In mergers and acquisitions (M&A), acquirers have incentives to overstate earnings when they finance acquisitions using stock rather than cash. There are two reasons for this. First, the stock price will be over-inflated if investors are misled by the overstated earnings. An inflated stock price reduces the cost of acquiring the target when the acquisition is financed using equity. Second, even if the market is not misled, stock-financed acquirers would still inflate earnings. Stein (1989) argues that in an efficient market, investors rationally unravel earnings overstatements when they know that companies are motivated to overstate earnings. Anticipating this rational market response, the company’s optimal response is to inflate earnings. Therefore, regardless of whether the market is misled, stock-financed acquires would have incentives to inflate earnings before stock-financed acquisitions. We expect that audits help to detect and correct these earnings overstatements. Accordingly, we hypothesize that auditors require more downward adjustments to earnings prior to stockfinanced acquisitions. We test this hypothesis using a difference-in-differences research design. The dependent variable captures the downward adjustments to companies’ annual earnings during the course of the audit. The treatment sample comprises stock-financed acquirers (STOCK = 1), while the control sample comprises cash-financed acquirers (STOCK = 0). We code the fiscal year-end immediately before the acquisition announcement as the pre-period (BEFORE = 1) and the fiscal year-end immediately after the acquisition completion (or termination) date as the post-period (BEFORE = 0). The treatment variable is the interaction term, STOCK × BEFORE, which captures how downward audit adjustments change for stock-financed acquirers (STOCK = 1) compared with cash-financed acquirers (STOCK = 0), moving from the period before the M&A announcement (BEFORE = 1) to the period afterwards (BEFORE = 0). Consistent with the hypothesis, we find larger downward adjustments to earnings in the year before stock-financed acquisitions. This suggests that stock-financed acquirers attempt to overstate earnings and auditors help to correct these overstatements by requiring earnings to be adjusted downwards.