Manipulation of Earnings: The Pressure of Opportunistic Behavior and Monitoring Mechanisms in Malaysian Shariah-compliant Companies

Abstract

Abstract The cases of large corporate scandals such as Enron, WorldCom and Xenox; resulted in to the escalation the scrutiny towards the accounting and auditing profession. Due to that, this study is intended to examine the influence of opportunistic behaviour and monitoring mechanisms towards EM. Real Earnings Management is a method to stage-manage the financial accounting proxy by abnormal cost of goods sold (COGS), abnormal cash flow from operation (CFO) and abnormal discretionary expenses (DISEXP). This study employs 2,955 of Shariah-compliant companies for a period of five years from 2009 to 2013. Several statistical analyses were carried out to observe the influence of opportunistic behaviour and monitoring mechanisms towards EM. Data are drawn from Bursa Malaysia website (annual reports) and Thomson Datastream (financial data). The findings of this study revealed that opportunity behaviour and monitoring mechanisms have significant affiliation with EM. The results should be of interest to the stakeholders, shareholders and regulatory bodies such as Shariah Advisory Council (SAC) and the Securities Commission (SC) to superintend the accountability of corporate financial reporting in the deterrence of EM in Shariah-compliant companies.