The effect of mandatory disclosure requirements and disclosure types of auditor fees on earnings management: Evidence from Taiwan

The Taiwanese authorities issued and revised the disclosure regulations with regard to auditor fees three times during the period 2002-2012. The most important change in disclosure regulation is that firms have to disclose their auditor fees and have been able to disclose fees in the form of individual amount or fee range since 2009. This study extends the perspective of auditor independence to explore the effect of mandatory disclosure requirements and disclosure types of auditor fees on earnings management of listed corporations. The results show that the enhanced information transparency induced by the mandatory disclosure requirements of auditor fees is useful to reduce both positive accruals-based earnings management and real earnings management. Furthermore, firms that disclose their auditor fees in the form of individual amount have lower positive accruals-based earnings management than those in the form of fee range. The overall findings are consistent with the notion that the enhanced information transparency related to auditor fees is associated with enhanced auditor independence and thus support Dye's (1991) theory.