statement approach advocated in Collins and Hribar (2002) as

defined in Eq. (3):

TACit ¼ NIit _ CFOit ً3‫ق‬
All variables are defined in the Appendix.
As we focus on the magnitude rather than the direction of
earnings management, the absolute value of the discretionary
accruals (denoted as |DACit|) is used as the dependent variable
to formally test the proposed hypotheses. The magnitude of
unsigned discretionary accruals has been reported to be a good
measure of the extent to which accruals have been used to
manage earnings in the absence of specific directional
predictions (Francis et al., 1999). For the main tests, the absolute
value
of residuals from Eq. (1) (MJ|DACit|) forms our first measure of
earnings management, and the absolute value of residuals
from Eq. (2) (KOTHARI|DACit|) forms our second measure.
We later partition the earnings management sample into firms
with
positive (income-increasing) discretionary accruals versus those
with negative (income-decreasing) discretionary accruals.
The main tests are then reperformed to investigate whether the
external auditor variables are differentially related to positive
and negative discretionary accruals.
4.2. Measurement of audit partner tenure and audit firm tenure
To comprehensively capture the influence of audit engagement
partner tenure on aggressive earnings management practices,
we focus on both continuous (PARTENUREit) and
dichotomous (STENUREit) measures of partner tenure.
PARTENUREit
denotes the number of consecutive years an audit partner has
served as the signing partner on an engagement for client firm
i at time period t. For STENUREit, a client firm i in time period
t is scored 1 if the audit partner has been its engagement partner
for two years or less (Carey and Simnett, 2006), and 0
otherwise.
The number of consecutive years of audit partner tenure
(PARTENUREit) is interacted with auditor type (Big 4 versus
non-
Big 4) to determine whether partner-tenure effects are stronger
(weaker) for auditors from non-Big 4 (Big 4) firms. Short
partner tenure (STENUREit) is interacted with auditor
NAS/abnormal NAS fees to examine whether the link between
auditor
NAS/abnormal NAS fees and earnings management is
contingent on the length of audit partner tenure.
While the primary purpose of this study is to examine the effect
of audit partner tenure on audit quality, we also use audit
firm tenure (AUDTENUREit) as a control variable.
AUDTENUREit denotes the number of consecutive years an
incumbent audit
firm has served the client firm i at the end of time period t. For
continued auditor–client relationships, we compute
AUDTENUREit from 1990, the year that DatAnalysis started
providing this information.
4.3. Measurement of auditor NAS/abnormal NAS fees
Auditor NAS fees are captured using two continuous measures
commonly used in empirical research, namely
RNONAUDITit, which represents the ratio of NAS fees to total
fees paid to the audit firm by client firm i at the end of time
period t, and LNNASit, which represents the natural logarithm
transformation of auditor NAS fees of client firm i at the
end of time period t (Habib, 2012). Following scholars such as
Hossain (2013), we use the following ordinary least squares
(OLS) model linking actual fees with their determinants to
calculate abnormal NAS fees (ABNONAUDITit) for each year
separately.
The abnormal NAS fees are the residuals of the following
estimated model:
LNNASit ¼ b0 b1LNTAit b2BIG4it b3EQUITYit
b4MERGACQSit b5ROAit b6LEVit b7NEG ROAit
b8GROWTHit b9MKTBKit b10LNSUBSit b11FOROPSit
b12USLISTit b13XINDUSTRYit eit ً4‫ق‬
All variables are defined in the Appendix.
Following Hossain (2013), client firms without NAS fees during
the period are