Impact of Corporate Governance Attributes on Earnings Management Practices – Evidence from Bangladeshi Commercial Banks

PurposeThis paper aims to consider data for listed companies in Bahrain Bourse to determine whether companies practice earnings management (EM). Further, the effect of a set of corporate governance characteristics on EM practices is examined.Design/methodology/approachThe EM level was measured using discretionary accruals (DA) [calculated using the Modified Jones (1995) Model]. The study sample consisted of 20 companies listed during the period 2011-2015. Panel regression model was used to test the study hypotheses and achieve the study aims.FindingsEM is negatively correlated with board size, confirming that a larger board is associated with a lower level of EM practices. Further, board independence is positively correlated with EM, suggesting that the larger the number of independent directors, the higher the level of EM practices. In addition, internal ownership is positively related to EM, confirming that the higher level of internal ownership increases EM practices. CEO duality does not appear to have any effect on EM in Bahrain Bourse. More interestingly, the findings reveal that companies practice EM through income-increasing DA.Research limitations/implicationsFinancial data and data related to other corporate governance characteristics are lacking.Practical implicationsThe results of this study provide empirical support for the development of new regulations and amendments and necessary corrective decisions regarding the effectiveness of applying corporate governance code in Bahrain Bourse. More specifically, this study reveals an urgent need for new amendments to restrict EM practices in Bahrain Bourse.Originality/valueThis study enriches the EM literature by covering Bahrain as an Asian country, which has not been sufficiently examined in relation to this topic. Further, this study provides a clear picture of the level of EM practices in Bahrain Bourse to multiple parties.

Objective - The purpose of this research is to analyze the effect of motivational bonus, leverage, firm size, corporate governance (audit committee's size, the proportion of independent commissioners, institutional ownership, managerial ownership) and free cash flow on earnings management. Methodology/Technique - Earnings management is analyzed in this research using the modified Jones model. The population for the research consists of manufacturing companies listed on the Indonesian Stock Exchange (IDX) between 2013-2015. The final sample includes 60 manufacturing companies. Findings - The result of this study indicate that motivational bonus, leverage, firm size and free cash flow have an influence on earnings management practices. Motivational bonuses and free cash flow as opportunistic behavior also influence earnings management. In addition, leverage and firm size as external monitoring mechanism influence earnings management practices while audit committee size, the proportion of independent commissioners, institutional ownership and managerial ownership as corporate governance practices in companies has no significant effect on earnings management practices. Hence, it is concluded that corporate governance has no effect on earnings management practices in Indonesia. Type of Paper: Empirical Keywords: Opportunistic Behavior; External Monitoring Mechanisms; Corporate Governance; Earnings Management. JEL Classification: G34, G02.

<p><strong>Purpose</strong> - This study is to examine the effect of sharia status on the level of earning management in Banking Companies in Indonesia.</p><p><strong>Method</strong> - This study use pooled data regression analysis and independent sample t-test to test the level of earning management between Islamic banks and non-Islamic banks. We use sample of Islamic banks and non-Islamic banks in Indonesia in the year 2009-2013.</p><p><strong>Result</strong> - We find the Islamic banks employ less earning management than non-Islamic banks. The results show that, as hypothesised, Islamic banks status has a significant negative association with earning management in regression model. This Suggest that Islamic banks have lower discressionary accrual than non-Islamic banks ans Islamic ethics palys monitoring role in reducing managerial opportunistic behaviors to manage earnings by discretionary accruals.</p><p><strong>Implication</strong> - At least the sample in this study was due to the limited number of Islamic banks and conventional banks in Indonesia. The discretionary accrual model used in this study may not be able to detect earnings management properly, so that there is a need to readjust other models related to earnings management.</p><p><strong>Originality</strong> - Earnings management has become a global issue, but for Islamic banking based on religious principles, the practice of earnings management can be minimized or eliminated. Then provide information about the high and low earnings management in banks, especially Islamic and conventional banking in Indonesia.</p>

This paper aims to examine the role of corporate governance (CG) on earnings management (EM) in Indian commercial banks. In addition, the study examines the role of board gender diversity within the CG framework using data from 22 publicly traded commercial banks in India from 2010 to 2019. The study uses Principal Component Analysis (PCA) to develop a comprehensive CG measure. Using a Panel Corrected Standard Error (PCSE) approach, the study finds that CG has a significant negative impact on EM in Indian commercial banks. The findings further revealed a positive association between gender diversity of boards and EM, indicating that the lack of gender diversity on a bank's board outweighs the benefits of gender-diverse boards. Our study shows that CG mechanisms are more effective when combined together than individual governance mechanisms. The study also provides new insight into the role of board gender diversity as a CG mechanism on EM in banks in the context of a developing country. The study provides practical implications for investors, managers, regulators and policymakers.

Purpose This paper aims to investigate the impact of audit mechanisms on earnings management (EM) practices in listed Saudi Arabian companies. Specifically, it examines the association between audit committee (AC) characteristics, external audit quality and EM before and after the revision of Saudi Regulations on Corporate Governance (SRCGs) in 2017. Design/methodology/approach The study analyzes a data set comprising 135 Saudi-listed companies observed from 2013 to 2020. EM practices are measured using the absolute value of discretionary accruals, and external audit quality is assessed by the involvement of BIG 4 auditors. The authors also consider four variables to gauge AC characteristics: independence, size, meeting frequency and expertise. To test the hypotheses, the authors use multivariate regression on panel data. Findings The findings provide robust evidence regarding the impact of audit mechanisms on EM practices. The presence of accounting and finance experts within the AC is shown to have a substantial and statistically significant effect in reducing EM practices. Similarly, AC independence demonstrates a negative association with EM after the implementation of the SRCGs 2017. However, the study does not uncover any statistically significant impact of AC size and meeting frequency on EM practices. Moreover, the research highlights a noteworthy positive relationship between EM practices and engagement with BIG 4 audit firms before the SRCGs 2017. However, this relationship ceases to exist following the regulatory amendment. Practical implications The practical implications of this research are significant for policymakers and companies operating in Saudi Arabia, as well as for practitioners and auditors working in the region. The findings underscore the importance of high-quality auditing work to prevent EM practices and promote transparent financial reporting. The study recommends increasing the number of independent members and financial experts on the AC, as well as rigorous monitoring of AC size and meetings. It also emphasizes the need for compliance with governance regulations to focus on effective monitoring of the AC rather than mere fulfillment of requirements. Originality/value The study enhances the existing literature on the effectiveness of ACs and external audit quality in mitigating EM by providing evidence from a unique and Islamic context that has not been extensively studied before. This can help in validating or challenging the findings of previous studies and provide a more comprehensive understanding of the factors that impact EM in different contexts.

PurposeThe purpose of this study is to look at the direct relationship between audit quality, earnings management (EM) practices and company performance, as well as the indirect influence (mediation) of EM practices in the relationship between audit quality and company performance. It offers empirical evidence from the Jordanian market, which is considered an emerging market.Design/methodology/approachThe population of this study is represented in Jordanian service companies listed on the Amman Stock Exchange (ASE), with a total of 344 company-year observations. Furthermore, panel data analysis was used in this study, and data for the study were acquired from yearly reports as well as the ASE’s database.FindingsBased on generalized method of moments model, the present findings demonstrate that the size of the audit firm and the tenure of the audit firm have a positive and negative influence on EM practices, respectively, but that industry-specialist audit firm has a negative and insignificant effect. EM practices have a negative impact on two company performance proxies (ROA and ROE), but have no effect on earnings per share (EPS). Furthermore, the size of the audit firm has a positive and significant influence on the performance proxies of the company [i.e. return on assets (ROA) and return on equity (ROE)]. The presence of an industry-specialist audit firm has a positive and significant influence on two proxies of company performance (ROE and EPS), but a negative and significant impact on ROA. An audit firm’s tenure has a negative and significant impact on two performance proxies (ROA and EPS), but a positive and significant impact on ROE. Then, EM practices either fully or partially mediate the relationship between audit quality proxies and company performance as assessed by ROA, ROE and EPS.Research limitations/implicationsThe current study’s limitation is that it only searched in Jordanian service companies listed on ASE from 2012 to 2019 to meet the study’s objectives; thus, the authors recommend that future work investigate the study model for other sectors, whether in Jordan or other emerging markets such as the Middle East and North Africa. Another limitation of this study is that the study models lack important variables, which may affect EM and company performance, such as corporate governance and ownership structure characteristics; as a result, the authors recommend that future work includes such variables in future research models to have more explanations in this context.Practical implicationsAnalysts, investors and other strategic decision makers may use the findings of this study to improve the efficiency and efficacy of Jordan’s financial market. These findings will enhance policymakers’ willingness to establish appropriate regulations, which might improve Jordan’s financial market performance and efficacy. These findings may help investors make better judgments by using audit quality proxies and EM indicators, which can forecast business success.Originality/valueFirst, this study distinguishes itself from prior studies through establishing a new research model, by investigating the mediating effect of EM in the relationship between audit quality and company performance. It provides empirical evidence from the Jordanian market; hence, it increases the body of the knowledge in this context. Second, to the best of the authors’ knowledge, this is the first study to look into the link between audit quality, EM and company performance together; hence, the model of this study is developed using agency theory and information asymmetry theory. Third, the current study adds new evidence to the role of audit quality and EM in companies, as well as how audit quality and EM practices affect company performance in emerging markets such as Jordan.

Earnings management in islamic and conventional banks: Does ownership structure matter? Evidence from the MENA region

PurposeThe aim of this paper is to examine the impact of corporate governance mechanisms on earnings management practice for a sample of Gulf Cooperation Council (GCC) Islamic banks (IBs) using a new model of earnings management.Design/methodology/approachFirst, the authors estimate discretionary accruals based on loan loss provisions discretionary loan loss provision (DLLP) using the procedure derived from Jones’ (1991) original model. Second, the authors run a multivariate regression model to check the linkage between corporate governance characteristics and discretionary loan loss provision. Finally, the authors use an additional sensitivity check analysis to assess whether the results are robust to the estimation procedure and to other exogenous factors.FindingsUsing as sample of 26 IBs pertaining to the GCC region with a total of 223 firm-year observations and a nine-year period (2004-2012), the results are conclusive and show that first, IBs with large Shariah Board size manage less DLLP. Secondly, Accounting and Auditing Organization for Islamic Financial Institutions membership positively impacts earnings management through DLLP in IBs. Third, there is a negative relationship between boards of director’s independence the extent to which IBs manage DLLP. Fourth, the existence of block holders positively affects earnings management by IBs. Fifth, there is a negative relationship between audit committee meetings and DLLP. Finally, institutional ownership and bank size have no effect on earnings management through DLLPs.Research limitations/implicationsIn this research, the authors do not take into account all governance factors that are supposed to impact earnings management in IBs. Future research should explore the impact of additional IBs governance structures including chief executive officer bonus, experience, gender and the extent to which IBs use real earnings management with Murabaha, Mudaraba and Musharaka transactions.Practical implicationsThe paper is a very useful source of information that may provide relevant guidelines in helping the future development of corporate governance of IBs. In addition, the findings could prove to be useful for regulators because they are responsible for the acceptable level of corporate governance standards. Thus, they must consider strengthening governance mechanisms either through new legislation or stronger enforcement where earnings management is of such magnitude to that serious impedes information transparency and financial reporting quality of IBs.Originality/valueThis study associates the corporate governance characteristics with earnings management by IBs. The study contributes to the growing body of literature on earnings management and corporate governance in IBs. It should be useful to researchers, regulators, investors, analysts and creditors as well as other players in the capital markets, as it presents a new and important aspect that needs to be accounted for when assessing the quality of IBs’ accounting information in GCC countries.

The study investigates the influence of ethical leadership on the quality of earnings management in multinational corporations (MNCs), a topic of significant interest in the fields of corporate governance, accounting, and organizational behavior. Earnings management, which refers to the manipulation of financial statements to meet certain objectives, is often viewed with skepticism due to its potential to obscure the true financial health of an organization. The ethical orientation of leadership plays a critical role in shaping corporate culture and decision-making processes, and thus may have a substantial impact on the practices of earnings management. This research employs a mixed-method approach, combining quantitative analysis of financial data from a sample of MNCs across different sectors and qualitative interviews with senior executives in these organizations. The findings indicate that ethical leadership, characterized by transparency, integrity, and a commitment to long-term stakeholder interests, is negatively correlated with aggressive earnings management practices. Organizations led by ethically driven leaders are more likely to adopt conservative accounting practices, leading to a higher quality of earnings that reflects the true performance of the company. Conversely, MNCs with less ethical leadership were found to be more prone to manipulating earnings to meet short-term targets or expectations from investors. Furthermore, the study highlights the role of organizational culture in mediating the relationship between ethical leadership and earnings management. Leaders who emphasize ethical standards foster a culture of accountability and transparency, which discourages manipulative financial reporting practices. The research also identifies that the impact of ethical leadership on earnings management varies depending on the corporate governance mechanisms in place, such as audit committees and regulatory compliance. The findings of this study contribute to the growing body of literature on corporate ethics and earnings quality, offering practical implications for policymakers, investors, and managers. By emphasizing the importance of ethical leadership, the research advocates for the integration of ethical guidelines into leadership development programs within multinational corporations. Additionally, the study suggests that fostering a strong ethical framework in MNCs can mitigate the risks of earnings manipulation, thus enhancing the credibility and sustainability of financial reporting. This research also opens avenues for further investigation into the mechanisms through which ethical leadership influences other aspects of corporate governance, such as risk management and corporate social responsibility. Ultimately, the study underscores the critical role that ethical leadership plays in promoting transparency and long-term value creation in the global corporate environment.

Financial reporting using an accrual basis is preferred by conventional and Islamic banking because it is considered rational and fair in reflecting the company's financial condition although it can also provide flexibility to management in choosing accounting methods for certain purposes or earnings management. Based on the previous literature review regarding earnings management in both Conventional Commercial Banks and Islamic Commercial Banks, it is seen that the practice of earnings management is very likely to be carried out by managers as managers. The purpose of this study was to identify and analyze the differences in earnings management by conventional commercial banks and Islamic general banks. The type of data source used in this study is secondary data derived from audited published financial reports on Islamic Commercial Banks and Conventional Commercial Banks registered with the Financial Services Authority in Indonesia during the research period from 2014 to 2019. This study uses Earning Management as a variable measured by the Modified Jones Model. From this research, it can be concluded that there is a difference between the discretionary accrual ratio of conventional banks and the ratio of discretionary accruals of Islamic banks. Where Conventional Banks are higher in earning management than Islamic Banks.

PurposeThis paper aims to examine the relationship among corporate environmental disclosure (CED), earnings management (EM) practices and accounting conservatism in Chinese listed firms and determine how internal corporate governance (CG) mechanisms moderate these relationships.Design/methodology/approachThis study uses two different EM practices, accrual-based EM (AEM) and real EM (REM), to analyze the relationship between CED and EM practices, as well as accounting conservatism. The final sample consisted of 1,619 observations, documented between 2015 and 2019. The panel data method was applied to estimate the relationship among CED, AEM and REM, as well as the moderating effect of CG on this relationship.FindingsThis study finds a negative relationship between CED and EM (both AEM and REM) and a positive relationship between CED and accounting conservatism. Further, CG, measured as the independent director ratio, institutional ownership and state-owned entities, was found to moderate these relationships.Practical implicationsChinese policymakers should reinforce CED because it reduces corporate EM practices and improves accounting conservatism. Further, CED, as a mandatory requirement, may be expanded to all industries, that is, beyond the highly polluting industries listed on China’s stock exchanges.Originality/valueThis study is among the first to examine the relationship between CED and EM practices from both the AEM and REM perspectives and the one between CED and accounting conservatism. It also extends extant analyses by investigating the moderating effect of CG on these relationships in China.

Purpose: This study investigates the relationship between the advancement in Egyptian accounting standards and earnings management practices among listed companies in Egypt. Earnings management refers to the practice of manipulating financial statements to achieve desired financial results. The study aims to examine whether the implementation of updated accounting standards in Egypt has been effective in reducing earnings management levels. Methodology: The study covered the years 2004-2020, which included the adoption of three significant changes to Egyptian accounting rules in 2002, 2006, and 2015, and examined a sample of non-financial enterprises listed on the Egyptian Stock Exchange. The modified Jones model was employed to detect earnings management through discretionary accruals. The regression analysis assessed the impact of improvements in Egyptian accounting standards on earnings management practices while controlling for firm characteristics such as profitability, auditor type, firm size, leverage, cash flow from operations, and growth rates. The one-way ANOVA examined differences in earnings management levels during the three periods corresponding to the accounting standards revisions. Findings: The results from both the multiple regression analysis and the one-way ANOVA indicate that there is no statistically significant association between the advancement of Egyptian accounting standards and a reduction in earnings management practices. Specifically, the regression analysis revealed no significant relationship between the independent variable representing the advancement of accounting standards and the dependent variable of discretionary accruals, a proxy for earnings management. However, the control variables of profitability, auditor type, cash flow from operations, and growth rates were found to have statistically significant associations with earnings management practices. Furthermore, the one-way ANOVA results showed no significant difference in the mean levels of discretionary accruals across the three periods corresponding to the different versions of Egyptian Accounting Standards (EAS, 2002, 2006, 2015). Implications: The findings of this study have several implications. First, they highlight the need for further efforts to address earnings management practices in Egypt, as the current accounting standards and enforcement mechanisms appear to be insufficient in deterring companies from engaging in such practices. Second, the study provides empirical evidence that the development and implementation of new accounting standards alone may not necessarily lead to a reduction in earnings management. Other factors, such as corporate governance mechanisms, managerial incentives, and regulatory oversight, may also play crucial roles in determining earnings management levels.

This study investigates discretionary earnings management practices, tracing the changes over the years in selected top performing and highly liquid listed Indian firms. It empirically measures the impact of corporate governance, financial legislation and global reporting standards on the firms’ earnings management practices. The study analyses a sample of 712 firm-year data comprising 89 listed Indian companies across 7 different sectoral indices of the National Stock Exchange of India (NSE) over 8 years (2011–2018). The Modified Jones model was used to compute Discretionary Accruals to measure Earnings Management based on data obtained using Bloomberg terminals. Statistical results and plots generated in Stata offer evidence that instances of earnings management have significantly reduced after the enactment of the Companies Act 2013 and the adoption of Indian Accounting standards which are converged with the IFRS. Findings suggest that services firms are engaging in relatively higher levels of earnings management compared to manufacturing firms. This study reveals the positive impact of improved corporate governance, regulation, and enforcement by significantly reducing the levels of earnings management among listed firms in India.

PurposeThe purpose of the study is to determine the relationship between bank efficiency in terms of corporate governance guidelines and the extent of practice of earnings management (EM).Design/methodology/approachArchival data of listed private commercial banks of Dhaka Stock Exchange over the period of 2007–2016 relating to corporate governance and earnings management are collected and analyzed using parametric and non-parametric methods (efficiency analysis) and applying panel regression analysis.FindingsThe same distribution pattern and have low degree of the correlation (0.248) among them. It is found that private commercial banks of Bangladesh, on average, display efficiency level of 80.84%. The average value of discretionary loan loss provision (i.e. measure of earnings management) is 0.4249 and this indicates the presence of earnings management. The relation between earnings management and efficiency score in both cases of two-step system generalized methods of moments (GMMs) and difference GMM are found to be negative. The negative coefficients (−0.7969 and −0.57) indicate that as the efficiency increases, the practice of earnings management by the private commercial bank reduces. By estimating efficiency based on corporate governance guidelines and detecting the existence of EM, the major contribution of the study is establishing the relationship between bank efficiency based on compliance with corporate governance guidelines and managerial practice of earnings management in Bangladesh. Empirical results of the study have also established the fact that the more efficient the management of the banks are, the less likely it will practice earnings management under the compliance of corporate governance guidelines in Bangladesh.Research limitations/implicationsThis research study has some limitations. Only conventional banks are considered for the study, with the exception of Islamic banks. Comparison between conventional banks and Islamic banks could have been done.Practical implicationsBased on the literature study, the effectiveness of corporate governance aligns with decreasing agency conflict, protection of shareholders' interests and restrain management from self-serving activities (i.e. practice of earnings management). The empirical results of the study established these facts. Regulators should give more emphasis on effective implementation of good governance.Originality/valueTo the best of the authors' knowledge, this may be the first to empirically determine the relationship between efficiency estimation based on corporate governance and earnings management in case of listed commercial banks of Bangladesh.

يهدف هذا البحث إلي اختبار العلاقة بين ممارسات إدارة الأرباح وقابلية القوائم المالية للمقارنة، واختبار تأثير بعض اليات حوكمة الشركات علي هذه العلاقة كمتغير معدل للعلاقة، وذلك باستخدام عينة من الشركات غير المالية المقيدة ببورصة الأوراق المالية المصرية، كما تبحث هذه الدراسة فيما إذا كانت أنشطة إدارة الأرباح الانتهازية للمديرين تؤثر علي قابلية القوائم المالية للمقارنة لشركاتهم مع الشركات الأخرى. وقد توصلت الدراسة أنه مع زيادة ممارسات إدارة الأرباح تنخفض قابلية القوائم المالية للمقارنة، وفي المقابل وجدت الدراسة زيادة ممارسات إدارة الأرباح الحقيقية للمديرين (REM) بينما تتناقص ممارسات إدارة الأرباح علي أساس المستحقات (AEM)، بمعني أن المديرين يقوموا باستبدال ممارسات إدارة الأرباح الحقيقية مقابل ممارسات إدارة الأرباح من خلال المستحقات. ويقدم البحث أيضاً دراسة لدور آليات حوكمة الشركات علي العلاقة بين ممارسات إدارة الأرباح وقابلية القوائم المالية للمقارنة، وتشمل اليات حوكمة الشركات كل من جودة المراجعة، وخصائص مجلس الإدارة، ولجنة المراجعة.