Real and accrual-based earnings management in the pre- and post- engagement partner signature requirement periods in the United Kingdom

In order to address the concern about whether the Public Company Accounting Oversight Board’s recent requirement to disclose an EP’s name in the United States (US) may cause unwanted consequences such as an increase in real earnings management (EM), I investigate the effect of requiring an engagement partner (EP) to sign audit reports on real and accrual-based earnings management in the United Kingdom, a comparable test environment. I measure accrual-based earnings management as the signed abnormal discretionary accruals and real earnings management as abnormally low levels of operating cash flows and discretionary expenses, as well as abnormally excessive production. I do not find a significant change in the usage of accrual-based and/or real earnings management for firm-years suspected of beating/meeting the zero, last-year, or analyst forecast consensus earnings threshold from the pre- to post-signature period. The results are robust to alternative proxies for EM and the control sample approach. My results mitigate the concern that managers may resort to more economically costly real earnings management following the mandatory disclosure of an EP’s name in the US.