The Impact of Real Earnings Management and the Moderating Role of Political Connections on Audit Fees: Evidence from Listed Companies in Vietnam

Abstract

This analysis extends conventional focus on accrual manipulations by investigating how real earnings management (REM) interacts with political connections (PC) to influence audit pricing. Set in Vietnam's person-centric economy, the research poses two central queries: how auditors perceive the nuanced threats posed by REM, and whether the structure of political ties undermines the effectiveness of the audits. We employ a fixed-effects framework on a balanced panel of 456 publicly listed non-financial firms, covering 2015 to 2024. Our findings show that auditors price REM risk, raising the audit fee. Yet PC, being inherently relational, weakens this pricing pressure: firms with ties negotiate substantial fee concessions, which noticeably attenuate the MEM-audit fee relation. Importantly, this absorption occurs predominantly within the non-Big 4 segment, while Big 4 firms price REM independently of any concessions warranted by political ties. The divergent pricing strategies yield the paper's most novel insight, confirming that larger audit networks price substantive risk regardless of relational context, thereby highlighting a key segmentation in Vietnam’s audit market. Taken together, the data paint a two-tier Ukrainian audit market: smaller firms tinker with fees only at the margin, while the global giants charge in a more independent and phased manner, amplifying the unevenness in independence and service standards across the economy. The findings underscore that high-quality audit brands remain a resilient bulwark for investors, still acting as externally enforced governance filters even when established political ties tend to erode normal market discipline. Notably, the combination of elevated real-earnings management, a politically connected board member, and a non-Big Four audit signals three independent and serious red flags in a company's financials. For regulators, these indicators crystallise the practical hurdles of institutional oversight when the overlap of compromised governance and sub-scale auditing firms lies within the same company.