Discretionary accrual, auditor rotation and super-audit: An exploratory study of the role of CAG in earnings management

Abstract

In this study, I investigate the association between auditor rotation and super-audit by the Comptroller and Auditor General of India (CAG) with discretionary accrual. The CAG’s super-audit is compulsory for all majority government-owned companies. I use the Jones model (1991) to estimate the level of discretionary accrual. I compare the levels of discretionary accrual in majority government-owned companies with those in which government does not own shares for the period 1991 - 2008. The results indicate that the difference in the level of discretionary accrual between the two sets of firms are not statistically significant. Also, given the level of discretionary accrual, it is not possible to conclude with a significant degree of accuracy whether a company is majority governmentowned or not. I offer some explanations for the results. This exploratory study contributes to our understanding of the role of he CAG as a super – audit and the usefulness of auditor rotation in government – owned companies in India.