External Auditors, AuditCommittees and EarningsManagement in France

We investigate the effect of various audit quality dimensions (i.e. auditorreputation and tenure, audit committee existence and independence) on earningsmanagement in France. We thus contribute to the empirical audit quality literature in aContinental European environment that markedly differs from the USA in terms ofauditing and corporate governance. The main findings are that: (1) the presence of anaudit committee (but not the committee’s independence) curbs upward earningsmanagement; and (2) the presence of aBig Fiveauditor makes no difference regardingearnings management activities. Implications of these findings are discussed with regardto the specificities of the French auditing and governance settings. In particular, althoughthe audit committee acts as a device to control the more egregious (i.e. income-increasing) forms of earnings management, the monitoring incentive of outside directorsmay be hampered by the collective board responsibility for financial reporting quality.Second, the lack of differentiation amongBig Fiveauditors in terms of accountingconservatism is consistent with the lower litigation risk offered by the French Civil Code(vs. the US Common Law system), which is likely to eliminate the deep pocketsincentive for investors.