Cosmetic Earnings Management and Auditor Choice - An Empirical Analysis of German Private Firms

This study uses Benford's law on the frequency distribution of digits in empirical data in order to investigate whether German private firms exercise cosmetic earnings management. Cosmetic earnings management is the firms' tendency to do small roundings of reported net income in order to influence the perception of these figures by the financial statement users. Furthermore, this study examines whether the auditor choice (Big4 vs. non-Big4 auditor) has an impact on cosmetic earnings management. The results initially indicate that German private firms exercise cosmetic earnings management and that Big4 auditors mitigate such behavior. In the age of digitalization, this study demonstrates the importance of digital data analyses in research and practice.