Earnings management in Brazilian credit unions

Saulo Cardoso Maia,Valéria Gama Fully Bressan,Wagner Moura Lamounier,Marcelo José Braga

doi:10.15728/bbr.2013.10.4.4

Abstract

This article investigates the practice of earnings management by Brazilian credit unions. The main focus is to check for the existence of earnings management to meet the capital adequacy requirements imposedby the Brazilian Central Bank, in line with the Basel Accords. The study also examines the occurrence of income smoothing across credit unions as well as earnings management to avoid reporting losses. The results indicate that the studied institutions do not manage their earnings towards regulatory capital adequacy, but they do engage in income smoothing and earnings management to avoid reporting losses.

Highlights

This article investigates the practice of earnings management by Brazilian credit unions
We expect a negative sign for RRE Inadequacy (RREInad), i.e., credit unions with greater concerns over failure to meet the capital adequacy requirements should have a lower level of provisions
4.1 CAPITAL MANAGEMENT we present the results of the tests of hypothesis H1: The Reference Equity (RRE) capital requirement is a factor motivating credit unions to engage in capital management

Summary

INTRODUCTION

Otwithstanding the relevance of earnings management for various types of Norganizations, the theme has particular importance in the case of financial institutions. It is necessary to evaluate other aspects that can cause these institutions to manage earnings One of these aspects is the need to satisfy capital adequacy requirements, as set forth in the Basel Accords and regulated in Brazil by the Central Bank. If the credit union does not offer competitive services, the members will be motivated to choose other financial institutions In this context, Hillier et al (2008) worked with the hypothesis that credit union managers use earnings management to respond to the need to satisfy the minimum capital requirement. We used data starting in 2001 to avoid possible distortions because of the start of implementation of CMN Resolution 2,682/1999, which took effect in March 2000, involving provisions for loan losses

ANALYSIS OF THE RESULTS

Findings

FINAL CONSIDERATIONS