Abstract
Earnings management is a technique used by the management of an organization to intentionally manipulate a company's profits in such a way that the figures suit the agreed target and to generate financial results that provide an excessively optimistic view of the company's operation and finances. Due to poor performance, companies are using different strategies to exploit and provide a positive picture of financial and management profitability to look better in the eyes of shareholders and stakeholders, and this is generally referred to as earnings management. This study aims to examine the potential factors of pressure (financial stability and financial target), opportunity (board independence and audit committee), and arrogance (CEO duality and the CEO's picture) that cause earnings management in manufacturing companies in Malaysia. This study used organizations as the unit of analysis while manufacturing companies from the Public Listed Companies (PLCs) were chosen as the research sample. This study found that the proxies of board independence, audit committee, and CEO's picture have a positive relationship with earnings management. Adversely, the indicators of financial stability, financial target, and CEO duality have negative effects on the incidence of earnings management.
Highlights
The International Financial Reporting Standards (IFRS) embodies the highest quality accounting principles to improve financial reporting transparency and comparability (Wahyuningtyas, 2018) [45]
The findings reported by Supri et al [40] have shown that the dimension of constraint imposed by financial stability has a substantial positive impact on false financial statements that originated from earnings management
This study primarily focuses on the three elements from Crowe's pentagon theory as the underlying independent variables, namely pressure, opportunity, and arrogance (CEO duality and CEO’s picture)
Summary
The International Financial Reporting Standards (IFRS) embodies the highest quality accounting principles to improve financial reporting transparency and comparability (Wahyuningtyas, 2018) [45]. The investigation report by the Global Economic Crime and Fraud Survey conducted by [35], accounting or the financial statement of fraud score cases were ranked fifth in the global out of 13 main fraud cases. The results from both researches underline the serious impact of occupational fraud on organizations worldwide, thereby contributing to huge losses to the nation. The statistical report by ACFE in 2020 shows that Malaysia was ranked the fifth in the number of reported occupational fraud cases (19 out of 198 cases) in Asia-Pacific countries from January 2018 to September 2019. ACFE 2020 in Asia Pacific Edition has reported that financial statement fraud was ranked fifth in terms of occupational fraud cases (14%) with a median loss of $3,000,000
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