The impact of audit quality on profit management and future returns of companies with initial public offering in Iran's capital market

Dissertation to receive Master's degree (M.A.)

Accounting field

Abstract

One of the times when management's motivations are triggered for profit management is the initial public offering. Any public offering of securities that is offered to the public and investors for the first time is called an initial public offering (IPO). One of the ways to reduce profit management is to improve audit quality. In the current research, we will examine profit management in IPO companies, and the impact of audit quality in limiting profit management in IPO companies. The statistical sample of the research included 84 companies during the years 1987 to 1991, which was used to select the sample using the systematic elimination method (screening). After collecting field information through viewing financial statements, the relationships between research variables have been investigated through descriptive statistics and inferential statistics in the form of Eviews and Spss software. In this research, in order to investigate profit management in companies with initial supply, we use Student's t-test and to investigate the relationship between audit quality and profit management, we use panel data using the fixed effects method based on the ordinary least squares regression model. The findings of the research show that there is a significant relationship between profit management and companies with initial public offering. There is also a negative and significant relationship between audit quality and real profit management. Keywords: audit quality, profit management, discretionary accruals, initial offering of securities. One of the goals of financial reporting is to provide information that is useful for investors, creditors and other current and potential users in decisions related to investment and credit and other decisions. Among the important criteria that these groups use to estimate the company's profitability, predict future profits and related risks, as well as evaluate management performance, are the company's current and past profits. Profit itself consists of cash and accrual items, and the accrual items of profit are largely under the control of the management, and he can use accrual items to improve the performance of the company and increase the predictability of future profits and manage the profit in the modern term (Sajadi and Arabi, 2018).

Companies that provide audited financial statements have higher quality information and profit. One of the forms of management control is the use of auditing. Auditing can be used by managers to reassure shareholders that management is not engaging in opportunistic behavior. During the last two decades, many countries have tried to shrink the government and hand over companies to the private sector. This process of expansion of the private sector also increases the supervisory power of the government. For this purpose, Iran has also put the privatization of state enterprises and companies on its agenda. There are various methods for privatization, one of the most widely used in all countries, including our country, is the transfer of shares of state-owned companies to the private sector through the stock exchange (Kirimi Patanlar, 2013). The initial public offering is done in different ways, the most important of which are book registration, public offering by auction method, public offering at a fixed price and new internet methods. In other parts of the world, the initial offering is done by book registration. In Iran, price discovery is done by auction method. Of course, in a new instruction, the stock exchange has proposed to change the method of initial public offering from auction to bookkeeping. Past research on earnings management has concluded that companies with initial public offerings use accrual earnings management during the initial public offering period, and this earnings management leads to lower returns after the initial public offering (Friedlen, 1994, Fan, 2007, Cheng et al., 2010). The present study aims to investigate the profit management in companies with initial public offering and the impact of audit quality in limiting the profit management in companies with initial public offering, accepted in the Tehran Stock Exchange. In previous researches, the relationship between audit quality and profit management based on accruals has been well proven, while limited research has been done on the impact of audit quality on profit management based on actual items. Aldero Zhou (2002) and Chen et al. (2005) have shown that the emergence of audit organizations has caused adjustments to accrual earnings management during the initial public offering period.Therefore, based on previous evidence, audit organizations have stimulated accrual earnings management and led IPOs to actual earnings management. Therefore, in this research, we examine the role of the audit organization on the management of actual and accrual profit in companies with initial public offering, accepted in the Tehran Stock Exchange. 1-1-Statement of the research problem Profit management is the result of a degree of flexibility and theoretical application that managers have in their financial reporting. Managers may use this power to opportunistically manage earnings (Zimmerman, 1994) or to convey confidential information about the company's future performance. Profit management means that the manager can choose an accounting procedure that achieves a specific goal. One of the times when management's motivations are triggered for profit management is the initial public offering. Any public offering of securities that is offered to the public and investors for the first time is called an initial public offering (IPO). Companies that offer their shares to the public for the first time may increase the profit in the last period before the stock offering by using discretionary accruals to show the economic status of the company. Profit accrual items are largely under the management's control, and he can use profit accrual items to improve the performance of the company and increase the predictability of future profits and manage the profit in today's terms. One of the ways to reduce profit management is to improve audit quality. Audit quality reduces the amount of discretionary accruals and earnings management.

D'Angelo defined audit quality as follows: the market's assessment of the probability that the auditor will discover material misstatements in the financial statements and accounting systems of the employer and report the discovered material misstatements. If earnings management is applied in a responsible manner, it is not so bad. The impact of audit quality in limiting profit management in companies with initial supply is one of the topics of interest in financial management, accounting, and their interrelationship with audit knowledge. One of the basic issues is that IPO companies need to control management's behavior through auditing, so as to assure the owners (shareholders) that the company's management will not behave opportunistically. Past research on earnings management has concluded that IPO companies use accrual earnings management during the IPO period, and this earnings management leads to lower returns after the initial public offering. (Friedlen, 1994. Fan, 2007. Cheng et al., 2010). In the current research, we will examine the profit management in companies with initial public offering and the effect of audit quality in limiting the management of profit in companies with initial public offering, accepted in Tehran Stock Exchange. In previous research, the relationship between audit quality and accrual earnings management has been well proven, while there is limited research on the impact of audit quality on actual earnings management. Previous studies have provided evidence that high-quality audits on accrual earnings management have been associated with lower levels of earnings returns. Elder and Zhu (2002) and Chen et al. (2005) have shown that the emergence of auditing organizations has caused the adjustment of accrual profit management during the initial offering period. Therefore, based on previous evidence, audit organizations have stimulated accrual profit management and led IPO companies to real profit management. One of the important aspects of the current research is to show whether a high-quality audit reduces profit management in companies with initial supply or not?

In other words, in this research, an attempt has been made to answer the question whether companies with initial supply that are audited by the audit organization use more real items for profit management? We examine the companies with initial public offering, accepted in the Tehran Stock Exchange. 1-2- The importance and necessity of conducting research: In recent years, according to Article 44 of the Constitution, many public companies are being handed over to the private sector, and of course, this is also facing challenges. In this regard, the quality of the accounting items as well as the success rate of the mentioned companies in order to achieve the primary goals are very important.