Abstract
Financial Risk Ratios and Earnings Management: Reducing Uncertainties in Shariah-compliant Companies
Highlights
Islamic scholars issue various rulings that make Shariah principles compatible with the current business needs
The present study investigates the relationships among risk of financial distress (z-score), leverage, and free cash flows in earnings management in Shariah-compliant companies to address the issues of earnings manipulation in Shariah-compliant companies
return on assets (ROA) was calculated as revenue/total assets, and net profit for revenue was calculated as net profit/revenue
Summary
Islamic scholars issue various rulings that make Shariah principles compatible with the current business needs. Shariah principles become a common condition in business transactions because they provide an overview and appreciation of full compliance with Islamic law (Falaika, 2002). Companies classified as Shariah-compliant are perceived as free from earnings manipulation, unethical transactions, and matters that have adverse effects on their investment activities. Engagement in these activities constitutes earnings manipulation. Earnings management may involve the manipulation of accounting records, intentional omission, or intentional misapplication of accounting principles. It is practiced by the management and often results in inaccurate and misleading financial reports (Aini, Takiah, Hamid, & Jenny, 2006). Earnings management is related to low financial reporting quality (i.e., intentional misstatement or omission of amounts) or disclosures in financial statements to deceive financial statement users (MIA, 2002)
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