Qualitative audit materiality and earnings management Joseph Legoria • Kevin D. Melendrez • J. Kenneth Reynolds Published online: 22 December 2012 Ó Springer Science+Business Media New York 2012 Abstract This study investigates auditors’ propensity to rely on quantitative materiality thresholds to the exclusion of qualitative materiality thresholds. Spe- cifically, we examine whether auditors are more likely to allow earnings manage- ment that is less than typical quantitative materiality thresholds but that nonetheless is qualitatively material. We use changes in tax expense as a proxy for earnings management. Our results indicate that companies with pre-managed earnings that would have missed the consensus analyst forecast are more likely to decrease their tax expense when the magnitude of the decrease is less than quantitative audit materiality thresholds. The results also indicate that firms are more likely to meet or beat the forecast when the amount of earnings management necessary to meet the analyst forecast is less than quantitative materiality. These results are consistent with auditors relying on quantitative materiality thresholds to the exclusion of qualitative materiality thresholds, i.e., the importance of meeting or beating the analyst forecast. Finally, we find that the ability to use tax expense reduction within quantitative materiality to meet or beat analysts’ consensus forecasts was signifi- cantly reduced by the SEC’s guidance on materiality in SAB-99 and by the passage of the Sarbanes–Oxley Act. J. Legoria Department of Accounting, Louisiana State University, Business Education Complex, Room 2800, Baton Rouge, LA 70803, USA e-mail: jlegoria@lsu.edu K. D. Melendrez Department of Accounting & IS, New Mexico State University, MSC 3DH, P.O. Box 30001, Las Cruces, NM 88003, USA e-mail: kdm@nmsu.edu J. K. Reynolds (&) Department of Accounting, Florida State University, 408 Rovetta Business Annex, 821 Academic Way, Tallahassee, FL 32306, USA e-mail: kreynolds3@cob.fsu.edu 123 Rev Account Stud (2013) 18:414–442 DOI 10.1007/s11142-012-9218-3