Abnormal Discretionary Expenses Research Articles

The Effect of Accrual Earnings Management and Real Earnings Management on Environmental, Social, and Governance (ESG) Reporting Performance

This research aims to offer empirical insights into variations in earnings management within companies categorized in the Environmental, Social, and Governance (ESG) score ranking, and seeks to establish a correlation between earnings management practices and Environmental, Social, and Governance (ESG) performance. The study scrutinizes accrual earnings management alongside real earnings management. The Environmental, Social, and Governance (ESG) score ranking comprises four categories: low, medium, high, and severe. Accrual earnings management is gauged through the modified Jones model, while real earnings management is assessed using three proxies ABNCFO, ABNPROD, and ABNDISC. The research focuses on manufacturing companies possessing Environmental, Social, and Governance (ESG) scores and adopts a purposive sampling approach. The outcomes reveal distinctions between ABNCFO and ABNPROD real earnings management in the severe and low ESG rating groups, whereas no differences exist in accrual earnings management and ABNPROD real earnings management. Additionally, the study establishes that ABNCFO and ABNDISC real earnings management significantly influence Environmental, Social, and Governance (ESG) performance positively. Conversely, accrual earnings management shows no adverse impact on Environmental, Social, and Governance (ESG) performance, and ABNPROD real earnings management exhibits a positive albeit insignificant effect on Environmental, Social, and Governance (ESG) performance. The practical implication of this research is that when the company has a high ESG score which reflects the uncertainty of the company's future operations, the company tends to carry out real earnings management in the form of abnormal cash flow operations (ABNCFO) and abnormal discretionary expenses (ABNDISC).

The effect of corporate governance on earnings management moderated by political connection

Research aims: This research aims to prove the effect of independent commissioner performance and audit committee expertise on earnings management to avoid earnings decreases and political connections to strengthen independent commissioner performance and audit committee expertise to limit earnings management.Design/Methodology/Approach: The population was manufacturing firms listed on Indonesian Stock Exchange during 2017-2020. The sampling technique used purposive sampling with a sample of 102 firms for four years or 408 observations. Then, hypothesis testing employed multiple regression analysis and hierarchical regression analysis.Research findings: The results showcased that accrual earnings management and abnormal discretionary expenses were used by managers to avoid decreases in earnings. On the other hand, corporate governance, like audit committee expertise, could be used to limit earnings management. While the political connection could strengthen and weaken the effect of independent commissioner performances in limiting earning management, political connections could not strengthen audit committee expertise in limiting real and accrual earnings management.Theoretical contribution/Originality: This research contributes to the political connection and earning management literature and provides empirical evidence of agency theory, positive accounting theory, prospect theory, and resource dependence theory.Practitioner/Policy implication: This research contributes to investors in determining investment decisions.Research limitation/Implication: The limitation of this research is that independent variables only used two components of corporate governance, i.e., the independent commissioner performances and audit committee expertise, so the level of influence of the independent variables on the dependent was small.

Implementasi Perubahan Peraturan mengenai Pembebasan Bea Masuk dan Pajak Impor pada Usaha Mikro Kecil dan Menengah

This study aims to examine the effect of the characteristics of the board of directors and audit committee on real earnings management. Three measurements are used to measure real earnings management, namely abnormal cash flow from operations, abnormal discretionary expenses, and abnormal production costs. Company management can manipulate operational activities such as sales, reduce discretionary costs, and manipulate production levels excessively. Using purposive sampling method, this study uses a total of 98 observation of manufacturing companies that are listed on the Indonesia Stock Exchange during 2017 to 2021. The data collected will be tested with the help of Eviews software. The data analysis methods used in this study include descriptive statistical analysis, panel data regression test, and hypothesis testing. The results of this study reveals that audit committee size variable hasa significant positive effect on real earnings management, while the board of directors size variable, board of directors independence, board of directors meetings, audit committee independence, audit committee meetings, and audit committee expertise do not affect real earnings management.

Nexus between corporate governance and earnings management in family and non-family firms

This study explores the relationship between internal corporate governance mechanism and accruals and real earnings management (EM), following Pakistan’s 2012 amended Code of Corporate Governance. It also examines the moderating role of family firms on the relationship among corporate governance mechanisms and accruals and real earnings management. For this purpose, we used a sample of 172 firms listed on the Pakistan Stock Exchange (PSX) for 2012–2019. The dependent variables were estimated by utilizing the generalized method of moments (GMM), fixed random effects and moderation analysis were estimated through Stata. Hausman specification test was used to choose among random and fixed effects. Results report that board size showed a significant positive impact on abnormal discretionary expenses and overall real earnings management. Board independence led to a substantial and negative impact with accruals EM. Managers of familyowned firms are also opportunistically altering the reported earnings. Results illustrate to the users of financial statements that the reliability of financial information depends on the effectiveness of corporate governance. Also, highlight the efficiency of monitory mechanisms and suggest that board independence is one of the practical approaches for an emerging market to restrain the EM practices. Findings are helpful for regulators, policymakers, and investors to regulate and make policies to improve the financial reporting quality in Pakistan. As per the authors’ knowledge, this study adds the novelty by focusing on two critical internal monitoring mechanisms (board independence and board size) in mitigating earnings management, following the 2012 amended Code of Corporate Governance in Pakistan. It will add uniqueness by studying the moderating role of family ownership, as the literature is scarce. The findings of this study highlighted the impact of the internal monitoring mechanisms on earning management practices in Pakistan.

CEO Type and Earnings Management to Avoid Loss or Earnings Decreases: Evidence from South Korea

This study examines the relations between the CEO type (owner CEO vs. professional CEO) and earnings management over 9,266 firm-years from 2011 to 2020 in Korea. Two earnings management measures, accrual management and real activity management (abnormal cash flow from operations, abnormal production cost, and abnormal discretionary expense), are considered as means to avoid reporting losses or earnings decreases. We partition the sample into two groups based on the type of CEO (owner CEO vs. professional CEO) and investigate whether earnings management is used for achieving earnings targets (small profit or small earnings increases) for each group. We find all earnings management measures are significant at the 5% level or better in the direction of aggressive earnings management in the owner CEO sample, while all but one measure (abnormal production cost) are insignificant in the professional CEO sample. Our findings suggest that an owner CEO is more likely to manage earnings to achieve small profit or small earnings increases compared to a professional CEO.

Financial distress and accrual and real earnings management in Polish public companies

Purpose: The study aims to assess differences in accrual and real earnings management strategies between financially distressed and non-distressed companies. The research sample includes public non-financial companies in Poland.Methodology/approach: Based on the GICS classification, cross-sectional regressions were estimated. Abnormal accruals were calculated using the Jones model and the modified Jones model. Based on Roychowdhury, real earnings management was proxied: abnormal operating cash flow, abnormal production costs, and abnormal discretionary expenses. Symptoms of financial difficulties were observed with discriminant analysis, net working capital strategy and ability to pay interest. Parametric and non-parametric statistical tests were used.Findings: There were statistically significant differences in earnings management between non-distressed and distressed companies. Financially healthy companies, as well as those with conservative net working capital strategies and a good ability to pay their interest, were more likely to manage earnings. However, they used selected to influence through real transactions.Research limitations/implications: Proxies for earnings management and financial difficulties are commonly recognized in the literature, but none of them is without imperfections. Therefore, many alternative research approaches have been used.Originality/value: Previous Polish research has not addressed the relationship be-tween earnings quality and financial distress. Multiple robustness tests were imple-mented.

Real Earnings Management Sine Qua Non Book-Tax Differences in Tax Avoidance of Mining Sector Companies in Indonesia

This study aims to prove the effect of book income that can be manipulated through real earnings management activities on book-tax differences that appear to be interrelated but have not been widely studied. Researchers want to prove the coupling relationship (sine qua non) between real earnings management and book-tax differences based on rational choice theory as the main theory. Tests were conducted on 43 sample companies in the mining sector listed on the Indonesia Stock Exchange in 2018–2021. The analytical method used is panel data regression with the help of EViews (Econometric Views) version 12. The results prove that there is an effect of abnormal cash flow and abnormal discretionary expenses on book-tax differences, while abnormal production costs have no effect. Furthermore, the same result is also obtained when the reverse test is conducted, namely book-tax differences in real earnings management. The reciprocal test gives the result that book-tax differences affect abnormal operating cash flows and abnormal discretionary expenses but do not affect abnormal production cots. Meanwhile, the alignment of the reciprocal relationship between abnormal cash flow operations and abnormal discretionary expenses to book-tax differences shows the relationship (sine qua non) between real earnings management and book-tax differences. The contribution of this research proves that book-tax differences are the output of real earnings management, so the amount can be used as an indicator if a company manipulates earnings. Therefore, it is important for the government, especially the Directorate General of Taxes as a policymaker to start considering the amount of book-tax differences in a certain range that is permitted for companies. In addition, it can be followed up by issuing additional tax regulations if needed to minimize tax avoidance.

Gender diversity and earnings management: Evidence from Bangladesh

This study aims to evaluate the impact of Gender-diversity on earnings manipulation using both accrual and real earnings management techniques. All the data has been gathered from yearly reports of recorded non-financial organizations in Bangladesh from 2011 to 2019; after necessary diagnostic checking, this study finally uses the OLS regression model to evaluate the relationship. Findings show that the non-financial organizations of Bangladesh are practicing both forms of earnings management simultaneously. Evidence illustrates that female directors on the board have no significant association with any proxies of accrual earnings management but are significantly positively associated with abnormal discretionary expenses. Moreover, the gender diversity of CEOs is negatively connected with abnormal production costs and positively associated with abnormal cash flow from operating activities, and the relationship is statistically significant. Policymakers and other stakeholders can use these findings to give more concentration on the issue of women's involvement at the corporate level and the development of governance issues. IIUC Business Review Vol. 9, Dec. 2020 pp. 111-133

Tata Kelola Perusahaan dan Manajemen Laba Riil pada Perusahaan Manufaktur di Bursa Efek Indonesia (BEI)

This study aims to examine the effect of the characteristics of the board of directors and audit committee on real earnings management. Three measurements are used to measure real earnings management, namely abnormal cash flow from operations, abnormal discretionary expenses, and abnormal production costs. Company management can manipulate operational activities such as sales, reduce discretionary costs and manipulate production levels excessively. The object under study is the annual reports of manufacturing companies from 2017 to 2021 which are listed on the Indonesia Stock Exchange. The data collected will be processed with the help of Eviews software. The data analysis method used is descriptive statistical analysis, panel data regression test, and hypothesis testing. The results of this study prove that the audit committee size variable has a significant positive effect on real earnings management, while the board of directors size variable, board of directors independence, board of directors meetings, audit committee independence, audit committee meetings, and audit committee expertise do not affect real earnings management.

Capital structure and earnings management: evidence from Pakistan

PurposeThe purpose of this study is to investigate whether capital structure affects accruals and real earnings management (AEM and REM) of nonfinancial firms listed on Pakistan Stock Exchange (PSX). Moreover, to investigate whether institutional development (ID) moderates the relation between capital structure and earnings management (EM).Design/methodology/approachData were taken from annual reports of nonfinancial firms listed on the PSX during 2012–2019. Data of 150 firms for a period of eight years were found completed with respect to the variables used in this study. The generalized moments of methods estimator is used to estimate the effects of explanatory variables on earning management. Furthermore, fixed and random effects methods were used to estimate the impact of capital structure on AEM and REM.FindingsResults show that all three measures of capital structure (i.e. total debt ratio, long-term debt ratio and short-term debt ratios) are inversely related to AEM. In contrast, all measures of capital structure are positively related to abnormal cash flow from operations. Total debt ratio and long-term debt ratio are negatively while short-term debt ratio is positively related to abnormal discretionary expenses. Total debt ratio and short-term debt ratio are significant and negatively related to abnormal production cost. Additionally, interaction terms of ID (i.e. rule of law and regulatory quality) significantly moderate the controlling role of debt on discretionary accruals. In sum, results show that the use of debt induces lender's monitoring. Consequently, managers move toward REM because of lower probability of being exposed.Practical implicationsFindings of this study have significant implications for managers and regulatory authorities. For instance, the use of debt increases the lender’s influence which restricts the managers to be involved in EM practices. Moreover, regulatory authorities are required to address the loopholes in regulations to refrain the managers to be engaged in EM.Originality/valueTo the best of the authors’ knowledge, this is the first study in Pakistan that has explored the impact of capital structure on AEM and REM. More importantly, a careful review of the literature affirms that this study is among the few studies that have used ID as a moderating variable to explain the relation between capital structure and EM.

Earnings Management and Firm Performance: Analyzing the Impact of COVID-19

Earnings management has long been in practice for several reasons with various implications reported on firm performance. The COVID-19 pandemic has created another compelling reason for earnings management to be conducted as it has undoubtedly affected many businesses financially. This study examines the impact of earnings management on firm performance during the COVID-19 pandemic hits. Earnings management is quantified following the Roychowdhury-inspired model of real earnings management, where abnormal cash flows from operation, abnormal discretionary expenses, and abnormal production costs are used as proxies. As for performance, it is reflected through the firm’s return on assets (ROA), return on equity (ROE) as well as earnings per share (EPS). The sample for the study comprises a number of consumer goods firms listed in Bursa Malaysia from 2020 through 2021. Analyses of descriptive statistics, correlation analysis, and multiple regressions were adopted to test the research hypotheses. Results showed that earnings management had a positive but insignificant impact on firm performance during the pandemic years. This study adds to the body of knowledge by shedding light on the effects of earnings management during the pandemic and by expanding the literature on earnings management. This is particularly useful for managers, investors, and analysts for decision-making and analysis purposes.

Financial Distress and Earnings Management: Evidence from Malaysia before and during the COVID-19 Pandemic

The main objective of this study is to determine the choice of earnings management approach among financially distressed firms in the period before and during the COVID-19 pandemic. The manager may choose either Accrual Earnings Management (AEM) or Real Earnings Management (REM). This study uses the modified Jones, 1991, model for AEM. Whereby for REM is the Abnormal Cash Flow from Operation (AbCFO), Abnormal Production Cost (AbPROD), and Abnormal Discretionary Expenses (AbDISEXP) model by Roychowdhury, 2006. Using a final sample of 672 firms year observation consisting of Malaysian public listed companies for the period of 2018 to 2021, this study reveals that financially distressed firms do manipulate earnings using the REM approach both before and during the pandemic. Further analysis discovers that those firms specifically practice AbCFO and AbDISEXP in managing earnings. This study also finds a significant negative relationship between financial distress and the AEM approach. In addition, some other control variables such as leverage, firm size, ROA and liquidity also have a significant effect on EM. This study contributes to the earnings management literature, notably how managers choose to manipulate earnings at the different levels of financial health, which then can influence the accounting earnings quality.

Real earnings management and capital structure: Does environmental, social and governance (ESG) performance matter?

This paper examines the impact of real earnings management (REM) on the capital structure of listed firms across ASEAN countries using the fixed effects panel data estimator for the period 2014–2019. Prior literature has focused primarily on aggregate real earnings management, overlooking the disaggregated sources of EM from real activities. It also investigates the role of environmental, social, and governance (ESG) performance on the impact of REM on leverage. We find that REM has a significant positive effect on leverage. It also finds that REM sourced from abnormal production costs and abnormal discretionary expenses have positive impacts on leverage. In contrast, abnormal cash flows from operating activities do not significantly influence leverage. On the role of ESG performance, we find that REM significantly and positively affects leverage in firms with low ESG performance and across ESG pillar scores. However, REM does not affect leverage in high- ESG performing firms, except for the governance pillar score. This suggests that ASEAN firms exhibit weak corporate governance as sustainable behaviours may not reduce the agency cost of debt. Our results are robust to a battery of tests. Our results have implications for the stakeholder theory in that it attenuates the agency costs of earnings manipulations.

Related party transactions and earnings management in family firms: the moderating role of board characteristics

PurposeThe purpose of this paper is to investigate the effect of family control on the association between related party transactions (RPTs) and different forms of accrual-based earnings management (AEM) and real earnings management (REM), analyzing the effect of board characteristics on the possible association.Design/methodology/approachThis paper studies a sample of Italian non-financial listed firms over the 2014–2019 period, by GLS regression models, controlling for the fixed effects of the company's sector of operation and the year.FindingsResults indicate a different association between RPTs and earnings management (EM) in family and non-family firms. They point out that family firms use RPTs in association with downward AEM and REM perpetrated by abnormal discretionary expenses as well as a substitute of REM via abnormal production costs. For non-family firms, findings indicate only a substitution effect between RPTs and AEM. Furthermore, CEO duality, board gender diversity and the presence of the family on the board positively moderate the association between RPTs and, respectively, REM implemented through sales manipulations, downward AEM and upward AEM.Originality/valueThis study suggests that the socioemotional wealth (SEW) differently affects the relationship between RPTs and EM, according to the form of the latter. It also points out family firms' heterogeneity in earnings manipulations, by providing evidence of the moderating role of board characteristics on the association between RPTs and the various forms of EM.

Auditor quality and real earning management of state-owned enterprises in Indonesia

Purpose. The study aims to examine the effect of auditor quality on real activity manipulation.
 Result. The population is 20 state-owned enterprises (SOEs) listed on the Indonesia Stock Exchange for the period 2018–2020. Using the purposive sampling method, 57 observations for the specified period were obtained. Next, we used a linear regression model as the method. The results showed that auditor quality had no effect on real activity manipulation through abnormal Operating Cash Flow (CFO), abnormal Production Costs (PROD) and abnormal Discretionary Expenses (DISC). Auditor quality has no effect on real activity manipulation through abnormal CFO. This is because the auditor’s independence attitude decreases which causes management to manipulate real activities through abnormal CFO, namely by increasing the company’s sales value. Auditor quality has no effect on real activity manipulation through abnormal PROD. This is because a qualified auditor in the company is only a formality to provide assurance in the eyes of investors that the company is in good condition. So, management will manipulate real activities through abnormal PROD, namely increasing the company’s production. Auditor quality has no effect on real activity manipulation through abnormal DISC. This is because the client’s accounting flexibility from qualified auditors is hampered, where management will change earnings management by using real activity manipulation through abnormal DISC, namely reducing discretionary costs.
 Scientific novelty. This research is based on the application of the already known methodology and design developed by Sanjaya, the difference is that in this study we used SOEs as the object. Moreover, we employed different period from prior study which are in the year of 2018 to 2020. Also, this study uses agency theory because this is based on information asymmetry between the principal and agent, which overall indicates a certain novelty of our work.
 Practical value. The results of this study are useful for assessing the quality of auditors in increasing the credibility of financial statements to reduce risks that occur in financial statements such as real earnings management through abnormal CFO, abnormal PROD, and abnormal DISC. Prospects for its development are by expanding and adding objects and years, as well as used variables.

Pengaruh Koneksi Politik Terhadap Praktik Manajemen Laba Riil Pada Perusahaan Manufaktur di Indonesia

This study aims to analyze the effect of political connections on earnings management practices in manufacturing companies. The sample of this study was 153 manufacturing companies listed on the Indonesia Stock Exchange (IDX) for the 2018-2020 period with a total of 459 observations. Earnings management in this study was measured by real earnings management, namely abnormal CFO, abnormal discretionary expense, and abnormal production. Political connection is measured by the number of boards in the company, both the board of directors and the board of commissioners, who are politically connected. The research hypotheses were tested using panel data regression analysis techniques. The results showed that the politically connected board of commissioners has a positive effect on earnings management as measured by abnormal discretionary expense and a negative effect through the measurement of abnormal production. Politically connected board of commissioners has no effect on earnings management through abnormal measurement of CFO. Meanwhile, the politically connected board of directors was found to have no effect on earnings management, either by measuring abnormal CFO, abnormal discretionary expense, or abnormal production. The research findings confirm the application of agency theory that political connections within the company, especially politically connected boards, affect the company's earnings management practices

Real Earnings Management And Firm Value: Examination Of Costs Of Real Earnings Management

The objective of this research is to find the evidence of (1) REM towards firm value and (2) the moderating role of costs of REM which are market share, financial health, and effective tax rate between REM and firm value. Research samples are manufacturing firms listed on the Indonesian Stock Exchange 2018-2020. REM includes abnormal CFO, abnormal production, and abnormal discretionary expenses. Data analysis uses a white regression test. Based on data analysis, REM has a negative effect on firm value which indicates that REM reduces economic value. Market share and financial health weaken the negative effect of REM on firm value, indicating that REM is a signal where the firm has strong industry and financial advantages to increase firm value. The effective tax rate has no moderating effect between REM and firm value, indicating that low effective tax rate can be both efficient tax planning such as tax avoidance and aggressive tax planning such as tax evasion. Research contribution gives academics, financial statement users, and regulatory bodies an additional literature of REM as a signaling tool of industry and financial health advantages.

President Director Age, MBA Degree, and Earnings Management

This study aimed to examine the effect of president director’s characteristics (i.e., age and MBA degree) on earnings management. This study used accrual earnings management with abnormal accruals as a proxy and real activity earnings management with abnormal discretionary expense as a proxy for earnings management. The population is all manufacturing companies listed on the Indonesia Stock Exchange between 2016 and 2019. The sample was selected based on the purposive sampling method, so that the companies sampled were 91 companies with a total of 364 observations. The data analysis method used is multiple regression analysis. These results find that age has a negatively significant effect on abnormal accruals and has not significant effect on abnormal discretionary expense. An MBA degree as a proxy for education has a positively significant effect on earnings management. Our results are consistent with the predictions of the upper echelons theory and have implications for various stakeholders, as well as providing insight for regulators in determining the qualifications or requirements to become president director

Does Tax Avoidance, Deferred Tax Expenses and Deferred Tax Liabilities Affect Real Earnings Management? Evidence from Indonesia

The study analyses the effect of tax avoidance, deferred tax expenses and deferred tax liabilities on real earnings management. The samples consist of 152 manufacturing companies listed on the Indonesian Stock Exchange (IDX). The study examines the financial statements from 2011 to 2019, ending up with 1,368 observations. The empirical results of this study are as follows. First, tax avoidance affects positively the abnormal discretionary operating cash flows and the abnormal discretionary expenses. However, tax avoidance does not affect the abnormal discretionary production costs. Second, deferred tax expenses affect real earnings management positively, either through abnormal discretionary operating cash flows, abnormal discretionary expenses, or abnormal discretionary production costs. Third, deferred tax liabilities affect real earnings management positively, either by using abnormal discretionary operating cash flows, abnormal discretionary expenses, or abnormal discretionary production costs. The findings of this study may be of interest to regulators and tax authorities, as they highlight how to increase the actual amount of tax payments by reducing the occurrence of real earnings management activities. Regulators need to consider tax audits on companies that have suffered losses but are still operating.

Koneksi Politik Dan Praktik Manajemen Laba Riil: Studi Pada Industri Keuangan Di Indonesia

The aim of the research is to find empirical evidence of the impact of political ties on the management of actual earnings in the Indonesian financial industry. Earnings management in this study is measured by real earnings management, namely abnormal CFO and abnormal discretionary expense, as well as the value of Allowance for Impairment Losses (CKPN). The research sample is 98 companies that are members of the financial industry listed on the Indonesia Stock Exchange (IDX) for the 2018-2020 period with a total of 294 observations. This research used the panel data regression analysis technique. The results showed that the politically connected board of commissioners had a positive effect on earnings management as measured by abnormal CFO and CKPN, but had no effect on earnings management as measured by abnormal discretionary expense. Meanwhile, the politically connected board of directors was found to have no effect on earnings management, either as measured by abnormal CFO, abnormal discretionary expense, or CKPN. This research provides additional empirical evidence that is advantagoues for several parties such as companies, investors and regulators regarding the consideration of political connected council that have a negative effect on earnings management. The results of this study support the agency theory that political connections increase agency problems through earnings management practices.