Abnormal Discretionary Expenses Research Articles

IFRS ADOPTION AND EARNINGS MANAGEMENT PRACTICE: EVIDENCE FROM INDONESIA COMPANIES

The purpose of this study is to verify IFRS contribution by examining the presence of Accrual Earnings Management (AEM) and Real Earnings Management (REM) in the period pre- and post- IFRS implementation in manufacturing companies in Indonesia. AEM is measured by absolute value of discretionary accrual, while REM is proxied by three measurements of REM, they are abnormal cash flow operation, abnormal production and abnormal discretionary expenses. The sample is taken from Indonesia stock exchange in 2009-2011 and 2013-2015. 2012 is Indonesia adoption period and it is excluded from the sample, because it is considerated as transitory year. This study uses regression analysis and Paired t-test to compare the presence of AEM and REM preceding and following IFRS implementation. The findings reveal that IFRS adoption has significantly negative effect towards AEM and REM. It indicates that the following IFRS implementation, AEM and REM are decrease. Therefore, IFRS is able to reduce earnings management practices in manufacturing companies in Indonesia both for AEM and REM.

Accretive Share Repurchases Versus Accrual/Real Earnings Management: Complements or Substitutes?

This paper seeks to address whether managers use accretive repurchases in conjunction with or to the exclusion of other earnings management tools. Prior literature has shown that managers use accretive repurchases to meet or beat analyst forecasts of earnings per share (EPS). However, whether such planned and aggressive repurchasing of common shares outstanding is used as a complement or substitute for traditional tools of earnings management remains unexplored. I find a complementary relationship between accretive repurchases and income-increasing discretionary accruals, a complementary relationship between accretive repurchases and abnormal discretionary expense cuts, and a substitutional relationship between accretive repurchases and abnormal operating cash flow reductions. In addition, I find that the likelihood to use income-increasing discretionary accruals in conjunction with accretive repurchases is significantly driven by the number and dollar amount of stock and stock options awarded to the firm’s CEO in the previous year. I also find that firms with a CFO who is co-opted by the firm’s CEO are more likely to use accretive repurchases than firms in which the CFO is not co-opted by the CEO. This suggests that a CEO likely influences the CFO to make capital allocation decisions that benefit the CEO, but may not be in the best long run interests of the firm. Finally, I find that transient investors strongly predict whether a firm uses accretive repurchases, suggesting that managers use this tool to avoid price pressures imposed by not hitting quarterly forecasts of EPS.

Audit quality and real earnings management: evidence from the UK manufacturing sector

PurposeThe purpose of this paper is to investigate whether audit quality is associated with real earnings management in the UK.Design/methodology/approachThe authors apply the panel fixed effects method that controls for heterogeneity across firms to investigate whether audit quality is related to real earnings management for a large sample of UK manufacturing companies for the period 2010–2013. The authors utilized three proxies to measure real earnings management and two proxies to measure audit quality.FindingsThe results provide evidence that audit fees are negatively related to abnormal operating cash flows. Conversely, audit fees are positively related to abnormal discretionary expenses. Besides, audit quality proxies show insignificant relationship with abnormal production costs and real earnings management index. Overall, the study finds partial evidence of significant relationship between audit quality and real earnings management.Research limitations/implicationsThese results are important subject to the adequacy of the indicators of real earnings management and audit quality. Like previous research works that mostly focus on upward earnings management, the authors do not address the question of whether and how firms take real actions to manage earnings downwards in certain contexts.Practical implicationsThe findings inform monitoring bodies that the imposition of higher levels of audit quality may result in unintended consequences. Therefore, monitoring bodies, such as audit committees, should consider the implication of imposing higher quality auditing, which may drive firms to potentially value-decreasing real earnings management practices. Managers should curtail real earnings management practices, especially abnormal operating cash flow, because attempt to use higher-quality auditors to mitigate such practice may destroy firm value. Also, managers’ employment may be threatened due to the potential deterioration of firm value caused by using higher-quality auditors to mitigate managers’ real earnings management practices. Moreover, shareholders are informed of the potential detrimental effects of imposing higher levels of audit quality which may lower the value of their investments.Originality/valueThe paper extends previous research on earnings management in several ways. First, while earlier studies usually use accruals methods to measure earnings management, the authors use the real earnings management approach as managers can switch from accruals to real earnings management when facing more scrutiny from auditors and/or more constrained regulations or standards that may limit their capability to use discretionary accruals. Second, this study reports new findings, as the authors find partial evidence of a significant relationship between audit quality and real earnings management. Third, it is one of the few studies to use a real earnings management index to measure earnings management and its link to audit quality.

Stock pledging and earnings management: an empirical analysis

PurposeThe purpose of this paper is to investigate the impact of agency risk implied in case of personal debt obtained by promoters through pledging of their stock on accrual and real earnings management practices.Design/methodology/approachIn this paper abnormal accruals, as suggested in Dechow et al. (1995), and the real earnings management proxies as indicated in Dechow et al. (1998) and Roychowdhury (2006) are used. OLS regression is run over 29,054 firm-years of Indian companies starting from the year 2008 to 2016. Then the occurrence of earnings management is tested in firms in year t where promoters pledge/release their holdings from the pledge in year t+1.FindingsThe findings suggest that earnings management increases in the prior year with an increase in the proportion of promoters’ stock pledge in the subsequent year. The authors find evidence for increased earnings management through accruals and also for real earnings management using abnormal cash flows and abnormal discretionary expenses. However, the authors do not find real earnings management using abnormal production cost as a measure.Practical implicationsThe paper has considerable implications on managerial behavior toward earnings management because of the flexibility managers have in applying accounting policies and authority in operating decisions under domestic GAAP, and IFRS and earnings are prone to management tactics, fostering agency risk when they relate to the welfare of decision makers.Originality/valueThis paper addresses the consequences of individual borrowing of promoters collateralized by their stake in the firm, which is a global phenomenon, on reporting quality.

Real Earnings Management in Family-Affiliated Firms: Empirical Evidence from Malaysia

Research aim: This paper examines the effects of size and complex structure of family-affiliated business groups on Real Earnings Management (REM) practices in Malaysian listed firms. Design/Methodology/Approach: Family-affiliated business groups listed on Bursa Malaysia during the years 2006 to 2015 filtered using specific criteria were selected as the sample. STATA software was used to analyse the panel data, and two different regression models were run for the empirical testing to examine the effects of size and group complexity. Research finding: It is evidenced that the size and complexity structure of family-affiliated business groups are positively associated with REM, measured by abnormal cash flow from operations and abnormal discretionary expenses, but negatively associated with abnormal production cost. Theoretical contribution/Originality: Since previous studies based on Malaysian public listed firms focus on Accruals Earnings Manipulation (AEM), this study broadens the scope by providing empirical evidence on the relationship between family-affiliated firms’ characteristics and REM. Practitioner/ Policy implication: Investors, auditors, analysts and practitioners should consider family-affiliated firms as a factor that significantly induces earnings manipulation. The result is also relevant for regulators in regulating takeover rules or tax policy to affiliated groups in order to create incentives for them to maintain a specific size or complexity structure, or otherwise, be penalised for exceeding the size or complexity characteristics. Research limitation/ Implication: The results from this study may apply to Asian countries with similarities in family ownership to that in Malaysia. The findings, however, may not apply to developed countries where family concentration and pyramidal structure are not significant. Keywords: Real Earnings Management, Family-Affiliated Firms, Emerging Market, Entrenchment Effect, Malaysia Type of article: Research paper JEL Classification: M41

Earnings Management and Fraudulent Financial Reporting

Objective – The objective of this research is to obtain empirical evidence about the effect of real earnings management that is proxied by abnormal Cash Flow from operating and discretionary expenses towards fraudulent financial reporting. Methodology/Technique – The objects in this research are companies listed on the Indonesian Stock Exchange (idx) between 2011 and 2015 comprised of companies that have engaged in fraudulent activities as well as those that have not, to enable a comparison to be made. The companies that have engaged in fraudulent financial reporting were obtained from a list issued by the Financial Services Authority (OJK), being the agency that oversees the capital market in Indonesia. The sampling is conducted using purposive sampling. Secondary data is used, and the hypotheses are testing using logistic regression analysis. Findings – The results of this research show that: (1) Real Earning Management proxied by Abnormal Cash Flow from operating activities (CFO) have a significant effect towards Fraudulent Financial Reporting (FFR), (2) Real Earning Management proxied by Abnormal Discretionary Expenses does not have an effect on Fraudulent Financial Reporting (FFR) and (3) Real Earning Management that is proxied by Abnormal Cash Flow from operating (CFO) and Abnormal Discretionary Expenses have a simultaneous and significant effect on Fraudulent Financial Reporting (FFR). Novelty – Based on these findings, this research provides insight to companies to enable them to give greater attention to abnormal cash flow from operating activities due to the effect this has on companies that are suspected of committing irregularities in its operational activities. This is important because fraudulent reporting can erode investor’s confidence and thereby reduce investment in the company. Type of Paper: Empirical. Keywords: Abnormal Cash Flow; Abnormal Discretionary Expenses; Financial Services Authority (OJK); Fraudulent Financial Reporting; Real Earning Management. Reference to this paper should be made as follows: Suryaningsih, R; Simonb F; 2019. Earnings Management and Fraudulent Financial Reporting, Acc. Fin. Review 4 (2): 50 – 55 https://doi.org/10.35609/afr.2019.4.2(3) JEL Classification: G40, G41, G49.

Government-Linked Investment Companies and Real Earnings Management: Malaysian Evidence

This study examines the association between government-linked investment companies’ (GLICs’) shareholdings and real earnings management activities in Malaysia. Consistent with prior research, this study uses three proxies to measure real earnings management; abnormal cash flow from operations (RCFO), abnormal production costs (RPC), and abnormal discretionary expenses (RDE). This study segregates GLICs’ shareholdings into two categories; Federal Government Pension Investment Funds (FGPIF) and other GLICs (OFGLIC). Using a sample of 213 firm-year observations of Malaysian government-linked companies from 2010 to 2015, this study finds that FGPIF is a more effective monitoring mechanism than OFGLIC in limiting real earnings management. The findings also show that there is a significant and negative relationship between Employee Provident Fund (EPF), Khazanah Nasional Berhad (Khazanah), Permodalan Nasional Berhad (PNB) and RCFO and RPC. The evidence suggests that these three are the most effective government institutional investors in promoting corporate governance, which in turn limit real earning management activities in Malaysia. In general, the findings support the incentive alignment hypothesis, which argues that companies with government intervention are normally better governed.

The Impact of Managerial Ability on the Relation between Real Earnings Management and Future Firm’s Performance: Applied Study

This study aims to investigate the managerial ability of executives’ managers’ role on mitigating the negative impact of real earnings management on future firm’s performance. The researcher operationalizes managerial ability by using a measure developed by Demerjian, Lev, and McVay (2012). This measure captures managers’ ability to efficiently convert firm resources into sales revenue relative to their industry peers. In other words, higher-ability managers are more likely to generate more sales revenue for a given set of resources compared to lower-ability managers. The researcher follows Roychowdhury (2006) and Kothari et al. (2016) to calculate abnormal sales, abnormal production costs, and abnormal discretionary expenses. To capture the total effects of three REM methods an aggregate REM that is a proxy for real earnings activities was used. Following Gunny (2010) and Huang & Sun (2017) future performance proxies are ROA and operating cash flows to total assets (CFO) for the next three years each year. Using a panel sample of 605 firm-year observations from 2005 to 2015. The study concluded that there is a positive significant relationship between the managerial ability of managers and earnings management through manipulating of real operational activities.

ممارسات تمهيد الدخل بالأنشطة الحقيقية وأثرها على القيمة السوقية للسهم في الشركات الصناعية المدرجة في بورصة عمان

تمهيد الدخل | القيمة السوقية للسهم | التلاعب بالمبيعات | تخفيض النفقات الإختيارية | الإنتاج الزائد | Income Smoothing | Market Value per Share | Sales Manipulation | Abnormal Discretionary Expenses | Abnormal Production Cost

The impact of ownership type on the relationship between corporate governance and earnings management: An empirical study

This study investigates the effect of ownership type on the relation between corporate governance and earnings management. While previous literature has mainly examined the relationship between corporate governance and both accrual and real earnings management, no study to date, to the researcher’s best knowledge, focused on the moderation effect of ownership type on this relationship. Three proxies for measuring accrual and real earnings management, namely discretionary accruals (DA), abnormal cash flows (ACFO), and abnormal discretionary expenses (ADISX) are employed. Three empirical models (i.e. DA, ACFO, and ADISX) are developed in which the earnings management proxies represent the dependent variables and are tested using a sample of non-financial companies containing state-owned and privately owned companies over the period from 2010 to 2017, with 1030 firm-year observations. The results show a positive relationship between ownership type and both accruals manipulation and sales manipulation. In general, the results suggest that the ownership type moderates the relationship between corporate governance and earnings management. The results suggest also that corporate governance mechanisms may not play an almost the same role in monitoring and mitigating real earnings management (REM) practices as they do for accrual earnings management (AEM) in Egypt. Moreover, no evidence is found supportive of the trade-off effect which means that managers in Egyptian firms use both types of earnings management jointly to reach the target levels of earnings

ANALISIS PENGARUH ACCRUAL DAN REAL EARNINGS MANAGEMENT TERHADAP CORPORATE ENVIRONMENTAL DISCLOSURE DAN MEKANISME CORPORATE GOVERNANCE SEBAGI VARIABEL PEMODERASI

The purpose of this research is to examine of the effect of accrual and real earnings management on corporate environmental disclosure and corporate governance as moderation variable. The variabel accrual earnings management measure use discretionary accrual and abnormal cash flows from operating, abnormal production costs, and abnormal discretionary expenses measured for real earnings management with Roychowdhury (2006) model. Variable corporate governance measured use proportion of indendent commissioners, the number of audit committee members, and the size of the board of directors.For corporate environmental disclosure variabel measured with Index Clarkson, et al (2013). Sampel in this research is 97 companies. The result shows accrual and real earnings management has no significant effect on corporate environmental disclosure . But the effect of moderate proportion indendent commissioners to accrual earnings management on corporate environmental disclosure show the confirmed hypothesis proposed.

ANALISIS PENGARUH ACCRUAL DAN REAL EARNINGS MANAGEMENT TERHADAP CORPORATE ENVIRONMENTAL DISCLOSURE DAN MEKANISME CORPORATE GOVERNANCE SEBAGI VARIABEL PEMODERASI

The purpose of this research is to examine of the effect of accrual and real earnings management on corporate environmental disclosure and corporate governance as moderation variable. The variabel accrual earnings management measure use discretionary accrual and abnormal cash flows from operating, abnormal production costs, and abnormal discretionary expenses measured for real earnings management with Roychowdhury (2006) model. Variable corporate governance measured use proportion of indendent commissioners, the number of audit committee members, and the size of the board of directors.For corporate environmental disclosure variabel measured with Index Clarkson, et al (2013). Sampel in this research is 97 companies. The result shows accrual and real earnings management has no significant effect on corporate environmental disclosure . But the effect of moderate proportion indendent commissioners to accrual earnings management on corporate environmental disclosure show the confirmed hypothesis proposed.

Abnormal audit fees and accrual and real earnings management: evidence from UK

PurposeThis paper aims to examine the relationship between abnormal audit fees and accrual-based and real-based earnings management by using a sample of 1,055 UK firm-year observations from 2006 to 2015.Design/methodology/approachLinear regression was used to test the hypothetical relation between abnormal audit fees and accrual and real earnings management. Following prior research, several proxies have been used to measure abnormal audit fees, accrual earnings management and real earnings management.FindingsAbnormal audit fees were negatively associated with real earnings management. A higher level of abnormal audit fees was the major driver of enhanced audit quality, in turn reducing managers’ flexibility to use real earnings management and to manipulate reported earnings. Abnormal audit fees were found to be negatively associated with abnormal discretionary expenses, abnormal production costs and the aggregated measure of real earnings management.Practical implicationsThis paper outlines the importance of considering any abnormal audit fees paid to audit firms. It is expected that the abnormal audit fees might compromise auditor independence and lead to a higher level of earnings management. However, the findings of this paper provide a new insight to many interested parties, e.g. regulators, audit firms, investors and creditors, that abnormal audit fees are associated with higher audit quality and higher financial reporting quality in the UK. Regulators in the meanwhile should reform the audit market by, e.g. revising the types of non-audit services that are provided for the same client, setting a cap on the maximum fees that can charged by auditors and monitoring earnings management practices. Audit firms should take into consideration that any charged abnormal level of audit fees may have a direct impact on audit quality.Originality/valueThis is the first study to examine the impact of abnormal audit fees on accruals and real earnings management after major regulatory changes that took place in the UK. These major changes are the adoption of the International Financial Reporting Standards in 2005 and the new legislation concerning the ethical standards issued by the UK Audit Practice Board in 2004. These two major changes are expected to have a direct impact on both earnings management and audit fees, notably for the largest public listed firms. This study also focuses on one of the very developed and attractive stock markets in the world, the UK FTSE 350 stock index, that incorporates that largest 350 public firms.

Effect of earnings management on earnings predictability in information signaling perspective

This research is aimed to examine (1) effect of discretionary and innate accrual on earnings predictability (2) effect of market share and financial health on relationship between real earnings management and earnings predictability. This research use manufacture firms listed in Indonesian Stock Exchange 2003-2015 as research sample, with 2013-2014 as research period. Accrual earnings management is measured by discretionary and innate abnormal accrual. Real earnings management is measured by aggregate of abnormal cash flow of operation, abnormal production, abnormal discretionary expenses. As expected, discretionary accrual as opportunist act does not support earnings predictability, while innate accrual as information signaling of business model improves earnings predictability. Real earnings management as information signaling of market share and financial health improves earnings predictability as well. In general, earnings management as information signaling is more likely to communicate condition of firm and leads to informativeness of earnings.

Dampak Penerapan Ifrs Terhadap Kualitas Laporan Keuangan Dan Arus Investasi

Objective of this study is to determine whether IFRS convergence will improve the quality of financial statements as indicated by decreasing levels of information asymmetry and declining real earnings management. IFRS convergence is measured by Dummy variables years before convergence and year after covergency while accounting quality reporting is measured by decreasing earnings management level and decreasing level of information asymmetry. Real earnings management uses abnormal cash flow, abnormal discretionary expense and abnormal production cost (Roydhuchory, 2006) while information asymmetry uses adjusted spreads. While the variable of investment flows is measured by the percentage of foreign investment ownership in Indonesia (defond et.al, 2011). This research uses a quantitative approach that aims to test the theory. The research method used is explanatory research. The sample of this study are all companies listed on BEI. Secondary data research data. From purposive sampling, 102 samples were obtained for IFRS convergence effect on Real earnings management and 100 companies to test the effect of IFRS convergence on asymmetry and information asymmetry on global investment flows. Methods of data analysis using linear regression analysis. The result of statistical analysis shows 1) that IFRS convergence has negative effect on real profit management. This indicates that the higher the IFRS convergence the real earnings management will decrease. 2) IFRS convergence has no effect on information asymmetry and 3) Information asymmetry has no effect on global investment flows in Indonesia.

Unconditional Accounting Conservatism and Real Earnings Management

This research examines the relationship between unconditional accounting conservatism and real earnings management in China’s corporations. Using the regression models, the real earnings management proxies are found by the abnormal cash flow of operations, the abnormal operation costs and the abnormal discretionary expenses and the aggregated measures. The research sheds light on the negative relationship between unconditional accounting conservatism and real earnings management after controlling internal control quality and audit risk. The results of these inferences remain the same after dealing with the robustness analysis and the endogeneity concerns.

Are socially responsible firms less engaged in earnings management? Evidence from ADX listed companies

Corporate social responsibility (CSR) disclosures have gained great attention both in media and academic community. In this paper, we check if socially responsible firms adopt transparent financial reporting strategy, or opportunistically manipulate accounting figures. Using a sample of 34 listed companies during five years (2010-2014), our results show a positive relationship between abnormal accruals and the level of CSR disclosures thereby enhancing the opportunistic hypothesis of earnings management but not the transparent financial reporting hypothesis. By contrast, we find no relationship between CSR disclosures and the three real manipulation proxies: abnormal operating cash-flows, abnormal production costs and abnormal discretionary expenses. Moreover, there is a positive relationship between CSR disclosures and the extent of income smoothing consistent with the opportunistic perspective of earnings management. Overall, our study shows that opportunistic and transparent financial reporting perspectives are not mutually exclusive since earnings management practice conducted by socially responsible firms may be context-oriented.

Are socially responsible firms less engaged in earnings management? Evidence from ADX listed companies

Corporate social responsibility (CSR) disclosures have gained great attention both in media and academic community. In this paper, we check if socially responsible firms adopt transparent financial reporting strategy, or opportunistically manipulate accounting figures. Using a sample of 34 listed companies during five years (2010-2014), our results show a positive relationship between abnormal accruals and the level of CSR disclosures thereby enhancing the opportunistic hypothesis of earnings management but not the transparent financial reporting hypothesis. By contrast, we find no relationship between CSR disclosures and the three real manipulation proxies: abnormal operating cash-flows, abnormal production costs and abnormal discretionary expenses. Moreover, there is a positive relationship between CSR disclosures and the extent of income smoothing consistent with the opportunistic perspective of earnings management. Overall, our study shows that opportunistic and transparent financial reporting perspectives are not mutually exclusive since earnings management practice conducted by socially responsible firms may be context-oriented.

Does Board Characteristics Constrain Real Earnings Management? Evidence From Korea

This study empirically analyzes the effect of board characteristics on real earnings management, which is measured by using three proxies including abnormal cash flows from operations, abnormal discretionary expenses, and abnormal production costs. Specifically, we will investigate how board independence (or board size) affects real earnings management. Additionally, we will investigate the relation between the board characteristics and real earnings management according to before K-IFRS mandatory adoption or after K-IFRS mandatory adoption.
 The empirical results of this study are as follows. First, the relation between board independence (board size) and the absolute value of abnormal cash flows from operations is statistically significant and positive (+). Second, the relation between board independence (board size) and the absolute value of abnormal production costs is statistically significant and positive (+). Third, the relation between board independence (board size) and the absolute value of abnormal discretionary expenses is statistically significant and positive (+). These findings present that the board independence (or board size) does not constrain real earnings management. Thus, these mean that board independence (or board size) does not work as a mechanism to reduce real earnings management.
 This study contributes to accounting research as it directly tests the relation between the board characteristics and real earnings management in Korea, providing empirical support that a board independence (board size) does not constrain real earnings management as effectively as it constrains accrual earnings management.

MANAJEMEN LABA: BAGAIMANA DAMPAKNYA TERHADAP IPO UNDERPRICING?

The purpose of this research was to investigate the effect of accrual and real earning management on IPO underpricing which was measured by initial return, on the first day of trading in Indonesia Stock Exchange, of Indonesian manufacturing companies during 2010-2014. This research was conducted using a purposive sampling technique from 20 analyzed manufacturing companies. Earnings management variable was measured using discretionary accruals, abnormal cash flow, abnormal production cost, and abnormal discretionary expenses while IPO underpricing was calculated using the initial return on the first day of stock trading in the stock exchange. This research used ordinary least squares technique (OLS) multiple linear regression analysis. The result of this study revealed that the real earning management practice through abnormal cash flow had a positive effect on IPO underpricing while the other earnings management proxy had a negative significant effect on underpricing. This finding indicated that every earnings management practice could give an effect in a different direction on IPO underpricing phenomenon, as a response of investors on the published company’s performance. Hence, this study’s finding provided a significant empirical contribution to the signaling theory, in particular for the issue of IPO underpricing in Indonesian Capital Market practices.