Earnings management and the quality of non-financial reporting in a regulated context

Zouhaira Khelil-Rhouma,Mounira Hamed-Sidhom

doi:10.22495/cgsrv5i4p5

Zouhaira Khelil-Rhouma, Mounira Hamed-Sidhom

Open Access

https://doi.org/10.22495/cgsrv5i4p5

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Abstract

This research aims to study the relationship between firms’ accounting earning management practices and the quality of non-financial information disclosed in their annual reports. It is part of the ongoing debate on the reality or symbolism of corporate social responsibility (CSR) practices of companies and their transparency in this area (Buertey, Sun, Lee, & Hwang, 2019; Bozzolan, Fabrizi, Mallin, & Michelon, 2015; Prior, Surroca, & Tribo, 2008; Riahi-Belkaoui, 2003). We apply generalized least squares (GLS) regression on panel data obtained by a content analysis of annual reports of French SBF 120 listed firms, for the 2012 to 2015 period. The study confirms that upward earnings management led to the disclosure of more mandatory environmental information, but no effect is detected on their objectivity. Environmental disclosures contribute to drawing an image of regulatory compliance and divert stakeholders’ attention from the opportunistic discretionary intervention on financial reporting. Findings support the substitution relationship between financial and non-financial reporting (Francis, Nanda, & Olsson, 2008; Yip, Van Staden, & Cahan, 2011). However, we evidenced that firms that are practicing more aggressive earning management are providing less comprehensive mandatory environmental reporting. Our findings differ from previous studies in that we consider information disclosed in response to regulatory requirements. Also, we analyze not only the comprehensiveness of information but also their objectivity, and demonstrate that earnings management practices have different effects on these characteristics

Highlights

Firms’ corporate social responsibility (CSR) disclosures in their annual reports have been extensively studied in the last decades
Two indicators are used in our work to apprehend the quality of environmental reporting: the mandatory thematic coverage ratio as identified in our content analysis index, and the objectivity score of these environmental disclosures
Where: ERQL: Environmental reporting quality; Thematic coverage ratio (TCOV): Mandatory thematic coverage ratio; Disclosure objectivity score (DOBJ): Environmental disclosures’ objectivity score; DACA: Discretionary accruals aggressiveness; DACD: Discretionary accruals direction. It is introduced as two binary factors in the model: DACD and DACD with neutral discretionary accruals taken as the basis for both

Summary

Introduction

Firms’ corporate social responsibility (CSR) disclosures in their annual reports have been extensively studied in the last decades. Some authors claimed that non-financial information is used to conceal earnings management practices and to distract stakeholders’ attention (Almahrog, Marai, & Knežević, 2015; Prior, Surroca, & Tribo, 2008; Riahi-Belkaoui, 2003). There has been an international regulatory movement calling for extra-financial information disclosures to motivate firms to be more transparent in various areas, such as environment, governance, or social responsibilities. This trend to require CSR information is coming from regulators and from investors and many other stakeholders. Accounting earnings, one of the most commonly used measures to evaluate firm performance and forecast their potential growth, are an object of discretionary manipulation which questions their reliability and can mislead users

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