Absolute Value Of Discretionary Accruals Research Articles

Earnings management and the informational and disciplining role of debt: evidence from Iran

PurposeThe agency theory predicts that there are conflict of interests between managers and shareholders over free cash flow and major operating decisions. Earnings management can help managers hide and retain their private benefits of control. Given that, the purpose of this study is to investigate whether financial leverage reduces agency and information problems caused by earnings management.Design/methodology/approachThe research uses a sample of annual data of 200 firms listed on the Tehran Stock Exchange during 2002-2016. The data required is obtained from the Rahavard Novin database. The research uses multivariate regression models that regress financial leverage on earnings management proxies and other determinants of capital structure.FindingsThe research documents that firms with higher income smoothing and the absolute value of discretionary accruals, as the proxies for earnings management, have higher financial leverage. The results suggest that a higher level of financial leverage can discipline managers and generate useful information about firm quality.Originality/valueThe study highlights the informational and disciplining role of debt in the presence of severe uncertainty about firm quality in a developing country.

Analisis Manajemen Laba Perbankan Konvensional dan Perbankan Syariah di Bursa Efek Indonesia

<p class="bdabstract">Earnings management in financial statements can be caused by accrual accounting policies applied and conflicts of interest in agency theory. This study aims to analyze and compare earnings management in financial statements of conventional banks and Islamic banks. This research is a descriptive study of banks listed on the Indonesia Stock Exchange in 2017-2018. Earnings management is measured by accrual earnings management proxied by discretionary accruals using the modified-Jones model. The samples are 10 Islamic banks and 32 conventional banks. The results show that the comparison of the average absolute value of discretionary accruals for conventional banks is 0.0659 and for Islamic banks is 0.0478. It shows that discretionary accruals for Islamic banks are generally smaller compared to conventional banks. This indicates that the level of earnings management in Islamic bank financial statements is lower than conventional banks.</p>

Earnings Management di Indonesia: Studi Empiris pada Periode Sebelum dan Setelah Terlaksananya Program Tax Amnesty

This study aims to examine earnings management practice in the Indonesian companies, before, during, and after the tax amnesty program, and compare it through testing the difference in the absolute value of discretionary accruals before, during, and after the tax amnesty program. To conduct this analysis, this study uses 42 samples of non-financial companies listed on the Indonesia Stock Exchange (IDX) from 2015 to 2018. Data from all company samples are arranged in the form of Discretionary Accruals, Non-Discretionary Accruals, and Absolute Discretionary Accruals. The results indicate that there are earnings management practices before the tax amnesty program, and it is greater during the tax amnesty, and smaller after the tax amnesty. Based on the results of different tests, this study also shows that there are differences in the value of Absolute Discretionary Accruals in the tax amnesty program (AbsPre) and Absolute Discretionary Accruals after the tax amnesty program (AbsPost), so the hypothesis states that there is difference between earnings management before the tax amnesty program and after the tax amnesty program, can be accepted. In addition, the amount of Absolute Discretionary Accruals before the tax amnesty program (AbsPre) which tends to be higher 68.37% or almost 70%, shows that there is a great effort made by the management of the company in order to make the company looks outperformed to the investors. Keywords: Tax Amnesty, Earnings Management JEL Classification: M41, 023, G18, G20, H71

Accruals quality, financial constraints, and corporate cash holdings

PurposeThe purpose of this paper is to examine how information asymmetry driven by earnings quality affects corporate cash holdings. It also investigates the role that financial constraints play in this effect.Design/methodology/approachThe paper examines a large sample of 6,501 observations of 741 firms listed on Euronext Paris over the period 2000–2015. Earnings quality is computed using the Jones model performance-matched discretionary accruals developed by Kothari et al. (2005): the larger the absolute value of discretionary accruals, the lower the accruals quality.FindingsThe study finds that firms with poor accruals quality hold more cash and that cash holdings in firms of low reporting quality are higher under financial constraints. These results indicate that firms tend to increase their cash reserves in the presence of high information asymmetry which is notably driven by low accounting quality. The findings also suggest that information asymmetry associated with low reporting quality is greater when firms also have strong financial constraints. The study’s conclusions are consistent with the precautionary motive for cash holdings.Practical implicationsThe results would enhance practitioners’ awareness of the importance of accounting choices in the management of cash policies. It would also give researchers an incentive to further explore how these policies are influenced by the precautionary behavior of managers.Originality/valueThis paper is the first work to investigate the effect of accruals quality on corporate cash holdings in the French equity market, which typically has a poor information environment resulting in high information asymmetry. Moreover, the role of financial constraints in this effect has not yet been explored.

Accounting Information Quality of Latin American Firms: The Influence of The Regulatory Environment

Objective: This study aimed to investigate the relationship between the regulatory environment and the quality of the accounting information of Latin American companies, specifically regarding earnings management through accruals. Background : It is believed that the regulatory environment in which firms operate has an influence on the informational quality of disclosed financial reports, since by monitoring information regulatory bodies increase incentives for the elaboration of high quality financial reports (Shima & Gordon, 2011). On the other hand, other authors such as Silva, Galdi and Teixeira (2010) point out that when regulation originates from agencies linked to the state, governments susceptible to popular reaction could establish stricter rules or control sectors in a strategic way. Thus, companies regulated by public bodies could use earnings management practices in certain periods, such as election years. Method: The study sample was comprised of companies listed on the main stock exchanges in Latin America, according to the availability of information in the Capital IQ ® database – the main data source for this study – and that adopted IFRS as the basis for preparing their financial statements in the period analyzed (2011 to 2016), thus totaling 2,360 firm-year observations. Considering the absolute value of discretionary accruals as a proxy for earnings management, the results suggest that there is a positive relationship between the regulatory environment and the manipulation of profits. The final sample resulted in observations about the companies listed on the stock exchanges of Brazil, Chile, Mexico and Peru, where the statistical analyzes presented for each country, as well as considering the Latin American context. Results: Our results indicate that the regulatory environment is positively related to the use of discretionary accruals for companies in Brazil, Peru, Mexico, and considering Latin America as a whole. For Chile, there does not seem to be any significant relationship between these factors, so that it is concluded that there are aspects related to the country level, whether economic, cultural, or institutional, that were not mentioned by this study and that are possibly able to influence the use of discretionary accruals as a form of earnings management. Contributions : The results presented by the study contribute to the literature on information quality and regulation, first because they present evidence that regulation negatively influences the quality of accounting information, secondly because it investigates a context of emerging markets that despite the political instability, some studies predict a growth of in the coming years, especially those in Latin America, and third, because it analyzes the companies of these countries from an individual and collective perspective , allowing a discussion of the reality of each country, among them and with other contexts.

An Examination of Prevalence of Earnings Management in Asia REITs

This study examines the prevalence of earnings management in Real Estate Investment Trust (REIT) funds in Asia. Discretionary Accruals (DA) is used as the measurement of earnings management. A panel data covering all REIT firms in three countries: Malaysia, Singapore and Hong Kong, from year 2007 to 2015 is used for this purpose. The results show all firms having the absolute value of discretionary accruals indicating that earnings management exists in Asian REITs. Further, independent t-test shows that earnings management activities are significantly prevalent in all these three countries despite the regulatory structure of REITs.

Evaluating the effect of industry specialist duration on earnings management

This study examines whether auditor industry specialist duration (i.e., the cumulative number of years an audit firm can be deemed an industry specialist) affects earnings management. Using a sample of 17,546 observations during the period of 2006 to 2014, we find that audits performed by firms with longer industry specialist durations are associated with lower levels of earnings management, as proxied by the absolute value of discretionary accruals. This finding enhances the industry specialization literature by showing that, in the long run, specialist auditors constrain the accrual management activities of their clients. However, we also find that audits performed by firms with longer industry specialist durations are associated with greater levels of real earnings management. In turn, this is consistent with real earnings management surfacing as an unintended consequence of specialist auditors being able to better constrain the accrual management activities of their clients (Chi, Lisic, & Pevzner, 2011).

Do investors care about earnings quality? The case of Chinese reverse mergers

This study examines a panel of U.S.-listed Chinese reverse merger firms to address the question whether, and to what extent, earnings quality is valued by investors. Empirical evidence indicates that U.S.-listed Chinese reverse merger firms tend to have much lower earnings quality as compared to both U.S.-listed Chinese IPO firms and ADR firms, as measured by both the absolute value of discretionary accruals and the accruals quality. This fundamental difference, however, is reflected in neither firm valuation nor stock performance, suggesting that investors do not pay enough attention to the integrity of financial information of foreign listings in general and reverse merger firms in particular.

Gender diversity in employees and discretionary accruals: the Korean evidence

PurposeThis paper aims to investigate the relation between gender diversity in employees and earnings quality. Specifically, how gender diversity among full-time and part-time employees is associated with discretionary accruals in Korea is examined.Design/methodology/approachThe author analyzes the association between women ratio among full-time (part-time) employees and discretionary accruals by using 3,687 firm-years of Korean listed companies from 2010 to 2012. The regression model used in Barua et al. (2010) is adopted. The dependent variables, the absolute value of discretionary accruals, are proxied by the Modified Jones Model of Dechow et al. (1995) and the Performance Matched Model of Kothari et al. (2005).FindingsFirst, a higher ratio of women among full-time workers is related to lower discretionary accruals, whereas that of part-time female employees is not related to discretionary accruals. Second, the effect of gender diversity in employees varies depending on the possibility of earnings management. Third, the results are robust with sample firm-years without female executives, thereby suggesting that the results are not driven by the existence of female executives, and robust to accounting standards and firm-year clustering.Originality/valueThis paper expands the understanding about the determination of discretionary accruals by demonstrating the impact of full-time female employees on earnings quality. Previous studies demonstrated that female workers are more ethical in the workplace, and the quality of accounting information disclosed by firms with female CFOs or directors, i.e. high ranking officers, is higher. It is observed that accounting information quality is higher when firms simply have more female workers, regardless of their relative position in the firm. This complements the results of previous studies and indicates gender diversity among employees is a sign of accounting information quality.

Fixed Costs, Audit Production, and Audit Markets: Theory and Evidence

We analyze the role of discretionary fixed costs in audit production. Such costs are common (or joint) across a set of clients serviced by an accounting firm during a period. Our motivation is to better understand the implications of common discretionary fixed costs for the production and supply of audit services and audit market outcomes, such as the assurance level provided (audit quality) and audit costs and pricing, we conjecture that discretionary fixed costs are associated with the technology and other types of investments used by the auditor to transform audit effort (hours) into assurance for a portfolio of clients. We assume that such investments (and resulting costs) influence production primarily through the efficiency of audit effort (process improvements). We formally analyze the audit production problem in the context of auditor profit maximization and a more simple expected cost minimization formulation, and use examples, simulation methods, as well as explanatory figures to understand the implications of these models. Also, we use monotone comparative statics (Milgrom and Shannon [1994] to show the implications of client-specific losses (the auditor’s loss function) and the number of clients in an auditor’s portfolio on the level of fixed investments and audit assurance. The assumption that discretionary fixed costs are an important feature of audit service production yields a rich mix of interesting insights into the audit service market that are not found in the existing literature. Based on these analyses, we develop four testable hypotheses concerning the relations between audit quality and (1) the magnitude of client-specific possible losses from servicing a client; (2) the average client losses in an audit firm’s portfolio; (3) the number of clients in an audit firm’s portfolio; and (4) the variability of client losses in an audit firm’s portfolio. Using the absolute value of discretionary accruals as the proxy for audit quality and client size as the proxy for auditor losses, we find evidence consistent with the four hypotheses. In addition, using restatements as the measure of audit quality, we find some (weaker) evidence consistent with hypotheses 3 and 4.

Management’s personal ideology and financial reporting quality

We investigate the relation between managers’ personal ideologies and financial reporting quality. We use Federal Elections Commission data to develop three proxies for managers’ personal ideologies and test their relations with two financial reporting quality metrics: discretionary accruals and financial statement restatements. We find that both the absolute value of discretionary accruals and the probability of restatement decrease in the degree to which firms’ managers have conservative ideologies. These results are robust in the post-SOX period, to controls for potential self-selection bias, to alternative measures of both ideology and financial reporting quality, and to controls for firm political sensitivity, lobbying activity, governance, operational complexity and auditor strength. Our findings contribute to a growing literature demonstrating that business outcomes are partially explained by manager-specific factors including managers’ personal views and priorities.

The The Influence of Audit Tenure and Audit Committee on Earnings Quality


 
 
 
 One of the Auditor and Audit committee role is to ensure the quality of corporate financial reporting process. This study aims to test the effect of the length of auditor tenure and audit committee on earning quality measured by the absolute value of discretionary accruals. A sample of 465 companies has been selected and data covering the period 2009-2014 has been collected from these firms, where 2325 observation were used in this analysis. The data collected form CSMAR and analyzed using GLS regression analysis.
 
 
 
 
 This study found that the short audit tenure on Chinese listed company in Shenzhen Stock Exchange has a significance negative influence on earning quality, meanwhile this study found that audit committee which is measure by the size of the committee does not has a significance influence on earning quality. This study suggests that auditor should have a longer tenure to gain adequate knowledge of client’s business. Moreover companies should strengthen the role of their audit committee in monitoring financial reporting process by improved their activity and financial knowledge of the member.

Engagement partner attributes and earnings quality: evidence from Borsa İstanbul

This paper investigates the effects of engagement partners' attributes on earnings quality using 725 firm*year observations between 2008 and 2013 from Borsa Istanbul manufacturing industry firms. We use two indicators of earnings quality to test the effects of gender, educational background, experience and certification from among engagement partners' attributes. Our findings emphasise that engagement partners' attributes do not have any impact on real activities-based earnings management but have an impact on accruals-based earnings management. Female engagement partners have a negative effect on the absolute value of discretionary accruals, especially in negative discretionary accruals. On the other hand, we find that engagement partners with longer experience have negative impact on the absolute and negative discretionary accruals.

Engagement Partners Attributes and Earnings Quality: Evidence from Borsa stanbul

This paper investigates the effects of engagement partners’ attributes on earnings quality using 725 firm*year observations between 2008 and 2013 from Borsa Istanbul manufacturing industry firms. We use two indicators of earnings quality to test the effects of gender, educational background, experience, and certification from among engagement partners’ attributes. Our findings emphasize that engagement partners’ attributes do not have any impact on real activities-based earnings management but have an impact on accruals-based earnings management. Female engagement partners have a negative effect on the absolute value of discretionary accruals, especially in negative discretionary accruals. On the other hand, we find that engagement partners with longer experience have negative impact on the absolute and negative discretionary accruals.

Regulatory investigations of audit partners and audit quality improvement

Prior studies of the effect of regulatory monitoring on audit quality focus on regulatory sanctions but ignore regulatory investigations. We hand-collected data on the China Securities Regulatory Commission (CSRC) investigations announced during 2001–2015 to examine the impact of CSRC investigations on the audit quality of the targeted partners. We find that after the audit partners are investigated by the CSRC, their clients exhibit a lower absolute value of discretionary accruals and the partners are more likely to issue modified audit opinions. Our results suggest that CSRC investigations lead to improvement in the audit quality of the partners involved in the investigations. In contrast, CSRC sanctions have a relatively weak effect on the audit quality of the involved partners. Overall, our study provides evidence that CSRC monitoring helps to improve the audit quality of audit partners, and the effect manifests around CSRC investigations.

Business group affiliation, earnings management and audit quality: evidence from Bangladesh

PurposeThis study aims to investigate the moderating role of audit quality on the association between business group affiliation of firms and earnings management in the South Asian emerging economy of Bangladesh.Design/methodology/approachA usable sample of 917 firm-year observations was drawn from companies listed on the Dhaka Stock Exchange from 2005 to 2013. Data were collected from the annual reports of sample companies. Earnings management was measured using the absolute value of discretionary accruals, and two proxies were used to measure audit quality: auditor size and industry specialisation.FindingsResults showed that the level of discretionary accruals is positively associated with business group affiliation status, and higher audit quality reduces this association. This suggests that in environments without strong investor protection, complex ownership structures create opportunities for controlling shareholders to expropriate minority shareholders. The controlling shareholders could then mask this practice through earnings management. The findings also show that in environments lacking strong investor protection, audit quality can help improve earnings quality for group-affiliated firms.Practical implicationsThe results suggest that financial statement users need to consider audit quality for a reasonable evaluation of the earnings quality of business groups. The study also informs regulators by illuminating audit quality as a key area of focus in any effort directed at enhancing stock market efficiency through improved earnings quality in environments where business group affiliation is prevalent.Originality/valueThis study documents empirical evidence on the moderating effect of audit quality on the positive association between business group affiliation and earnings management.

Do big 4 audit companies detect earnings management and report it in the audit opinion? Empirical evidence from italian non-listed firms

One of the earliest theories in the audit literature is that Big 4 auditors, due to their larger size and better training programmes, provide higher audit quality than other auditors in listed companies (e.g. Dopuch and Simunic, 1982; Davidson and Neu, 1993; Becker et al., 1998; Francis and Krishnan, 1999; Bauwhede et al., 2003; Cai et al., 2005). The argument is that larger audit firms have more reputation to lose by sacrificing their independence on any given audit engagement, thus Big 4 auditors’ higher levels of audit quality should be associated with lower levels of earnings management. To the extent that managers want to mislead some stakeholders about the underlying economic performance of the company or to influence contractual outcomes that depend on reported accounting numbers (Healy and Wahlen, 1999, p. 368), earnings will also be managed in non-listed firms. Bank financing is usually a major source of finance in privately held companies (Van Tendeloo and Vanstraelen, 2008), resulting in agency conflicts between bankers and owners, and between bankers and management (Vander Bauwhede and Willekens, 2004), which could also create earnings management incentives. The audit quality is the joint probability that the auditor detects an anomaly (first dimension) in financial statements, and then reveals it to the external users (second dimension) (DeAngelo, 1981). Analysing a panel sample of Italian non-listed firms over the years 2007-2012, our main findings suggest that Big 4 auditors are more likely to discover (auditor’s technical capabilities) earnings management initiatives than other auditors (a non- Big 4 auditor and statutory auditors), because a Big 4 auditor is negatively associated with the absolute value of discretionary accruals (Jones, 1991; Dechow et al., 1995). Analysing the same sample firms, a logistic panel regression suggests that, according to previous literature, the absolute value of discretionary accruals is positively associated with the probability that a qualified audit report is issued, meaning that the absolute value of discretionary accruals explains the issuance of qualified opinion for materially misstated financial statements. The panel logistic regression also suggests that the association of the absolute value of discretionary accruals and of a Big 4 auditor is positively associated with the probability that a qualified audit opinion is issued, meaning that when a Big 4 auditor discovers an accounting anomaly in the financial statements, it is reported in the audit opinion (auditor independence). Our findings also show that the audit opinion in previous years also affects, on average, the audit opinion of the year of the analysis.

The Influence of Audit Tenure and Audit Committee on Earnings Quality (Empirical Study on Chinese A-Shares Manufacture Companies Listed in Shenzhen Stock Exchange)

One of the Auditor and Audit committee role is to ensure the quality of corporate financial reporting process. This study aims to test the effect of the length of auditor tenure and audit committee on earning quality measured by the absolute value of discretionary accruals. A sample of 465 companies has been selected and data covering the period 2009-2014 has been collected from these firms, where 2325 observation were used in this analysis. The data collected form CSMAR and analyzed using GLS regression analysis. This study found that the short audit tenure on Chinese listed company in Shenzhen Stock Exchange has a significance negative influence on earning quality, meanwhile this study found that audit committee which is measure by the size of the committee does not has a significance influence on earning quality. This study suggests that auditor should have a longer tenure to gain adequate knowledge of client’s business. Moreover companies should strengthen the role of their audit committee in monitoring financial reporting process by improved their activity and financial knowledge of the member.

The association between human resource investment by audit firms and their audit quality

Utilizing unique data available only in Korea, we examine the association between investment in human resources and audit quality provided by audit firms. While human resources investment is important in improving audit quality, few studies have examined this association mainly because public data about human resources investment and financial statements of audit firms are unavailable. Using two proxies for audit quality (i.e. discretionary accruals and accounting conservatism), we provide evidence that higher compensation in audit firms improves audit quality. In addition, we find higher audit quality in audit firms with higher education expenses, when audit quality is measured by the level of conservatism of clients’ financial statements. These results support regulators’ stance that quality control through human resources investment in audit firms can effectively improve audit quality and therefore the quality of clients’ financial reporting. However, we find no association between education expenses and the average absolute value of discretionary accruals of audit clients. These results generally suggest that direct investment in human capital (i.e. compensation) is more effective in improving audit quality than indirect investment in human capital (i.e. education expenses).

ERP Systems and Earnings Quality: The Impact of Dominant Shareholdings in China

ABSTRACT Using a sample of ERP adopters among Chinese publicly listed firms and a one-group pre- and post-test design, this study examines the impact of dominant shareholdings on the relationship between Enterprise Resources Planning (ERP) systems and earnings quality. We use the absolute value of discretionary accruals as a proxy for earnings quality. We predict and find that as the dominant shareholdings increase, Chinese firms show a decrease in the absolute value of total discretionary accruals after ERP implementations. Furthermore, we find that after ERP implementations, discretionary short-term accruals decrease with higher dominant shareholdings, while discretionary long-term accruals increase with higher dominant shareholdings. Our study contributes to research and practice by documenting that dominant shareholdings in China can influence the impact of ERP implementations on earnings quality, suggesting that dominant shareholdings may induce dominant shareholders' self-serving incentives to influence firms' financial reporting via ERP implementations.