This paper applies the pooled cross-sectional distribution approach to testify whether Small and Medium Enterprises (SMEs) perform earnings management from 1997 to 2003. The study finds that as the SMEs incurred the minor loss, the earnings was manipulated to slight positive earnings for deficit avoidance and failure embarrassment. This leaping zero earnings thresholds of earnings management behavior was not affected by industry characteristics. Regarding the relationship between the earnings management and audit quality, chi-square tests are used. The goal of earnings management crossing the zero earnings thresholds triggered the intention of audit service prepared by the low audit quality Certified Public Accountants (CPAs).
Key words: Small business accounting, earnings management, audit quality.
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