Auditor Industry Specialization, Free Cash Flow and Earning Management through Related Party Transactions

Based on existing empirical evidence, related-party transactions are widely used to manipulate earnings for financial reporting. This study investigates the effect of auditor industry specialization and free cash flows on earnings management through related-party transactions as well as the moderating effect of auditor industry specialization on the relationship between free cash flows and earnings management through related-party transactions. Sample of the study includes 136 listed firms in Tehran Stock Exchange during 2010 to 2014, and panel data regression has been used to test the hypotheses. The results show an inverse relationship between auditor industry specialization and earnings management through related-party transactions. On the other hand, there is a direct relationship between free cash flows and earnings management through related-party transactions. However, auditor industry specialization mitigates the direct relationship between free cash flow and earnings management through related-party transactions.