the
Sarbanes–Oxley Act of increased the scrutiny of audit firms (Myers et al., 2014). Moreover,
DeFond and Lennox (2011) studied the effect of Sarbanes–Oxley Act (SOX) on small auditor
and audit quality. They found that the Public Company Accounting Oversight Board
(PCAOB) inspections increase audit quality by incentivizing low-quality auditors to exit the
market. According to DeAngelo (1981), bigger audit firms have higher audit quality as they
tend to maintain their desirable background in the market. Kanagaretnam et al. (2010)
studied the association between auditor’s reputation and earnings management in banks.
To achieve this goal, they considered auditor type and auditor industry specialization as two
aspects of auditor’s popularity. Their findings proved that both auditor type and auditor
expertise constrain income-increasing earnings management, and auditor industry expertise
merely has a substantial effect on limiting income-increasing earnings management. In
French Banking Industry, Hadriche (2015) also found that high auditor reputation
constrains earnings management. Likewise, Alhadab and Clacher (2017) surveyed the
relationship between audit quality and the earnings management among UK initial public
offering (IPO’s) firms between 1998 and 2008. They inferred that big auditors constrain the
manipulation of discretionary accruals. Besides, Magnis and Iatridis (2017) proved that
different aspects of auditor reputation (i.e. auditor type and auditor industry specialization)
restrict the motivation of executives for earnings management. As such audit firms have a
vast range of clients, they would not decrease their audit quality because of losing one or
some of the clients (Reisch, 2000). As big auditors are more exposed to lawsuits, they have
more incentives to prevent the earnings management. Another important point is that
because of having better financial resources for training their staff (auditors), big audit firms
perform more and better audit tests; therefore, they have higher audit quality (Rusmin,
2010). In the Singapore market, Rusmin (2010) concluded that there is a negative link
between auditor’s reputation and earnings management. In one of the Middle East countries
called Jordan, Alzoubi (2016) used the cross-sectional modified Jones model to evaluate
discretionary accruals as a proxy for earnings management. The findings revealed that the
level of earnings management is significantly less among companies which were audited by
Big 4 audit firms, as compared to other firms. Using a unique dataset for Egyptian
companies, Khalil and Ozkan (2016) realized that bigger auditors are effective in dipping
earnings management. To guarantee the lack of participation in earnings management
opportunities, companies with higher discretionary accruals tend to use higher-quality
auditors. Furthermore, big auditors are probably removed by the clients who tend to change
 the accruals. The reason is that bigger audit firms are more capable to resist managerial Impact of
pressures than smaller ones (Barizah et al., 2005; Zengn and Ozkan, 2010; Hadriche, 2015). In auditor
general, all of the researchers provided evidence that firms audited by non-big auditors have
more accruals than firms audited by big auditors, which means famous audit firms prevent
conservatism
clients from earnings management behavior.
As previously stated, Iranian companies had financial problems because of the economic
sanctions during recent years. In such economic circumstances, firms usually try to use big
auditors so as to restore trust in investors. Because the credibility of these auditors is so high
for society, it leads to a greater transparency and better performance for the company
(Francis, 1984). Apparently, bigger audit firms are very likely to deter client’s earnings
management behavior because litigations against well-known auditors might damage their
reputation through showing a negative signal about the quality of the audit services, and it
even may result in the loss of the majority of their needful clients (Rusmin, 2010; Hadriche,
2015). Therefore, as more famous audit firms are more conservative, it is expected that
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Iranian companies audited by bigger auditors have lower discretionary accruals than those
firms audited by small auditors. Consequently, the first hypothesis is as follows:
H1. There is a negative significant relationship between the audit firm size and
discretionary accruals.
In Iran, regarding the going concern, the accounting standard No. 1 declares that:
Financial statements must be prepared based on the going concern, except when the manager
wishes to disband or stop the operation of the business or when they are practically obliged to do
so. In cases where the management is aware of the events and circumstances that may create a
substantial doubt about the ability of the business in going concern, this ambiguity should be
revealed. In case financial statements are not prepared based on the going concern, this reality
must be revealed along with the preparation basis of financial statements and the fact that why
the corporation is considered to lack the going concern.
This accounting standard also adds “the management investigates the entire existing
information about the predictable future – at least 12 months after the balance sheet date to
evaluate the going concern”. In addition, according to agency theory, auditors are expected
to act as an effective mechanism to properly reduce the conflict of interests between
managers and outside shareholders (Elfouzi and Zarai, 2009). Because conservative auditors
probably have fewer constraints to issue the GCO, the number of discretionary accruals
might be different among the companies that are able to continue their business activities
and audited by high-quality auditors and non-big audit firms. Rosner (2003) and Arnedo
et al. (2008) found that the auditors’ conservative behavior has a reverse impact on accruals
and leads to increase in the number of negative discretionary accruals when auditors issue
the GCO. In an interesting study, Beams and Yan (2015) investigated the influence of
financial crisis on auditor conservatism using a sample of the US distressed companies from
2005 to 2011. They found that auditors became more conservative in the form of issuing
higher levels of GCOs even after controlling for other predictors of GCOs. Actually, the
increased conservatism rapidly came back to the normal situation when the financial crisis
reduced. Because of the country’s economic predicament during 2009 to 2016, Iranian
accountants were likely to use income-increasing accounting methods to cover their weak
financial performance. So, Iranian big auditors are expected to prevent the clients’ earnings
management behavior to maintain their credibility in the audit market. Tagesson and
Öhman (2015) also investigated the relationship between audit firm and the likelihood of
issuing going concern warnings and realized that Big 4 auditors are more likely to issue
such warnings than non-big auditors. The reason for doing this is completely clear, that is
 IMEFM because if auditors fail to issue GCOs when companies break accounting’s rules, they will be
charged by investors and other users of financial statement (DeAngelo, 1981). In Iran, a
research was conducted by Mahmoudi (2010). The result of that study was similar to
Carcello and Palmrose (1994) and Kaplan and Williams (2013). The modified audit opinion is
an alarm sign to reduce the potential tendency of making a complaint to the auditors, so
according to the changes in the audit profession such as increased competition, litigation
and complexity in clients’ commercial activities and the audit firm purposes in the current
business environment, audit risk is a risk applied to the audit firm because of the quality of
auditing contract, legitimate claims and damaged fame or contract costs exceeded from the
audit fees (AICPA, 1983). Fargher and Jiang (2008) also investigated the changes in the
auditing environment and compared the auditors’ tendency to issue GCOs before and after
2000-2002. They found that auditors were really interested in issuing the GCOs to
financially stagnant firms after this crisis period. Raghunandan and Rama (1995) studied
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the impact of the auditing standard No. 59 on the auditing report of companies with
financial distress. Their results showed that big auditors compared to small ones more
really like to have clients who are in financial distress and those who also are involved in
advanced industries. However, when the litigation’s risk increases, well-known auditors are
not interested in accepting such clients. Kaplan and Williams (2012) investigated the
changing relationship between the audit firm size and going concern reporting as well. They
proved that public stock companies with financial stagnancy tend to make auditing contract
with smaller audit firms because bigger audit firms refuse to have a contract with these
companies. Moreover, their evidence suggested that during recent years, the possibility of
the issuance of GCO by smaller audit firms is higher than big ones.
Regarding the aforementioned issues, it is anticipated that public stock companies with
financial distress are increasingly audited by smaller audit firms. We think that bigger audit
firms refuse to accept these clients because of conservativeness and preventing from being
exposed to legitimate claims. Undoubtedly, as non-big auditors have less power in
confronting with the financial impact of main legitimate claims, they would be on the
defensive against clients with financial distress. For this reason, they would act in a
conservative manner by deciding to issue the GCO for such clients. In addition, financially
distressed firms are often interested in income-increasing management (Rosner, 2003). What
figures out from the studies of Rosner (2003) and Arnedo et al. (2008) is that when financially
weak firms report negative abnormal accruals in their financial statements, big auditors
issue a GCO. This implies that auditor’s conservatism is positively connected with reversals
of accruals when issuing a GCO, whereas Butler et al. (2004) indicated that distressed
financial position is the reason why there is a positive relationship between going concern
firms and large negative abnormal accruals. To put it another way, they believed that it was
not by reason of auditor’s conservatism. Obviously, it is predictable that going concern
firms audited by the famous auditors have fewer earnings management behavior than those
audited by unpopular auditors. Hence, the second hypothesis states that:
H2. The relationship between discretionary accruals and the GCO in companies audited
by a high-quality audit firm is more than other companies.

3. Methodology
The statistical model used for H1 is a panel data with fixed effects and next model is a
logistic regression. The information about independent, dependent and control variables
was collected from the financial statements of the companies listed on TSE via reliable
resources. The time range of the study was (2009-2016) as long as eight years.
 3.1 Population and statistical sample Impact of
The target population included all companies listed on TSE, during the period 2009-2016. auditor
Common features of the companies to determine the population are as follows:
conservatism

According to the research period (2009-2016), the company is listed on TSE before
the year 2009 and its name is not removed from the companies mentioned by the
end of 2016.

The fiscal periods of companies should be finished at the end of the solar year to
enhance the comparability and homogeneity of companies in terms of period.

The company should be continuously active during the research period and its
shares have been traded, and there is no trading halt.

The type of the company activity is productive and thus investment companies,
leasing, credit and financial institutions and banks are not included in the sample
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because of their different natures.

Taking account of the above conditions, a sample size of 172 companies from firms
listed on TSE has been selected. What is worth mentioning is that our research sample
does not include requirements related to preparing two sets of financial statements
(Table I).
Our sample includes 1,376 firm-year observations that represent 13 industries and
spans to years 2009 to 2016. Looking at the details, as regards sample industry
distribution, Electrical appliances has the lowest and Automotive and the
manufacture of Automotive Parts has the highest number of observation in our
statistical sample.

3.2 Research models

According to H1, the following regression model was constructed to test the
hypothesis. According to the literature, it is expected that b 1 in model (1) is negative
and significant on the error level of 0.05, so that it may be argued that there is a
negative significant relationship between the audit firm size and discretionary
accruals.

Industry name Firm-year observation (%) of sample

Automotive and the manufacture of automotive parts 208 15.11

Pharmacy 160 11.62
Cement, lime and plaster 136 9.88
Chemical products 136 9.88
Food & Beverage products except for sugar 120 8.72
Basic metals 120 8.72
Machinery and appliances 80 5.81
Tile and Ceramic 80 5.81
Production of metal products 80 5.81
Table I.
Non-metallic mineral products 80 5.81
Rubber and plastic 72 5.23 Firm-year
Metal minerals 56 4.06 observations
Electrical appliances 48 3.48 distributed across the
Total 1,376  100 industry sectors
 IMEFM ABNORACCi;t ¼ b 0 þ b 1 BIGNit þ b 2 Qi;t þ b 3 LnASSETit
þ b 4 LEVit þ b 5 ROAit þ b 6 MBit þ b 7 LnAgeit þ b 8 SGit (1)
þ b 8 CFOit þ « it

According to H2, the following regression model (2) was constructed for testing this
hypothesis. According to the mentioned literature, it is estimated that b 1 in model (2) is
significant on the error level of 0.05, and also b 1 > b 2 is met so that it may be argued
that the relationship between discretionary accruals and GCO among companies
audited by high-quality audit firms is greater than other companies. The extent of b 2 in
the relationship between discretionary accruals and GCO is decreased so that H2 is
confirmed:

PROBðGC ¼ 1Þi;t ¼ b 0 þ b 1 BIGit *ABNORACC þ b 2 ABNORACC

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þ b 3 BIGit þ b 4 Qi;t þ b 5 LnASSETit þ b 6 LEVit

þ b 7 ROAit þ b 8 MBit þ b 9 LnAgeit

þ b 10 SGit þ b 11 CFOit þ « it (2)

3.3 Calculations and data collection in the model

In this study, the dependent variable in H1 is abnormal accruals (ABNORACC). BIG
is an independent variable whose value is considered as one if the auditor is famous
according to the classification presented by Iran’s stock market and zero otherwise.
Other variables are considered as control variables. The most commonly used method
for measuring abnormal accruals is the modified Jones model. For this purpose, the
starting point is the whole accruals which are in turn divided into discretionary and
non-discretionary. Non-discretionary accruals are calculated by the following
relation:

NORACCit ¼ TAit  ABACCit

Total accruals are calculated as:

Accruals = operating earnings – cash flow from operations
ABACC is non-discretionary accruals which is calculated by the following relation:





1 DREVit PPEit ROAit
ABACCit ¼ ait þ b 1it þ b 2it þ b 3it
Ait1 Ait1 Ait1 Ait1

In the above relation:

DREVit = changes in the Ith company’s income in year t ;
PPE it = net properties, machinery and equipment’s of the Ith company in year t ;
ROA it = return on assets of the Ith company in year t ;
Ait = total assets of the Ith company in the year (t  1); and
b ijt and ait = special parameters of the Ith company in year t whose estimation for every
company is conducted by using the following regressive relation based on
the estimation period observations of accruals:





1 DREVit PPEit DCFOit Impact of
TAit ¼ ait þ b 1it þ b 2it þ b 3it þ «0
Ait1 Ait1 Ait1 Ait1 auditor
conservatism
The above relation is used for calculating the required model coefficients ( b ijt and ait).
In fact, after calculating the special parameters of the company and non-discretionary accruals
of the estimation period, the discretionary accruals equation for every company is as below:
"



#
1 DREVit PPEit DCFOit
NORACCit ¼ TAit  ait þ b 1it þ b 2it þ b 3it
Ait1 Ait1 Ait1 Ait1

Tobin’s Q: in this study, one of the control variables is Qi,t: Tobin’s Q is calculated this way:
Tobin’s Q = MVOCE þ PSLVþ BVOLTD(BVOSHTABVOSHTL)/BVOTA
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MVOCE = market value of all common stocks at the end of the year
PSLV = cash values of the preferred stocks at the end of the year
BVOLTD = book values of the long debts at the end of the year
BVOSHTA = book values of the current assets at the end of the year
BVOSHTL = book values of the current debts at the end of the year
BVOTA = book values of the total assets, at the end of the fiscal year
In H2, going concern is a dependent variable. This variable is the auditor’s GCO whose
value is 1 if the company has received the GCO and 0 otherwise. Other variables of the
model are control variables. Because Rosner (2003) and Arnedo et al. (2008) indicated that
famous auditors’ reaction to going concern companies aggravates reversals of accruals, our
independent variable in this model is BIGN*ABNORACC. Hence, if the estimated value of
b 1 is positive and significant, it implies that H2 is supported to accept (Table II).

4. Findings
4.1 Descriptive statistics
In summary, the features of a set of information may be declared by using appropriate
descriptive statistics and facilitate the comparison of the test with other tests. The study
descriptive statistics are presented in Table III.

Variables Definitions

ABNORACC Abnormal accruals estimated using the modified Jones model

BIGN BIG is a dummy variable whose value is considered as one if the auditor is famous according
to the classification presented by the stock market and zero otherwise
Tobin’s Q Q is the ratio of the market value of a company’s assets
LnASSETit The natural logarithm of total assets of the ith company in the fiscal year t
LEVit Financial leverage is book value of long-term debt divided by the total book value of the
assets of the ith company in the fiscal year t
ROAit The ratio of net income to total assets of the ith company in the financial year t
MBit The market-to-book ratio of the equity of the ith company in the financial year t
LnAgeit The age of the ith company in the financial year t
SGit Sale growth of the ith company in the financial year t
CFOit Operational cash flows of the ith company in the financial year t
GC This dependent variable is the auditor’s GCO whose value is one if the company has received Table II.
the GCO and zero otherwise Variables definition
 IMEFM Variable Mean SD Minimum Maximum Skewness Kurtosis

PPE 989592.1 3,914,514 1,874 51,442,934 7.299 67.514

ABNORACC 3421785 12,926,923 22,725 148,673,339 7.302 59.063
CFO 399315.1 18,87,665 2499452 27,565,778 7.224 65.709
ROA 0.109 0.188 0.485 0.600 1.582 19.402
delta REV 231462.3 2,919,189 37517828 39,277,750 3.411 118.0714
LnASSET 19.597 2.689 8.816 21.614 0.716 1.012
LEV 0.957 0.412 0.089 3.761 2.923 16.299
SG 0.319 0.623 0.945 11.003 9.622 131.653
Tobin’s Q 0.894 0.708 0.212 14.523 6.009 27.702
MB 1.506 13.523 277.242 89.069 16.809 287.252
Ln (Age) 2.349 0.648 0.319 3.877 0.128 0.079
Table III. TA 48562.5 1,498,454 17969861 12,500,365 6.613 97.865
Descriptive statistics delta CFO 78613.78 2,552,699 22738575 42,619,489 1.318 40.365
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According to the results of the above descriptive statistics table, it may be declared that the
skewness value results in MB and Ln Age are negative. The negative skewness of all similar
variables shows an asymmetric distribution with kurtosis toward smaller values (negative
skewness). In addition, the results show that according to the positive kurtosis index of all
study variables except for Ln Age, the sampling distribution is longer than a normal
distribution. As a result, its scatter is less than a normal distribution.

4.2 Conclusive statistics

Based on econometric science, panel data refers to a set of data based on observations which
are examined by a large number of sectional variables that are often selected randomly
during a given period. As the panel data include both aspects of time series data and
sectional ones, using appropriate statistical explanatory models which describe the features
of the variables is more complicated than the models used in sectional and time series data
(Salehi et al., 2018).

4.3 F-Limer test

In accounting, when data are collected for several companies over a specific period, in this
case, we are faced with longitudinal data (Pooled or Panel). Hence, when data are
longitudinal, the type of estimation of a model must first be determined. In fact, in the first
step, it is necessary to specify whether the model is fitted to the ordinary least squares (OLS)
or panel data method. The F-Limer test is used for reaching this purpose. In this test, the
non-acceptance of the null hypothesis means that the model must be estimated with a panel
data pattern and OLS model otherwise (Salehi et al., 2018).
According to the result of Table IV, it may be inferred that the value of the statistic of the
F-Limer test equals 17.615. According to the probability value of the H0 test that is less than
0.05 in model one, the preference of the OLS method is rejected, while the panel data method
is accepted.

Null hypothesis Test Statistic p-value Result

Table IV.
F-Limer test Preferred OLS F-Limer 17.615 <0.001 H0 denial
 4.4 Hausman test Impact of
Confirming the use of the panel data method in the first research model, the Hausman test is auditor
used to determine whether a panel data with fixed effects or a panel data with random effect
should be used (Salehi et al., 2018). The Hausman test is used for identifying the presence or
conservatism
absence of correlation between the error of regression and independent variables. Random
effects model will apply if such a relationship exists (the acceptance of H0), and if it does not,
fixed effects model will be used.
What stands out from the Table V is that as the probability value of H0 is less than 0.05,
the preference of the fixed effects model is accepted and the random effects model is rejected
in the first model.

4.5 Results of the first research model

After confirming the fixed effects model, we have to determine if there is a significant
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relationship between audit-firm conservatism and earnings management. Hence, the results
of parameter estimation for the model are as follows (Table VI):
After confirming the fixed effects model according to tests carried out, the first
regression model is estimated. As already mentioned, it is necessary to test the significance
of the model before examination of the variables and approval or rejection of the hypothesis.
This can be done by calculating the F statistic and p-value of this statistic. As p-value
calculated for this statistic is less than 0.05, the significance of the model can be confirmed at
5 per cent error level. Based on the result, the high value of R-squared indicates that the
model will fit our data better. One of the assumptions of linear regression is the assumption

Null hypothesis Test x 2 Statistic p-value Result

Table V.
Preferred random effects model Hausman 107.912 0.001 H0 denial Hausman test

Variable Coefficient SD t-statistic p-value

C 11.522 1.117 7.716 0.000***

BIGN 3.16 2.53 12.213 0.000***
Q 0.112 0.085 2.156 0.038**
LNASSET 0.913 0.091 7.209 0.001***
LEV 0.614 0.312 2.044 0.046**
ROA 2.442 0.216 9.584 0.005***
MB 0.002 0.003 1.771 0.116
LNAGE 0.013 0.031 0.656 0.007***
SG 0.016 0.028 0.319 0.006***
CFO 0.007 0.052 0.025 0.856
Model Summary
R2 0.412 Mean dependent variable 0.007
Adjusted R2 0.316 Durbin–Watson statistic 1.812
F-statistic 4.816 Lagrange Multiplier Test 19.688
Table VI.
p-value of F statistic <0.001 Jarque–Bera Test 4.684
The results of the
Notes: ***Significant at error level less than 1%; **Significant at error level less than 5%; *Significant at first model using a
error level less than 10% fixed-effects panel
 IMEFM of normal distribution of errors. The Jarque–Bera test is designed for evaluating the
normality of errors. If the statistical probability is more than 5 per cent, the (H0) hypothesis
based on the normal distribution of errors will be accepted. The results showed that it is
4.684 and statistical probability value is 0.098. Another assumption in the classical linear
regression model states that the regression residuals should have the lack of serial
autocorrelation. Because the amount of Durbin–Watson state is 1.81 (between 1.5 and 2.5),
this provides strong evidence of the lack of serial autocorrelation (first lag) in the residuals.
Finally, in this study, Lagrange Multiplier test is used for investigating the
heteroskedasticity of residuals. As p-value calculated statistic is more than 5 per cent, it
should be noted that the variance of the error is fixed and does not violate the assumption of
heteroskedasticity.

4.6 Results of the second research model

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Using a logistic regression in the second model, we tried to discover whether the relation
between discretionary accruals and the GCO in firms audited by a high-quality audit firm is
more than others in Iran market. Thus, the results of H2 of this research are presented in
Table VII.
In this research, McFadden’s R2 is used to verify the suitability of logistic regression.
According to the results of Table VII, it was found that the value of McFadden’s R2 is 0.96,
which is very close to one. Therefore, the second model of our study has great predictive
power. In addition, the Hosmer–Lemeshow test is a statistical test for goodness of fit for a
logistic regression model. As the amount of H-L’ x 2 is 3.765 and p-value of it is 0.877, it can
be concluded that the second model has a good fit with the data. It should be noted that to
evaluate the normality of residual values, Kolmogorov–Smirnov Test is used in this paper.
Because the amount of K-S equals 0.818 and the probability value obtained is 0.702, the
residual normality assumption is confirmed. Moreover, we found evidence that the
relationship between discretionary accruals and the going concern report in companies
audited by high-quality audit firms ( b 1: 1.718) is significant at 0.05 error level which is

Variable Coefficient SD t-statistic p-value

C 0.263 5.365 0.058 0.008***

BIGN*ABNORACC 1.718 0.617 2.702 0.005***
ABNORACC 0.914 0.894 1.201 0.007***
BIGN 0.006 0.617 0.009 0.006***
Q 1.812 0.923 2.816 0.019**
LNASSET 0.041 0.419 0.074 0.817
LEV 0.994 1.541 0.665 0.613
ROA 1.679 0.740 3.001 0.005***
MB 0.019 0.094 0.331 0.914
LNAGE 0.027 0.665 0.053 0.829
SG 1.653 2.554 0.312 0.001***
CFO 5.16 1.33 0.317 0.738
Model Summary
Table VII. McFadden R2 0.964 Mean dependent variable 0.216
LR statistic 1086.559 Hosmer-Lemeshow x 2 3.765
The results of the
p-value of LR statistic <0.001 Kolmogorov-Smirnov 0.818
second model using
the logistic Notes: ***Significant at error level less than 1%; **Significant at error level less than 5%; *Significant at
regression error level less than 10%
 higher than other companies ( b 1: 0.914). Therefore, the estimated value of b 1 is positive and Impact of
significant, which implies that the second hypothesis is confirmed. auditor
conservatism
5. Concluding remarks
No study, especially in a certain period when the country was faced with very severe
economic problems, has ever examined the impact of auditor conservatism on discretionary
accruals and GCO. This would be the innovative aspect of the study. As abnormal accrual is
a proxy for earnings management behavior, this paper aimed to evaluate big auditors’
conservatism from two sides. The first research angle of this study is auditors’ response to
clients’ earnings management activities, and the second perspective is the limitations of
external auditors for issuing the GCOs. In the first step, we found that there is a significant
negative relationship between the auditor’s reputation and the discretionary accruals. The
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result of this study is consistent with the results of DeAngelo (1981), Bartov et al. (2000), Lee
et al. (2006), Cano-Rodríguez (2010), Kanagaretnam et al. (2010), Muramiya and Takada
(2010), Rusmin (2010), Wuchun Chi and Mikhail (2011), Comprix and Huang (2015), Alzoubi
(2016), Khalil and Ozkan (2016), Magnis and Iatridis (2017) and Alhadab and Clacher (2017),
whereas it is not similar to the findings of Piot and Janin (2007) in France and Yoshida (2008)
in Japan. In general, Iranian manager had motivations for increasing earnings so as to
introduce better the company’s financial performance and attract the attention of investors
because most Iranian firms were faced with financial problems by reason of economic
sanction over an eight-year period between 2009 and 2016. Therefore, we concluded that the
Iranian big auditors are effective in preventing income-increasing earnings management,
even though Japanese big auditors deter income-increasing management. This difference
may be caused by the different economic situation in two markets. Anyway, Iran’s economic
situation is not as really strong as Japan, and the pressure from the Iran market is also more
than Japan market. In addition to this case, it seems that Japanese accounting practices
comply with tax practices. In such environment, firms are likely to decrease earnings to
reduce taxable income (Muramiya and Takada, 2010).
The results of H2 showed that the relationship between abnormal (discretionary)
accruals and the GCO among companies audited by a high-quality audit firm is more than
other companies. The results of this hypothesis are in line with the results of Spathis (2003),
Rosner (2003), Arnedo et al. (2008), Muramiya and Takada (2010), Kaplan and Williams
(2012), Myers et al. (2014) and Tagesson and Öhman (2015). In fact, we realized that when
Iranian companies are less engaged in earnings management activities, the possibility of
receiving a GCO by them will be increased. In other words, Iranian famous auditors have a
lower sense of issuing going concern to the financially distressed firms compared to non-big
auditors. In keeping with this view, Fargher and Jiang (2008) believed that found
conservative auditors are very likely to issue the GCO to financially distressed firms after a
period of economic crisis. As these firms are facing the biggest financial problems and
actually are going to mask their poor financial performance by earnings management
activities, big audit firms often refuse to accept such clients.
In short, the results of this study will have the profound implications for society and
users of financial statements because this paper revealed more than ever the important role
of the auditor as an observer on the financial statements. Without any hyperbole, this
research will make investors and stakeholders aware of this fact that auditor conservatism
will be effective in dropping the manipulation of financial reporting and agency problems in
emerging markets, particularly those markets struggling with economic sanctions like Iran.
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Assurance Services, and Related Services, The Publication of audit organization, Tenth Edition,
Tehran.

Corresponding author
Mahdi Salehi can be contacted at: [email protected]

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