Dissertation

The Study of the Effect of ‘Auditor’s Independence’
on ‘Earnings Management’
Submitted
in fulfillment of the Degree of Bachelor of Commerce
Submitted by:
Sinjini Chatterjee
Roll Number: 1372
Room Number: 24
Semester: 6
Supervised by:
Dr. Soma Nath
April 2024
St. Xavier’s College (Autonomous), Kolkata
Department of Commerce
PROJECT COMPLETION AND PLAGIARISM VERIFICATION CERTIFICATE
Student Name: Sinjini Chatterjee

Room No.: 24
Roll No.: 1372
Title of the dissertation: The Study of the Effect of ‘Auditor’s Independence’ on ‘Earnings
Management’
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The dissertation may be considered for submission.
Name of the Supervisor: Dr. Soma Nath
Signature:
Date:
STUDENT’S DECLARATION
I, Sinjini Chatterjee hereby declare that the Project Work with the title ‘The Study of the
Effect of ‘Auditor’s Independence’ on ‘Earnings Management’ submitted by me for the
partial fulfillment of the degree of B.Com. (Honours) at St. Xavier’s College (Autonomous),
Kolkata is my original work and has not been submitted earlier to any other Institution for the
fulfillment of the requirement for any course of study.
I also declare that no chapter of this manuscript in whole or in part has been incorporated in
this report from any earlier work done by others or by me. However, extracts of any literature
that has been used for this report have been duly acknowledged providing details of such
literature in the references.
Signature:
Name: Sinjini Chatterjee
Address: 111, Bangur Park, Rishra, Hooghly, 712248

Room No.: 24
Roll No.: 1372
Place: Kolkata
Date:
ACKNOWLEDGEMENT
I have been able to complete this project because of the support and contribution of
several people and it gives me immense pleasure to acknowledge their contribution.
I am very grateful to St. Xavier’s College (Autonomous) Kolkata for allowing me to present
my research project and providing me with the requisite resources for completing this project.
I am also very grateful to the Father Principal and Father Vice Principal for their constant
motivation.
I would like to express my gratitude to my supervisor, Dr. Soma Nath. Without

h e r constant support and guidance, the completion of this project would not have
been possible.
I would also like to thank my parents for their encouragement and support.
Chapters Sub Chapters Particulars Page Number
List of Charts
Executive Summary
Introduction
Definition of
Earnings
Management
Forms of
EXECUTIVE SUMMARY
In a world and an era where the concept of Individual Independence is extremely necessary
for a society to function fairly and smoothly, how would the case turn up to be if the
backbone of the society i.e. its financial statement matters, is operated by individuals who do
not enjoy 100% independence? Not necessarily all frauds are illegal. There is a term given to
a lower level of fraud or is sometimes not considered as fraud according to various rules and
regulations in the auditing field: Earnings Management. Though quite a controversial topic,
the individuals who operate the financial statements of a country i.e. the Auditors, sometimes
sacrifice a small part of their free will and independence to commit the lower level fraud of
Earnings Management. This sacrifice of course is not made without any factors or
compensation. The results are debatable and kept under a curtain of mystery but it is accurate
that almost all organizations practice Earnings Management by influencing their Auditors
with many factors like “Audit Fees, Non-Audit Fees, the status of Audit Committee
Independence, Audit Tenure, Audit firm size”, Client-Auditor relationships, and other
industry dynamics that affects the decision making of an ethical Auditor. For a brief
understanding, Earnings Management may be changing the figures of a quarter but not
changing the total profit altogether. Changing the figures in profit is considered fraud. But
here, with the change in the figures of a quarter, a company can gain the reputation of
stability and thus the trust of its shareholders and attract the same from the population.
This research looks into the impact of the Independence of Auditors on Earnings
Manipulation and investigates how the independent nature of an Auditor influences the
practice of manipulating financial statements. Earnings Management has been a persistent
concern in Corporate Governance. The increase in Auditors' independence is promoted to
mitigate the occurrence of Earnings Management. However, the extent to which an Auditor
truly practices independence remains a subject of debate.
This study aims to contribute to the existing literature by providing insights into the complex
nature and elements surrounding Auditors' Independence and its impact on Earnings
Management. The study also determines the relationship between the factors of Auditors’
Independence (like Audit Fees and Non-Audit Fees) and Earnings Management and finds out
their relational degree.
To make this study a success, the approach of using solely Primary Data has been adopted.
For this, an online survey was conducted by drafting a questionnaire with the Likert 5-point
scale and circulating it among the people belonging to the area of work where they are
directly exposed to the current situation of Auditor's Independence and the practices of
manipulating financial records in various organizations of the country. Such people include
Chartered Accountants, Cost Accountants, CA, and CMA finalist students, and Academicians
expertising in Audit. The data gathered is then analyzed with the help of various graphs and
statistical analysis tools to arrive at satisfactory and valid conclusions.
CHAPTER 1: INTRODUCTION
The primary duty of an auditor is to ensure that the financial statements of a business present
a "true and fair" picture of the business's financial situation. The auditors oversee ensuring
that a company's financial accounts are reliable and accurate. However, when an auditor's
independence is compromised, there is a potential that the company's or other parties'
interests would influence their decision-making, which might lead to financial statements
being falsified. A company might fool stakeholders and investors by falsifying its financial
figures to match or surpass expectations. We call this strategy "earnings management."
Auditors are crucial for spotting and putting a check on earnings management. On the other
hand, they could be less inclined to notice and disclose such manipulations if their
independence is in danger. Considering this, an ongoing study seeks to determine how auditor
independence affects earning management.
According to the literature now in publication, earnings management is a method

management uses to manipulate a company's profitability artificially, primarily through non-
cash activities. Such actions are certain to prevent shareholders from obtaining a clear
understanding of the Company's financial situation, and it is the auditors' responsibility to
disclose such mishaps.
Nonetheless, there is a good probability the auditor who lacks independence may supervise
such little tampering and carry out audits that are biased in favor of the client. In such a
scenario, the study addresses the following research question: How does auditor
independence affect earnings management?
An auditor manipulates the financial records by sacrificing his/her ethics and auditing morals
which in turn decreases their independence by auditing. Hence, it can be said that “the Higher
the Earnings Management, the lower the Auditors’ Independence”. Many factors of
Independence come into play like- “Audit fees and Non-Audit fees”. To get a better
understanding, each of the individual terms are explained below:
1.1 Meaning of Earnings Management (EM)
Earnings Management is the “strategic manipulation of the financial statements” of a

company which is usually done with the motive of portraying a more favourable condition of
its financial reports than what might otherwise be the case. While sometimes a certain level
of EM is acceptable, it becomes an issue when it poses serious misstatements and errors in
the financial records giving it a fraudulent image.
There are many ways through which earnings management can occur. The most common
ones being “income smoothing” and “manipulation of accounting estimates”. In income
smoothing, the auditor of accompany intentionally evens out it earnings over multiple
quarters so that the investors can be assured of the stability of the company. This can be
performed by delaying the process of entry of expenses or speeding up the documentation of
revenue.
To manipulate Accounting estimates, companies usually adjust depreciation schedules to to

increase or decrease the earnings manually. Another process called the “Cookie jar
Accounting” can be used to offset the current poor performance with the built up reserves in
the profitable years.
Channel stuffing is another aggressive tactics of EM where the companies ship off the
excessive inventory to distributors or customers in order to increase its sales figures
artificially. This is usually done at the end end of a reporting period irrespective of any actual
demands.
A certain level of EM can be considered as a lower level of fraud that might not break the
legal laws but excessive manipulation can put the company under serious trouble. It has the
capability to erode investor trust, change the market valuations and finally harm the
shareholders’ interests. The Securities and Exchange Commission (SEC), is given the duty of
monitoring the companies and getting a hold of the ones practicing Earnings Mangement.
1.2 Earnings Management and its forms
Several methods exist for managing earnings. The first method by which managers tamper
with their profits is called real earnings management, or economic profit management, which
they employ while determining how to run their company. Economic theory is fully aware of
opportunity costs, which are the foundation of the concept of economic profit. Managers
understand that to reach the necessary short-term ratios, they will have to accept a certain
amount of future cash flow loss when employing economic profit management strategies.
The notion that company managers need to be completely informed on every facet of
financial performance and the associated expenses for an organization to enhance its financial
performance is echoed by other writers. Because it comprises “investment and operational
decision-making” techniques which eventually impacts the cashflow of the company, the
management for economic profit is more challenging to identify. “Accrual-based earnings
management”, or accounting profit management, is the second type of profit management.
Accruals, the foundation of accounting profit management, are intended to portray the actual
performance of the company by recording “revenue and expenses in the period in which they
were incurred”.
1.3 How to measure and detect Earnings Management
According to the accrual principle's definition, an accrual serves as the foundation for
calculating and identifying earnings management. One instrument available to investors and
other external entities for utilizing data regarding the performance of specific companies is
Accrual. Regardless of when cash is received, revenue can be recorded at the time of sale of
product according to the accrual principle. In a similar vein, irrespective of the time spent in
money, the costs related to the revenue can be recorded in the period—a time discrepancy
between cash flows and the way transactions are treated in accounting results in accruals.
1.4 Earnings Management detection models

The development of EM-detecting models in the global context starts with basic NDA
simplified models and goes on to more complex alternative models that try to split the total
“accrual into discretionary and non-discretionary” categories. Nevertheless, there is no real
proof of the relative power of alternative models for Earnings Management detection, and the
decomposition of the total accrual is highly demanding. Three approaches are distinguished
by another author for EM detection: “total accrual models”, which focus on multiple
accounting items and break down the total accrual into discretionary and non-discretionary
categories while looking into discontinuities in profit distribution; simple accrual models,
which concentrate on individual accounting items and are applicable, particularly in financial
institutions. The issue lies in the fact that DA and NDA are difficult to identify.
Therefore, the goal of the entire accrual model is to estimate the non-discretionary portion.
The difference between “total and non-sparking accrual” is then used to compute the DA. We
can differentiate between static models, like the “Jones model or modified Jones model”,
which assume constant NDA and dynamic models, like the “Healy model or DeAngel
model”, which assume constant NDA but are subject to external and internal influences.
Since the NDA is greatly impacted by the economic shifts that enterprises experience during
a crisis, it is especially crucial to note that the NDA is not constant when analyzing Earnings
Management in the context of the financial crisis.
1.5 Meaning of Auditors’ Independence
“Independence” is a major challenge in the auditing profession. Audit independence is “the

ability of an auditor to act with integrity and impartiality during his/her auditing operations”.
Auditors' Independence has faced recent challenges that has compelled the accounting
profession to think of methods of correcting the materiality present in the audit reports. As a
result, the accounting profession has tried to come up with new ways to increase the
credibility of auditors and their works. It is constantly facing pressure from the all over the
country via media and social media sites like Twitter to correct this matter. "The value of
auditing services depends upon the fundamental assumption that certified public accountants
are independent of their clients"- Shockley.
Auditors’ Independence can be described as not being biased while performing audit tests,
analyzing its results and confirming the financial statements. According to Researchers,
auditing has three different functions: “focus the works of managers, enhance the information
environment and provide a source of insurance against corporate failures”. The value of audit
can be challenged and damage the reputation of the firm, if its auditors fail to report or
identify misstatements and errors present in its Financial records. This study will examine
whether the “audit fees, non-audit fees” will compromise auditor independence.
It has often been noticed that while corporate scams, the auditors are guilty of high audit fees
and non-audit fees while the audit committee independence of that organisation is less and
needs strict attention.
1.6 Factors affecting Auditors’ Independence
Many factors affect auditor's independence. However, in this study, factors such as “audit
fees, non-audit fees” will be discussed.
1.6.1 Audit Fees
Audit Fee is defined as the amount charged by an accountant or auditor from the clients in
exchange for the auditing services provided by him/her. The fee may depend upon the size of
the firm or based on the type of services performed. But whether it affects audit quality, will
always remain a question without an accurate answer. "The amount of audit fee can vary
depending on the assignment risk, the service complexity, the level of expertise required, the
cost structure of Public Accountant Firm and other professional considerations" -Rahmina,
"Large diversified with extensive receivables and inventories, pay higher fees" -Turpen. It
has been noticed that larger firms, higher is the audit fees as they believe in the assumption
that the accountants may provide better quality of performance while performing audits.
Lack of concept detail makes the measurement of audit quality quite challenging. According
to the studies of Rahmina - “There are nine elements firms should implement to meet quality
control expectations. They include: independence, assignment of personnel, consultation,
supervision, employment, professional development, promotion, acceptance and sustainable
clients and inspection”. Thus, higher the Audit Fees, lower will be the Auditors’
Independence and higher the Earnings Management.
1.6.2 Non-audit Fees
Since auditors are likely to jeopardize their independence in exchange for higher profits, non-
audit fees are a major source of concern. It is believed that to maintain their audit clients,
auditors may attempt to compromise their independence. These fees are obtained by
performing certain services known as non-audit services. A few examples of Non-audit
services are book keeping, internal audit services, actuarial services, and financial design
services among the rest. Auditors’ Independence is negatively affected by the increase in
NASs as per the studies conducted. Thus, the higher the Non-Audit Fees, the lower will be
the Auditors’ Independence and the higher the Earnings Management.
1.8 Research Question

“How does the Auditor’s Independence affect Earnings Management?”
CHAPTER 2: NATURE OF THE PROBLEM

The sole body of research supporting the idea that auditor independence has an impact on
“earnings management is the literature on the relationship between corporate governance
(C.G.) and earnings management”. "Independence of the Audit Committee," one of the
numerous corporate governance variables, has only been considered in almost all these
studies to gauge the independence of auditors. The published studies look at how corporate
governance practices affect earnings management rather than just how auditor independence
affects it.
Numerous studies have demonstrated that although "Audit Committee Independence" is one
of the variables that gauge auditor independence and is necessary to evaluate the effect of
auditor independence on earnings management, other variables such as audit fees, and
availability of Important indicators of auditor independence include audit tenure and non-
audit services. Hardly any research has examined the connection between auditor
independence and earnings management while accounting for all recognized markers of
auditor independence.
Based on the research that is currently accessible, almost all researchers have measured
earnings management using the “modified Jones' Model of Discretionary Accruals”, which
was created by Dr. Patricia M. Dechow (Dechow, Sloan, & Sweeney, 1995). “The Modified
Jones model”, while widely accepted, fails to take into consideration variations in operating
cash flow, which have been demonstrated to affect earnings management. To bridge this
measurement gap, the Kasznik Model of Measuring Discretionary Accruals (Kasznik, 1999)
was employed in the current investigation.
According to the literature analysis, most research on the connection between auditor
independence and earnings manipulation practices has been mostly practiced in South
American and Continental European nations. The relevant domain has conducted very little
research in India, especially in the state of West Bengal. The need to undertake a study
specifically for an Indian state stems from the disparities in finance, law, and economy
between India and other countries.
CHAPTER 3: LITERATURE REVIEW
1. Dr. Sun et.al, 2010:
The authors have defined Earnings Management as the practice of employing accounting
strategies to consciously influence a company's earnings to achieve a predetermined goal.
2. Gao et.al, 2016:
Earnings show a company's profit, and this profit is a key factor in investors' decisions on
whether to invest in the business. A company's share prices typically decline when its profit
projections become less favorable, which makes it less desirable. In such a circumstance, the
management frequently feels under pressure to manipulate earnings to enhance the
attractiveness of its financial statements.
3. Ghazali et.al, 2015:
This strategy, known as earnings management, might cause some facts to be misrepresented
in the financial statements. Studies conducted by Dr. Gazhani have defined Earnings
Management as the phenomenon of intentionally altering the firm’s actual financial
performance to portray a false company position to the stakeholders.
4. Rakshit et.al, 2020:
The works of Dr. Debdas Rakshit have defined Earnings Management as a mechanism for
smoothing out the fluctuations in the financial operations of a company. The authors believe
that one of the key elements in maintaining the integrity of the company is the independence
of the audit committee, which will give shareholders the best protection possible.
5. Needles et.al, 2019:

A research paper by Needles defined Earnings Management as a tool of artificially inflating
or deflating the earnings of a company by the management by manipulating mostly noncash
transactions.
6. Andrew, 2018:
Discretionary Accruals refer to that part of the total accruals of a company that is fully under
the control of the management and hence has a high chance of manipulation by the same. As
Earnings Management is usually done by the management by smoothing out certain income
and expenses over the period, Discretionary accruals are the best proxy for it as it is subjected
to maximum manipulations by the management itself. The fact that discretionary Accruals
reveal Earnings Management is proved in the studies of Jackson B Andrew. This noteworthy
study has stated that Discretionary Accruals are the most pertinent measure of earnings
Management because they are the most likely to be manipulated by the management.
7. Dechow et.al, 1995:
It is one of the earliest studies about Earnings Management proposed Discretionary Accruals
are a function of revenue growth and tangible Assets. Though the earlier model was well
accepted, certain revisions to the same were proposed in the year 1995 by Dr. Dechow who
came up with a modified version of the “Jones Model”. Under this model, Discretionary
Accruals were considered as a function of Revenue growth, tangible Assets as well as change
in Receivables over the year. The concerned model is the most cited model when it comes to
the studies related to earnings Management.
8. S.P.Kothari et.al, 2002:
Kothari, leone, and Weasley framed a subsequent model of Earnings management whereby
they added the factor “Return on Assets” (ROA) to the existing “Modified Jones model” of
Dechow. The Kothari model makes an important assumption—one that may not always be
true—that discretionary accruals are linearly related to a firm's success. Additionally, the
model makes the unavoidable assumption that accruals are regularly distributed. Research has
indicated that the Kothari model's ability to predict earnings management is limited. For
instance, it has been discovered that the model may not reliably identify manipulation in the
presence of real actions that increase income but are not included in the model.
9. Raghuveer Kaur et.al, 2014:
This study demonstrates that scams are a hindrance to the entire Accounting fraternity and
numerous research have proved that level Earnings Management has multiplied to result in
fraud which shook the entire ethical foundation of Auditing. In a handful of cases the
Auditors were at the roots and their compromised independence prompted them to be
unethical. In such a scenario the research aims towards a more ethical auditing scenario for a
more reliable business world.
10. Healey et.al, 1998:
The auditors are in charge of making sure that a business's financial records are correct and
dependable. The company's or other parties' interests could, however, influence an auditor's
decision-making when their independence is weakened, which could result in financial
statements being fabricated. A business may deceive investors and stakeholders by inflating
its financial reports to meet or exceed projections. This tactic is known as "earnings
management." The role of auditors is critical in identifying and preventing “earnings
management”. However, if their independence is threatened, they might be less likely to
recognize and report such manipulations.
11. Kasznik, 1999:
The Kasznik model takes into account the “Change in Cash flow from Operations” as yet
another factor alongside the factors mentioned in the “Modified Jones model”,1995 to detect
Discretionary Accruals. The Kasznik model’s consideration of a change in Operating Cash
Flow is a fair enough reason for considering it a better model than any other previous models
of measuring Discretionary Accruals as researchers have proved that that changes in
operating cash flows predict discretionary accruals more accurately than changes in net
income. Besides studies have shown that hat operating cash flow fluctuations should be taken
into account when calculating discretionary accruals.
12. Chatterjee et.al, 2020:
The studies of Dr. Debdas Rakshit and Dr. Rajarshri Chatterjee have proved that the model of
Discretionary Accruals as propounded by R. Kasznik is stronger compared to the other
models. The “audit committee's independence” has been regarded as the only proxy for the
independence of the auditors in practically all of the literature on the impact of corporate
governance on earnings management. According to Dr. Debdas Rakshit's writings, the
independence of the audit committee and earnings management have a bad relationship. The
authors believe that one of the key elements in maintaining the integrity of the company is the
independence of the audit committee, which will give shareholders the best protection
possible.
13. Bartlett, 1995:
Dr. Bartlett offers a significant definition of auditor independence, stating that it is the
objective mindset displayed by auditors while making decisions about audit work and
financial statement reporting. The ability of the auditors to reach conclusions about the audit
that are objective and free from pressure or coercion is known as their independence.
14. Pandit et.al, 2021:
This study shows that according to the “Independence Standard Board” (2000), an auditor's
independence is their freedom from demands and other factors that might undermine their
ability to make objective audit decisions or could be fairly expected to do so. Despite so
much importance of the Auditors’ Independence, there exist certain threats to Auditor
independence, putting the auditor in an ethical dilemma whether to compromise on his
independence and perform an unethical audit or to do client favoring audit.
15. Marques et.al, 2019:

In the quest to perceive the factors that affect Auditors’ independence, the studies conducted
by Ines Sofia Marques are very important as they take into account the Auditors’ perception
to find out the what are the factors responsible for Auditors’ Independence.
16. SEC 2000:
According to this research, auditors are often criticized whenever there is a scam or fraud in
an organisation. Due to this, several rules and guidelines have been taken up for restricting
the services the auditor can provide to its client. This will result in lowering the degree of
“Non-Audit Services” (NAS) which will lead to a low degree of “Non-Audit Fees”. This
restriction binds the auditor to perform only the services typically and ethically expected of
him instead of fulfilling any of the other wishes of the client.
17. Sultan Saif, 2024:
This research deals with the “relationship between the Audit Committee's Independence and
Audit quality”. These two terms are said to have a positive relationship i.e. higher the
independence of the audit committee, “the higher will be the audit quality”. This is because,
if the committee that is meant for the redressal of the auditors in the organizations is
influenced and controlled by externals, the auditors automatically lose their independence and
submit reports are not ethically accurate.
18. Suseno, 2013:
According to research, audit fees are one of the primary drivers of audits itself. The time an
auditor spends performing an audit and the complexity of the client's accounting structu the
two key determinants of the fees an auditor will charge.
19. ALJAAID et.al, 2021:
According to ALJAAID, ABIDIN, and HASSAN, there is a good chance that an auditor will
be highly dependent on a client who pays them relatively higher audit fees if they report a
problem with the company's financial statements. They may also be afraid of losing their job.
This work shows that “Audit fees affect Auditor independence and hence audit quality” is
also consequently affected.
20. Abbott et.al, 2003:
Financial statements from a variety of businesses included in the population show that in
addition to auditing services, the same auditor also offers non-audit services to the client.
According to Dr. Abbot Parker's studies, auditor costs for non-audit services can occasionally
exceed audit fees. Due to the substantial non-audit payments received by the client in this
situation, the auditor may feel pressured to keep the client, which could drive the auditor to
compromise their independence and do client-friendly audits. Second, while non-auditing
services like tax consulting, payroll processing, and bookkeeping are required, audits are
typically performed once a year, this makes the Non Audit fees usually higher than Audit
fees.
21. Ramzan et.al, 2020:
This recent study shows that due to the potential conflict of interest created by providing
“non-audit services” to audit clients, auditor independence may be impacted. Consulting, tax
preparation, and other activities unrelated to the audit function are examples of non-audit
services. When an auditor performs non-audit services for an audit client, there is a chance
that the auditor won't be unbiased and independent and may be swayed by the client's
interests. This can cause the auditor to be reluctant to provide unfavorable information about
the client or to voice concerns that might jeopardize their relationship with the client.
Additionally, offering non-audit services to an audit customer may put the client in a
dependent financial position.
22. The Ministry of Corporate Affairs, India, 2013:
The requirement for audit firms to separately disclose their fees for audit and non-audit
services in their annual filings to the “Securities and Exchange Commission” (SEC) is one of
the factors contributing to the use of non-audit fees as a stand-in for non-audit services.
Therefore, non-audit fees have been utilized by researchers as a tool to gauge the volume of
non-audit services that an audit firm offers to its audit clients.
23. Oziegbe et.al, 2022:
Numerous studies have demonstrated that the “longer the audit tenure, the greater the risk of
the auditor losing their independence”. It is only normal that as the audit tenure progresses
over time, the auditor would become more familiar with the client and may not conduct the
audit with the necessary professional scepticism, losing its independence. According to David
Oziegbe's research, the independence of auditors is compromised, which lowers the audit
quality, unless auditors are required to rotate every three years.
24. Simunic, 1984:
Dr. Simunic's research has shown that if an auditor compromises on his independence while
auditing but continues to work for the same client in other capacities, the client may decide to
keep them because they are "less likely to resign or be sacked by clients for refusing to
compromise their principles, resulting in longer tenure for auditors". In a sense, longer audit
tenures are associated with higher non audit services. From all of these, it concludes that the
length of an audit and the independence of the auditors are negatively correlated.
25. Saeed et.al, 2022:
According to this research, the auditor's work is overseen by the auditors' committee, which
also makes sure the auditor is impartial, independent, and free from conflicts of interest. As a
result, maintaining the auditor's independence depends on the independence of the auditors'
committee. The auditor's capacity to conduct their work impartially and objectively may be
compromised if the auditors' committee is not independent.
26. Abulaila et.al, 2019:

According to Dr. Abulaila's research, the number of independent directors on the board has a
beneficial impact on the independence of the auditors, which indubitably improves and
increases the openness of the financial statements.
27. Kumar et.al, 2013:
The auditors' committee may not be able to adequately oversee and question the auditor's
work if it is strongly influenced by the company's management or board of directors. In such
circumstances, the auditor can feel under pressure to furnish the company with favorable
reports rather than offer a neutral evaluation of the company's financial accounts. In almost
all of the studies, the number of independent directors present on the board has been
considered more in measuring Audit committee Independence.
28. Defond et.al, 2014:
The management of earnings is significantly impacted by auditor independence. Due to a

conflict of interest between the auditor and the client brought on by a lack of independence,
the auditor may fail to find and disclose major misstatements in the financial statements. Due
to this, earnings may be overstated or understated, which may significantly affect investors'
choices.
29. Guan, 2014:
In addition, if the auditor is not independent, the business might use sleight-of-hand or
inventive accounting methods, which could result in the manipulation of financial data to
obtain, desired financial results. This might entail, among other things, early revenue
booking, expense deferral, or the use of inflated projections.
30. Krishnan et.al, 2012:
Maintaining the auditors' independence throughout the audit process is crucial. This involves
both outward and internal independence. Auditors must provide a professional image of
independence, and any potential conflicts of interest must be avoided. The corporation or its
management shouldn't have any improper influence over the auditors.
31. Zhang et.al, 2015:
Making sure auditors maintain their independence throughout the audit process is crucial.
This also encompasses seeming and actual independence. Auditors should be regarded as
independent in appearance, and any potential conflicts of interest should be avoided. Auditors
should be unaffected by the company or its management in any way.
32. Lennox, 2000:
This study gives a brief idea about the “effect of the Auditor’s Independence on Earnings
Management”. One important factor taken from this study is that it states that it is evident
that of the few studies conducted most of them are conducted outside India. There is hardly
any study in the Indian context.
33. Ahmad et.al, 2006:
This study shows the foundation of the auditing profession is auditor independence.
Additionally, according to the “Independence Standard Board” (2000), an auditor's
independence is their freedom from demands and other factors that might undermine their
ability to make objective audit decisions or could be fairly expected to do so. Researches by
Prof. Ayob Che Ahamad has shown that substantial amount of non-audit services provided by
the auditor to the client makes the auditor lose his independence in the sense that the
management which has got more bargaining power might tempt the auditors with the Non
Audit fees to not report any discretionary accruals which are exclusively under the purview of
the management and hence overlook the Earnings Management practices.
34. Boiral et.al, 2014:

The works of Dr Dogui show that Audit fees affect Auditor independence and hence audit
quality is also consequently affected. The more the audit fees the more the chances of fraud
and unethical audit practice. It is a common belief among organizations that higher fees will
result in higher quality of work. Here by quality, the organizations mean that the Financial
reports can be published in such a manner that will be beneficial for them and by sacrificing
100% accuracy. This reduces the Auditors’ Independence who are given more fees for
following a path away from their auditing ethics and morals.
35. Carcello et.al, 2003:
The studies conducted by Joseph V. Carcello have proved that Audit committee Independence
when measured in terms of number of independent directors has a positive impact on
disclosures in financial statements. The work has shown, that “the more the number of
independent directors, the more transparent is the disclosure”. Thus if the Audit committee is
independent then they will be able to detect Discretionary Accruals without any hesitation
and hence curb Earnings Management practices. This lead to the formulation of the
hypothesis: “Audit committee Independence represented by the percentage of Independent
Directors present in the Audit committee is indirectly related to Earnings Management”.
36. DOAN et.al, 2020:
This Vietnam evidence determines that when an auditor performs non-audit services for an
audit client, there is a chance that the auditor won't be unbiased and independent and may be
swayed by the client's interests. This can cause the auditor to be reluctant to provide
unfavorable information about the client or to voice concerns that might jeopardize their
relationship. Additionally, offering non-audit services to an audit customer may put the client
in a dependent financial position. The provision of non-audit services is usually measured by
the Non Audit Fees received by the Auditor by the client.
36. Jackson et.al, 2017:
The fact that discretionary Accruals reveal Earnings Management is proved in the studies of
Jackson. This noteworthy study has stated that Discretionary Accruals are the most pertinent
measure of earnings Management because they are the most likely to be manipulated by the
management. The validity of “Discretionary accruals as the measure of Earnings
Management” is also evident in the studies of Jackson.
CHAPTER 4: OBJECTIVES OF THE STUDY
1. To understand the Auditors' acknowledgment of the existence of Earnings Manipulation

Practices.
2. To quantitatively assess the “relationship between earnings management and each aspect
that affects auditors' independence”.
3. To compare the relationships between the metrics of “auditor independence and earnings
management” is conducted to determine the direction of these relationships during the study.
4. To ascertain the auditor's independence's ultimate effect on earnings management.

CHAPTER 5: RESEARCH METHODOLOGY
The research is based purely on primary data collected from a group of respondents who
are either auditors or relate to auditing to some extent. The respondents were asked three sets
of questions, in the first their details were asked, in the second section they were tested about
their understanding of Earnings management and in the third their responses were analyzed to
understand their opinion on the relationship between auditors' independence and earnings
management.
At first, the research proceeds with primary data through a questionnaire. We choose
Auditors (Chartered Accountants and Cost Accountants), Academicians teaching audit, and
CA and CMA Intermediate students because they are directly or indirectly related to the
Audit process. Among them, we first test their knowledge of Earnings Management. Only
those respondents have been chosen who have shown signs of understanding the concepts of
Earnings Management and Auditor’s Independence in the questionnaire. Taking their input
into account, we find out whether Earning Management is taking place and relate the factors
of Auditor’s Independence like Audit Fees and non-audit Services according to their
judgments.
5.1 Data and Sampling

5.1.1 Sample selection Method
The research proceeded with a questionnaire designed based on a Likert 5-point scale. The
respondents were chosen based on Random Sampling. They were asked regarding their
degree of agreeableness on one factor of Auditor’s independence with earnings Management.
It collects primary data collected from Chartered Accountants, Cost Accountants, CA inter-
students, CMA Inter Students, and Academicians engaged in teaching Audits. This is further
sub-divided into age groups namely 18-20 years, 21-25 years, 26-30 years, 31 years and
above.
A total of 386 responses were collected.
The Respondents were initially tested on their knowledge of Earnings Management, out of
386 respondents only 232 valid responses were selected.
Out of these responses, only those who had an idea of Auditor’s Independence were selected.
This resulted the total responses for analysis to be 158.
These 158 respondents have a clear understanding of Auditor’s Independence on Earnings
Management and thus will give a valid and positive results to the analysis. Their responses
regarding how the factors of the Auditor’s Independence affect Earnings management were
collected and analyzed using various analytical tools.
5.1.2 Sample Size

In this study, the data being analyzed in this paper is collected via Questionnaires spread
across various social media sites like WhatsApp, E-mail, Telegram, and LinkedIn across the
city of Kolkata.
Total number of responses: 386
The number of responses having a clear idea of Earnings Management: 232
The number of responses having a clear idea of both Earnings Management and Auditor’s
Independence: 158
Total number of responses selected for a fair and valid analysis: 152
Out of these 152 responses, it is further divided into 5 professional groups namely
Chartered Accountants: 64
Cost Accountants: 35
CA Inter-qualified students: 16
CMA Inter qualified students: 12
Academicians teaching Audit: 31
5.1.3 Data Collection Time

The questionnaire was created and circulated on the 10 th of February 2024 via various social
media sites and G-mail so that it could reach to a large number of people of the target groups.
The forms were closed on the 21st of March 2024 with a total count of respondents being 386.
5.1.4 Data Analysis Tools and Strategy

The data collected via Questionnaire will be analyzed using Column graphs and Pie charts.
Statistical tools like correlation, regression analysis, and other graphical methods will be used
to reach to a conclusion.
A reliability analysis has been conducted to check the internal validity and consistency of
the items used for each factor. For Conducting reliability statistics, SPSS version 23 has been
used. As per Nunnally (1978), a questionnaire for various factors is judged to be a reliable
measurement instrument, with Cronbach’s Alpha score above the standard value of 0.6, thus
validating that all the items fit perfectly in our questionnaire and support our proposed
research model.
The present research tries to see the reliability by conducting Cronbach’s Alpha.
Correlation and Regression analysis will be carried out using SPSS version 23 to test the
degree of relevance and dependence between the variables:
 Audit Fees and Earnings Management
 Non-Audit Fees and Earnings Management
This will help us understand whether these factors (Audit fees and non-audit fees) of
Auditor’s Independence have anything to do with Earnings Management according to the
people who have exposure in this area. If yes, then which of the two has a greater impact on
Earnings Management.
The graphical figures created using Excel will help to get a clear picture of the opinions of
various age groups coming from distinct professions of similar backgrounds. The level of
independence an auditor gets in various professions will also be highlighted.
5.1.3 Research Ethics

While conducting this research, it was ensured that the process adhered to the ethical
standards necessary to maintain the credibility and reliability of this study. The participants
undertaking the questionnaire were informed about the purpose of the study from a holistic
point of view to ensure there was no bias when answering the questions and their identity and
any other personal information collected has been kept confidential.
CHAPTER 6: ANALYSIS
The analysis proceeds with Descriptive Statistics regarding the opinion of each group of
respondents segregated age-wise. At the foremost, the research shows the method of
obtaining an adequate sample from the total responses.
After that Descriptive Statistics has been used to show how the respondents agree to the
degree to which Earnings Management (Dependent variable) is affected by the factors of
Auditors’ Independence (Audit Fees, Non-Audit Fees) which is the independent variable.
6.1 Graphical charts showing sample data

Derivation of the Sample used for Analysis showed using Pie Chart
Category of Responses
232
386
158
158
Total Respondents having Knowledge of Earnings Management

Total Respondents having Knowledge of Earnings Management and Auditors' Independence
Sample Selected for Study
Total Responses
6.1.2 Category-wise Responses (Based on Age)

40
35 34
30
26
25
20 17 18
15
11 10 11
10 9
6
5 4 4 3
1 2 2
0 0 0 0 0
0
CA
A
CM
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d
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s
Au
Pa
Pa
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ing
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Int
Int
ch
A
ea
CA
CM
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an
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ad
Ac
Age 18-21 Age: 22-25 Age: 26-30 Age: 31 and above
6.2 DESCRIPTIVE ANALYSIS

Analysis of the Responses of the different professions
1. Analysis of the Responses of the Chartered Accountants:
Introduction:
The Chartered Accountants (C.A.s) are one of the most sought-after respondent category as
they are the one responsible for conducting the majority of the audit procedures and auditing
in general. The responses of the CA.s have been shown graphically based on their age to have
an idea regarding the variation of opinion as the C.As mature in their profession.
Analysis 1:
Impact of Audit Fees on Earnings Management:
The CA.s were asked to rate on Likert Point Scale as to whether they believe that higher
Audit Fess tends to Higher Earnings Management. The questionnaire was designed in such a
manner where 5 would mean that they strongly agree to something and 1 mean they strongly
disagree. 3 means neutral and any score above that would mean they agree to it and score
below means they disagree with it. The results of the same has been shown through graph
no….
35
30
30
25
20 19
15
10
7
5 4
3
1
0 0
0
18-21 22-25 26-30 31 and above
Agree to Strongly Agree Neutral to Strongly Disagree
Fig .. Graph Showing Age wise responses of the candidates on the Research Question,
‘High Audit Fees lead to Higher Earnings Management Practices’
Inference from Fig :
From the above graph it is evident that almost all category of respondents have agreed that-
higher the Audit fees higher is the Earnings Management. The respondents of the category
18-21 does not show any result as there were no respondents of that age. It is simply because
of the fact that for becoming a CA normally it takes more than 21 years .
Most of the respondents of the age between 22 to 25 has either agreed or strongly agreed on
the fact that Audit fees and Earnings Management show a positive correlation between them.
3 out of 4 respondents (75%) have shown high degrees of agreeableness towards the positive
correlation of Audit fees and Earnings Management.
The third category of respondents comprising of 24 respondents also believe that Earnings
Management would be more if the Audit fees is tempting. 17 out 24 respondents have shown
positive responses.
The most mature category of respondents also showed that higher the Audit fees higher is the
Earnings Management. Rather a larger portion of this category (almost 80%) have shown
favourable response.
Agreeableness to Higher Audit Fees leads to
Higher Earnings Management
80% 75%
75%
18-21 22-25 26-30 31 and above
Analysis 2:
Impact of Non-Audit Fees on Earnings Management:
The CA.s were asked to rate on Likert Point Scale as to whether they believe that higher
Audit Fees tends to Higher Earnings Management. The questionnaire was designed in such a
manner where 5 would mean that they strongly agree to something and 1 mean they strongly
disagree. Basically 3 means neutral and any score above that would mean they agree to it and
score below means they disagree with it. The results of the same has been shown through
graph no….
25
22
20
17
15
12
10 9
5
3
1
0 0
0
18-21 22-25 26-30 31 and above
‘High Non-Audit Fees lead to Higher Earnings Management Practices’
higher the Non-Audit fees higher is the Earnings Management. The respondents of the
category 18-21 does not show any result as there were no respondents of that age. It is simply
because of the fact that for becoming a CA normally it takes more than 21 years .
3 out of 4 respondents (75%) have shown high degrees of agreeableness towards the positive
positive responses.
Earnings Management. 22 out of 34 respondents (almost 65%) have shown favorable
response.
Agreeableness to Higher Non-Audit Fees leads
to Higher Earnings Management
65%
75%
65%
18-21 22-25 26-30 31 and above
6.2.2 Analysis of the Responses of the Cost Accountants:
Introduction:
The Cost Accountants have useful knowledge and insights in working with and
understanding financial processes of organisations. They are the ones who help in pin-
pointing materiality materiality in the fianacial statements. The knowledge and expertise that
they carry can help assess areas where auditors nmay be more prone to pressure or influence
from management. The Graph …. shows the opinion of the Cost Accountants on the impact
of Audit Fees on Earnings Management.
Analysis 3:
The Cost Accountants were asked to rate on Likert Point Scale as to whether they believe that
higher Audit Fess tends to Higher Earnings Management. The questionnaire was designed in
such a manner where 5 would mean that they strongly agree to something and 1 mean they
strongly disagree. Basically 3 means neutral and any score above that would mean they agree
to it and score below means they disagree with it. The results of the same has been shown
through graph no….
16
14
14
12
10
9
4
3 3
2 2
2
1 1
0
18-21 22-25 26-30 31 and above
higher the Audit fees higher is the Earnings Management.
3 out of 4 respondents of the category 18-21 showed positive results by agreeing to the fact
that Audit fees does influence Earnings Management and there is a direct relationship
between them.
2 out of 3 respondents have shown high degrees of agreeableness towards the positive
positive responses.
Earnings Management. Rather a larger portion of this category (81%) have shown favourable
response.

82% 75%
66%
81%
18-21 22-25 26-30 31 and above
Analysis 4:

The Cost Accountants were asked to rate on Likert Point Scale as to whether they believe that
higher Non-Audit Fees tends to Higher Earnings Management. The questionnaire was
designed in such a manner where 5 would mean that they strongly agree to something and 1
mean they strongly disagree. Basically 3 means neutral and any score above that would mean
they agree to it and score below means they disagree with it. The results of the same has been
shown through graph no….
16
14
14
12
10
9
4
3 3
2 2
2
1 1
0
18-21 22-25 26-30 31 and above
between them.
positive responses.
Earnings Management. Rather a larger portion of this category (81%) have shown favourable
response.

82% 75%
66%
81%
18-21 22-25 26-30 31 and above

6.2.1 Analysis of the Responses of the CA Inter-Qualified Students:
Introduction:
The CA inter-qualified students consist of the new and young minds in the area of Auditing
and finance with modern opinions. Such students are not completely a CA but have been
working in Audit Firms with various clients for 3 or 2 years as per the compulsory article
ship period mentioned by the ICAI. These respondents can give an idea about the current
scenario in new startup audit firms as they experience the same and learn from their
expertised seniors. Graph …. shows the opinion of the CA inter-qualified students on the
impact of Audit fees on Earnings Management.
Analysis 5:
The CA inter-qualified students were asked to rate on Likert Point Scale as to whether they
believe that higher Audit Fess tends to Higher Earnings Management. The questionnaire was
0
7
6
6
4
4
3
3
2
2
1
1
0 0 0
0
18-21 22-25 26-30 31 and above
Inference from Fig:
between them.
Majority of the respondents of the age between 22 to 25 has either agreed or strongly agreed
on the fact that Audit fees and Earnings Management show a positive correlation between
them. 4 out of 6 respondents have shown high degrees of agreeableness towards the positive
The third category of respondents comprises of 1 respondent who believes that Earnings
Management would be more if the Audit fees is tempting.
The CA inter qualified students usually qualify all the rounds and become a practicing
Chartered Accountant by the age of 31 and above. Due to this, there are no respondents in
this category.
66%
100%
66%
18-21 22-25 26-30 31 and above
Analysis 6:
The CA inter-qualified students were asked to rate on Likert Point Scale as to whether they
believe that higher Non-Audit Fees tends to Higher Earnings Management. The questionnaire
was designed in such a manner where 5 would mean that they strongly agree to something
and 1 mean they strongly disagree. Basically 3 means neutral and any score above that would
mean they agree to it and score below means they disagree with it. The results of the same
has been shown through graph no….
8
7
7
5
5
2
2
1 1
1
0 0 0
0
18-21 22-25 26-30 31 and above
Inference from Fig:
between them.
The third category of respondents comprises of 1 respondent who believes that Earnings
Management would be more if the Audit fees is tempting.
The CA inter qualified students usually qualify all the rounds and become a practicing
Chartered Accountant by the age of 31 and above. Due to this, there are no respondents in
this category.
77%
100%
83%
18-21 22-25 26-30 31 and above
6.2.1 Analysis of the Responses of the CMA Inter Qualified Students:
Introduction:
The CMA inter-qualified students are very similar to that of the CA inter qualified students.
They too get hands-on training on various fields like Auditing, Finance, Taxation from
knowledgeable Cost Accountants or Chartered Accountants. These respondents can give an
idea about the current scenario in new startup audit firms as they experience the same and
learn from their expertised seniors.
Analysis 7:

The CMA inter-qualified students were asked to rate on Likert Point Scale as to whether they
10
9
9
3
2
2
1
1
0 0 0 0 0
0
18-21 22-25 26-30 31 and above
Inference from Fig:
between them.
All of the respondents of the age between 22 to 25 has either agreed or strongly agreed on the
fact that Audit fees and Earnings Management show a positive correlation between them.
Both the 2 respondents have shown high degrees of agreeableness towards the positive
There were no responses in the third category of age i.e. 26-30.
The CMA inter qualified students usually qualify all the rounds and become a practicing Cost
Accountant by the age of 31 and above. Due to this, there are no respondents in this category.

90%
100%
18-21 22-25 26-30 31 and above
Analysis 8:
The CMA inter-qualified students were asked to rate on Likert Point Scale as to whether they
9
8
8
3
2 2
2
1
0 0 0 0 0
0
18-21 22-25 26-30 31 and above
Inference from Fig:
between them.
There are no respondents in the third category of age i.e. 26-30.
The CMA inter qualified students usually qualify all the rounds and become a practicing Cost
Accountant by the age of 31 and above. Due to this, there are no respondents in this category.
80%
100%
18-21 22-25 26-30 31 and above
6.2.1 Analysis of the Responses of the Academicians Teaching Audit:
Introduction:
The Academicians teaching Audit specializes in having deep knowledge of audit theories,
practices and methodologies. Such academicians also conduct several Research works on
their specific field i.e. the field of audit with Auditor’s Independence being a major topic.
These research works and the case studies they go through make academicians specializing in
audit critically analyze the current Auditing scenario and detect the independence of auditors
and the factors affecting them.
Analysis 9:
The Academicians teaching Audit were asked to rate on Likert Point Scale as to whether they
18 17
16
14
12
10
10
4
2
2 1 1
0 0 0
0
18-21 22-25 26-30 31 and above
Inference from Fig:
The respondents of the category 18-21 does not show any result as there were no respondents
of that age. It is simply because of the fact that for becoming an Academician, normally it
takes more than 21 years .
positive responses.
Earnings Management. Rather a larger portion of this category (almost 95%) have shown
favourable response.

95%
100%
90%
18-21 22-25 26-30 31 and above
Analysis 10:

The Academicians teaching Audit were asked to rate on Likert Point Scale as to whether they
18
16
16
14
12
10 9
4
2 2 2
2
0 0 0
0
18-21 22-25 26-30 31 and above
Inference from Fig:
higher the Non-Audit fees higher is the Earnings Management.
The respondents of the category 18-21 does not show any result as there were no respondents
of that age. It is simply because in order to become an Academician, normally it takes more
than 21 years .
positive responses.
Earnings Management. 16 out of 18 respondents (almost 90%) have shown favorable
response.

90%
100%
81%
18-21 22-25 26-30 31 and above

INFERENTIAL ANALYSIS
Reliability Analysis:
A reliability analysis has been conducted to check the internal validity and consistency of the
items used for each factor. For Conducting reliability statistics, SPS version 23 has been
used. As per Nunnally (1978), a questionnaire for various factors is judged to well a reliable
measurement instrument, with Cronbach’s Alpha score above the standard value of 0.6, thus
validating that all the items fit perfectly in our questionnaire and support our proposed
research model.
The present research tries to see the reliability by conducting Cronbach’s Alpha. The results
were shown afterward.
The reliability analysis has been done using the scores of CRONBACH’s ALPHA. It is
considered that a score of more than 0.6 is considered reliable.
Cronbach’s Alpha Cronbach.’s Alpha based on Number of items

standardised items
0.847 0.847 16
Reliability Statistics based for All variables (n=16) Source: Primary Data
Cronbach’s Alpha shows a score of 0.847 for the reliability measurement and hence the
data is considered Reliable.
Regression Analysis
Predictors: Audit Fees; Dependent Variable: Earnings Management
Model Rz R square Adjusted R Std error of

Square estimate
1 0.876a 0.717 0.713 0.6436
Coefficients
Model Un Standardised Standardise T Sig

Coefficients d Co-
efficients
1 B Std. Error 1.534 0.143
(Constant)
Pearson 0.378 1.193 0.381 6.826 0.000
Co relation
Sigma ( 2
tailed)
Inference:
To test the association between Auditors’ Independence and Earnings Management we

conducted a regression analysis on the factors of Auditors’ Independence on Earnings
Management. As it can be evidenced from the table the Sigma indicates that Audit fess has a
positive impact on Earnings Management as per the opinion of the respondents.
Regression Analysis
Predictors: Non Audit Services; Dependent Variable : Earnings Management
Model R R square Adjusted R Std error of

Square estimate
1 0.895a 0.724 0.707 0.57964
Coefficients
Model Un Standardised Standardise T Sig

Coefficients d Co-
efficients
1 B Std. Error 1.534 0.143
(Constant)
Pearson 0.378 1.193 0.381 6.826 0.000
Co relation
Sigma (2
tailed)
Inference:
Non-Audit Fees and Earnings Management has shown a Positive and significant Impact.
Conclusion:
The inferential analysis has been done following the steps of data validation and then co-
relation regression analysis. The data validation has been done using Cronbach’s Alpha and
the score obtained is 0.847 which is higher than the standard value of 0.60. this proves that
the responses are valid. This has to be as only those respondents have been chosen in the
sample size who have got a basic understanding of Earnings Management and also of
Auditors’ Independence.
The second part of the analysis deals with establishing a relation between Audit fees and
Earnings Management and for that a regression analysis has been conducted. The sigma
values show a positive correlation between the two factors.
Similar in the case of Non Audit fees there is also a positive corelation . However the degree
is greater in Audit fees which proves that Audit fees has a greater impact than non audit fees.
CHAPTER 7: FINDINGS AND OBSERVATIONS
Higher the Audit Fees Higher the Earnings Management
100% 95%
90%
90% 85%
80% 75%
70% 65%
60%
50%
40% 35%
30% 25%
20% 15%
10%
10% 5%
0%
CA
A
CM
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s
s
Au
Pa
Pa
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ing
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Int
Int
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ea
A
CA
CM
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Agree or Strongly Agree Neutral to Strongly Disagree

Higher the Non-Audit Fees Higher is the Earnings Management
100%
90%
90% 85%
80%
80% 75%
70% 65%
60%
50%
40% 35%
30% 25%
20%
20% 15%
10%
10%
0%
CA
A
CM
d
d
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dit
se
s
s
Au
Pa
Pa
er
ing
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Int
Int
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ea
A
CA
CM
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an
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ad
Ac
Agree or Strongly Agree Neutral to Strongly Disagree
Conclusion from the responses from CAs:
The most sought after category of respondents that is the Chartered accountants have opined
that Auditor’s independence and Earnings Management are negatively related to one another.
Starting from the most novice class of respondents to the most experienced, almost 75% of
them have opined on the same.
The CA.s believe that higher is the audit fees the more tempting it will be for the chartered
Accountants to conduct Audit of that particular firm. They might not want to lose that
opportunity and as result they might want to stay in the good books of the client. This may
call from the client some favour and the C.A.s might end up doing Client favouring audit.
This ultimately concludes into the auditor loosing his independence and hence might not
detect the earnings management practices of the client.
Non Audit service is another area of concern. Non Audit fees is measured by Non Audit fees,
the higher is the non audit fees, the higher are the services provided. If an auditor
continuously provides huge level of non Audit services, then there are high chances he might
want to be in the good books of the auditor so that he does not end up loosing the non audit
fees and hence provide client favouring audit. This might lead to less detection of earnings
Management.
Conclusively we can say that Auditor’s Independence and earnings management are
negatively related.
Conclusion from the responses of Cost Accountants:
Cost and management accountants, the most sought-after group of respondents, have stated
that Earnings Management and Auditor Independence are antagonistic. Beginning from the
most amateur class of respondents to the most experienced, practically 75% of them have
thought on something similar. The CMAs believe that chartered accountants will be more
likely to conduct audits of a company if the audit fees are higher.
They might not have any desire to lose that open door and as result they should remain in the
great books of the client. This might call from the client a few blessing and the CM.A.s could
wind up doing Client leaning toward review. As a result, the auditor loses his independence
and may not be able to detect the client's earnings management strategies. Another area of
concern is the non-audit service. Non Review expenses is estimated by Non Review charges,
the higher is the non review expenses, the higher are the administrations given.
If an auditor consistently provides a high level of non-audit services, there is a good chance
that he wants to be in the auditor's good books to avoid losing the fees for non-audit services
and thus provide a favourable audit for the client. This could prompt less identification of
profit the executives. Indisputably we can say that Evaluator's Autonomy and profit the board
are adversely related.
Conclusion from the responses from CA inter passes students:
The CA inter students, have stated that Earnings Management and Auditor's independence
have a negative relationship. Nearly 75% of respondents, from the most novices to the most
experienced, have voiced the same opinion. The understudies accept that higher is the review
expenses the really enticing it will be for the sanctioned Bookkeepers to direct Review of that
specific firm.
They might not want to miss out on that opportunity, so they might want to keep the client's
trust. This might call from the client a few blessing and the understudies could wind up doing
Client leaning toward review. As a result, the auditor loses his independence and may not be
able to detect the client's earnings management strategies.
Conclusion from the responses of CMA inter passed students:
The CMA students have believed that Examiner's autonomy and Profit are adversely
connected with each other. Beginning from the most fledgling class of respondents to the
most experienced, practically 75% of them have thought on something very similar.
The understudies accept that higher is the review expenses the really enticing it will be for the
sanctioned Bookkeepers to direct Review of that specific firm. They might not want to miss
out on that opportunity, so they might want to keep the client's trust. This might call from the
client a few blessing and the understudies could wind up doing Client leaning toward review.
This eventually closes into the evaluator losing his freedom and subsequently probably won't
distinguish the income the executive’s practices of the client. Non Review administration is
one more area of concern. Non-audit fees are measured in terms of non-audit fees, and the
more non-audit fees there are, the more services are provided.
On the off chance that an examiner consistently gives colossal degree of non Review
administrations, there are high possibilities he should be in the great books of the evaluator so
he doesn't wind up losing the non review expenses and subsequently give client leaning
toward review. This could prompt less identification of profit the executives.
Indisputably we can say that Inspector's Freedom and income of the board are adversely
related.
Conclusion from the responses of Academicians teaching audit:
The prime of the respondents are the Academicians instructing Review. They have thought
that Examiner's freedom and Income The board are adversely connected with each other.
Beginning from the most fledgling class of respondents to the most experienced, practically
75% of them have thought on something very similar.
The professors believe that chartered accountants will be more likely to conduct audits of a
particular company if the audit fees are higher. They might not want to miss out on that
opportunity, so they might want to keep the client's trust. This might call from the client a
few blessing and the teachers could wind up doing Client leaning toward review. This
eventually finishes up into the inspector loosing his freedom and thus probably won't
distinguish the income the board practices of the client.
Non Review administration is one more area of concern. Non-audit fees are measured in
terms of non-audit fees, and the more non-audit fees there are, the more services are
provided. If an auditor consistently provides a high level of non-audit services, there is a
good chance that he wants to be in the auditor's good books to avoid losing the fees for non-
audit services and thus provide a favourable audit for the client.
This could prompt less identification of profit The executives. Indisputably we can say that
Inspector's Freedom and income the board are adversely related.
CHAPTER 8: RECOMMENDATIONS
 The project in its entirety is based on Primary Data on the opinion of the respondents.
It is obvious that the recommendations would be based on their opinion rather than
the filtered opinion of the author. In this background, the very first thing that the
project recommends is having a proper guideline regarding Auditors’ Independence.
 Audit Fees is primarily based on the quantum of audit work done ethically and should
not be based on the tenure of relationship between the auditor and the client.
 Though The Companies Act, 2013 has got certain regulations regarding the provision
of Non-audit services by the auditor to the client, there must be a cease to the
consultancy services provided by the auditor.
 Earnings Management is done deliberately. It is the management which does the same
to hide certain short comings or the other way round, it is mainly done to set false
work standards by the management which sometimes become unattainable by the
peers. It must be understood that Earnings Management will lead to short term gains
but in the end it is the company’s value which is going to wash off once these
practices are caught. This is where lies the need and importance of ethical accounting
and auditing both.
 The project has revealed that ethics have become a dazzling narrative that are made to
be broken or are forced to follow. If indeed the importance of ethics needs to be
glorified, it must come from within and not forced upon. For this incorporating
spirituality in business is of absolute importance.
 Spirituality will help understand with better clarity the need for ethics rather than the
application of it. To begin with if the company is based on values, it won’t at the very
first go pressurize its management to inflate earnings to show a cosmetic position of
the company. If the management is not pressurized, then it would prepare accounts as
it is. If the accounts are prepared as it is, then it does not leave the auditor any room to
detect or omit Earnings Management practices as the earnings are not manipulated at
all. If the auditor is not required to do any falsification, then the question of
compromising on his independence does not even arise.
CHAPTER 9: CONCLUSION
The entire study can be concluded by fulfilling the objectives of the study. After a thorough
analysis, we can conclude:
 The very fact that the auditors who have an understanding of Earnings Management
have acknowledged the effect of Auditor’s Independence on Earnings Management
proves that they in their lifetime have gone through such practices and hence the
auditors are directly acknowledging the existence of earnings manipulation practices.
 A host of literature reviews have proved that Audit fees and Auditors’ Independence
are negatively related. The more the audit fees the more the inclination of the Auditor
towards the client and his Independence is compromised. The research shows that the
more the audit fees the more the chances of earnings management. This is because the
more the Audit fees the higher the chances of the Auditor losing its independence and
hence they will be less likely to detect the Earnings Management.
 When it comes to the provision of Non-Audit Services as represented by Audit fees, it

also shows a positive impact on Earnings Management. The reason as said by the
respondents is that Non-Audit fees are related to the provision of Non-Audit Services.
The more the Non-Audit Services are provided by the auditor they will get attached to
the client and hence their independence will be compromised and they will detect the
discretionary accruals less. The less they detect the discretionary accruals and find
faults the more will be the Earnings management.
 Thus, we can say from the study that Auditors’ independence is Negatively related to
Earnings Management.
CHAPTER 10: LIMITATIONS OF THE STUDY
Like every other research study, this study also has its limitations. Despite collecting and
analyzing the primary and secondary data thoroughly, there are a few limitations that can be
overcome with the help of further studies These limitations are:
 Resource Constraints: Shortage of time and monetary resources have hampered the
research project to some extent. The Impact of Auditors’ Independence on Earnings
Management is a vast topic and has various factors and to analyze them thoroughly,
one needs to invest time and money to study the subject.
 Sample size: Even though the total candidates were 386, the valid sample size
selected for this research study to get justified and valid conclusions is 158
candidates, focusing mainly on the city of Kolkata, West Bengal. This is a very small
sample to be able to draw certain conclusions Therefore, the researchers should aim
at increasing the sample size and understanding the opinions of a larger group of
people. The sample size is adequate but only 55% of the total responses.
 Data Unreliability: The primary data which was collected from around 386
respondents were cut down to 158. Even after the thorough selection, we cannot be
sure if the experienced 158 individuals have answered the questions about their work
experience with honesty and efficiency. The study was conducted based on Auditors’
opinion and hence it can be biased as it’s a natural impulse for human to not reveal
their own short comings.
 Sample Unawareness: Out of 368 respondents only 158 were aware of the concepts
of Earnings Management and Auditors’ Independence which resulted in excluding a
large chunk of the respondents from the analysis. This shows that either people are
hesitant to give their true opinions or they tend to answer the questions casually
without knowing the true essence and meaning of the same.
CHAPTER 11: SCOPE OF FURTHER STUDY
 For further studies, it is recommended to study the Auditors on a larger scale. This
will help in understanding a large number of opinions and experiences regarding
Auditors’ Independence in various places of the country. This will also help in
contributing to the studies on The Impact of Auditors’ Independence on Earnings
Management in India, since such studies are very less.
 The use of Secondary Data can enhance the scope of the research to a new level as the
analysis will be based on the reports that has already been published and contain the
opinion of thousands of targeted respondents.
 Auditors’ Independence has various factors that affect Earnings Management like
Audit Fees, Non-Audit Fees, Audit Committee Independence, Audit Firm size, Audit
Tenure, client-firm relationships, and other Industrial relations. This study only
includes three of the factors while the others are not studied and analyzed. These
factors can further be studied to gain a clearer picture of the Auditing scenario and
perhaps might give contrasting conclusions.
CHAPTER 12: BIBLIOGRAPHY
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CHAPTER 13: ANNEXURE
Questionnaire used for survey:
Section 1: Personal Details
1. Name
2. E-Mail id
3. Age
 18-21
 22-25
 26-30
 31 & above
4. Profession
 Chartered Accountant
 Cost Accountant
 CA Intermediate Passed Student
 CMA Intermediate Passed Student
 Academicians teaching Audit
Section 2: Understanding of Earnings Management
5. Earnings Management is defined as a lower level of fraud. Do you agree?

 Strongly Disagree
 Disagree
 Neutral
 Agree
 Strongly Agree
6. Do you agree that Auditors are responsible for maintaining the true and fair view of
the company’s financial statements?
 Disagree
 Neutral
 Agree
 Strongly Agree
7. Do you agree to the fact that auditor's independence makes the auditor perform audit
with better sincerity?
 Disagree
 Neutral
 Agree
 Strongly Agree
8. Do you agree that Auditors are responsible for detecting Earnings Management?
 Disagree
 Neutral
 Agree
 Strongly Agree
9. Do you agree that management often manipulates non-cash earnings?
 Disagree
 Neutral
 Agree
 Strongly Agree
10. Do you agree that proper timing of non cash earnings should be reported in the
financial statement?
 Disagree
 Neutral
 Agree
 Strongly Agree
11. Do you agree that accruals that are under the control of the management are a
proxy for earnings management?
 Disagree
 Neutral
 Agree
 Strongly Agree
Section 3: Relationship of Earnings Management with Factors of Auditor's

Independence
12. Earnings Management can be considered to be legal. Do you agree?
 Disagree
 Neutral
 Agree
 Strongly Agree
13. To what extent do you agree that auditor's independence contributes to Earnings
Management?
 Disagree
 Neutral
 Agree
 Strongly Agree
14. Do you think high audit fees contribute to earnings management?
 Disagree
 Neutral
 Agree
 Strongly Agree
15. Do you think the provision of non-audit services by auditors increases the chances of
earnings management?
 Disagree
 Neutral
 Agree
 Strongly Agree
16. Do you think audit committee independence affects Earnings Management?
 Disagree
 Neutral
 Agree
 Strongly Agree
17. Do you think discretionary accruals is a measure of Earnings Management?
 Disagree
 Neutral
 Agree
 Strongly Agree
18. Do you agree that high audit fees effects the Auditor's independence positively?
 Disagree
 Neutral
 Agree
 Strongly Agree
19. Do you agree that provision of non-audit services effects auditor's independence
negatively?
 Disagree
 Neutral
 Agree
 Strongly Agree
20. Do you think Audit Committee independence is a factor for Auditor's

Independence?
 Disagree
 Neutral
 Agree
 Strongly Agree

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The Study of the Effect of ‘Auditor’s Independence’

PROJECT COMPLETION AND PLAGIARISM VERIFICATION CERTIFICATE

Student Name: Sinjini Chatterjee

The dissertation may be considered for submission.

Name of the Supervisor: Dr. Soma Nath

Name: Sinjini Chatterjee

Address: 111, Bangur Park, Rishra, Hooghly, 712248

I would like to express my gratitude to my supervisor, Dr. Soma Nath. Without

According to the literature now in publication, earnings management is a method

1.1 Meaning of Earnings Management (EM)

Earnings Management is the “strategic manipulation of the financial statements” of a

To manipulate Accounting estimates, companies usually adjust depreciation schedules to to

1.3 How to measure and detect Earnings Management

1.4 Earnings Management detection models

1.5 Meaning of Auditors’ Independence

“Independence” is a major challenge in the auditing profession. Audit independence is “the

1.6 Factors affecting Auditors’ Independence

1.6.1 Audit Fees

1.8 Research Question

CHAPTER 2: NATURE OF THE PROBLEM

1. Dr. Sun et.al, 2010:

2. Gao et.al, 2016:

3. Ghazali et.al, 2015:

4. Rakshit et.al, 2020:

5. Needles et.al, 2019:

7. Dechow et.al, 1995:

8. S.P.Kothari et.al, 2002:

9. Raghuveer Kaur et.al, 2014:

10. Healey et.al, 1998:

11. Kasznik, 1999:

12. Chatterjee et.al, 2020:

13. Bartlett, 1995:

14. Pandit et.al, 2021:

15. Marques et.al, 2019:

16. SEC 2000:

17. Sultan Saif, 2024:

18. Suseno, 2013:

19. ALJAAID et.al, 2021:

20. Abbott et.al, 2003:

21. Ramzan et.al, 2020:

22. The Ministry of Corporate Affairs, India, 2013:

23. Oziegbe et.al, 2022:

24. Simunic, 1984:

25. Saeed et.al, 2022:

26. Abulaila et.al, 2019:

27. Kumar et.al, 2013:

28. Defond et.al, 2014:

The management of earnings is significantly impacted by auditor independence. Due to a

29. Guan, 2014:

30. Krishnan et.al, 2012:

31. Zhang et.al, 2015:

32. Lennox, 2000:

33. Ahmad et.al, 2006:

34. Boiral et.al, 2014:

35. Carcello et.al, 2003:

36. DOAN et.al, 2020:

36. Jackson et.al, 2017:

1. To understand the Auditors' acknowledgment of the existence of Earnings Manipulation

4. To ascertain the auditor's independence's ultimate effect on earnings management.

5.1 Data and Sampling

5.1.2 Sample Size

5.1.3 Data Collection Time

5.1.4 Data Analysis Tools and Strategy