Discretionary Accrual Models Research Articles

A quantitative study on the effectiveness of the governance attributes on ‘industry-wise earnings quality’ in the UK

Despite of positive impacts of the earnings management on the business purposes, many businesses have been suffered due to the audit failures as a result of aggressive earnings management. Therefore, the study on true reflection of earnings management, the controlling factors and how aggressively manipulated earnings quality can be mitigated are the areas of concern these days. For the estimation of earnings management, performance matched discretionary accruals model has been implemented as this model has been identified as the best explanatory models. Thereafter, this research has accumulated the sector-wise earnings management to identify the impact of sectors on the sectorial earnings management. There are eleven different industries involved in the research while four of them have revealed that the managers from certain sectors have got involved in the aggressive earnings management. Further, this research has investigated the impact of the attributes of the corporate governance on the sector-wise earnings management. the variables of corporate governance like managerial ownership, block-holders, institutional ownership and non-executive directors’ fees have significant impact on sector-wise earnings management where other variables like board meeting, board size, number of female members on the board, board independence have not been identified as they have significant impact on controlling earnings management. Univariate and multivariate methods are used to demonstrate the results and to establish the inferences of the outcomes of the research. The use of coefficients (β -value) and p-value are much prominent in this study.

THE EFFECT OF CSR ON EARNINGS MANAGEMENT: MODERATING ROLE OF BOARD DIVERSITY IN PAKISTANI LISTED FIRMS

This study examines Corporate Social Responsibility (CSR) and Earnings Management (EM) relationship with moderating role of board diversity of two types, i.e., female and foreign directorships on board. Content analysis is used for measurement of CSR through a data sample of 274 firms from the non-financial sector listed on Pakistan stock exchange for years 2012, 2014, and 2015. However, EM is measured over three discretionary accruals models Jones, Modified Jones, and Kothari models. Based on the results of descriptive analysis, it has been found that the level of CSR reporting has been improved in the post-CSR guidelines period as compared to the pre-CSR guidelines period. While results of regression analysis report that the higher CSR level of an organization the lesser would be the EM activities. This study suggests managers to concentrate upon CSR and board diversity for better earning management. Impact of board diversity on relationship as a moderator makes this study more novel because, as far as our research and previous literature is concerned, there has been very limited literature on this topic.

Accounting Conservatism in Borrowers’ Financial Reporting and Earnings Management

[Purpose] This study examines the association between conservatism in borrowers’ financial reporting and their earnings management behavior.
 [Methodology] Based on non－financial companies listed on KOSPI and KOSDAQ for the fiscal years from 2012 to 2021, we find the effect of bank loans on conservatism in borrowers’ financial reporting and their earnings management. We calculate earnings management by using the absolute value of discretionary accruals from the modified Jones model (Dechow et al. 1995) and the absolute value of discretionary accruals from the performance－matched discretionary accrual model (Kothari et al. 2005). We measure the value of firm－year accounting conservatism from Khan and Watts’ (2009) conservatism scores.
 [Findings] We find that earnings management behavior of a borrowing firm decreases as the firm’s accounting conservatism increases.
 [Implications] The results of this study indicate that firms’ accounting conservatism in financial reporting plays an effective role in constraining their earnings management behavior. In addition, results imply that conservatism in financial reporting has an incremental contribution to the governance role of banks in constraining borrowing firms’ opportunistic reporting behavior. Overall, the findings of this study demonstrate that accounting conservatism plays a complementary role to a bank’s monitoring function.

Analysis of Different Discretionary Accruals Model on Indian Economic System

Analysis of Different Discretionary Accruals Model on Indian Economic System

Analisis Faktor-Faktor yang Mempengaruhi Likuiditas Pasar Saham

The objective of this study is to obtain valid evidence regarding the individual effects of the variables Firm Value, earnings management, and stock risk on stock market liquidity. Stock Liquidity, Earning Management, Firm Value, and Stock Risk are measured respectively by Total Volume Activity, discretionary accrual model modified Jones, PBV, and Beta. Research in the form of causality. Samples were selected using a purposive technique. The data is extracted from the company's annual financial reports accessed from official sources. The samples were 16 companies from the infrastructure sub-sector manufacturing group listed on the IDX during the 2017-2021 period, so that 80 observation data were obtained. Multiple regression is used for data analysis, where the tests include multicollinearity tests, partial-t tests and coefficient of determination tests. The findings of this study show that Earning Management, Firm Value, and Stock Risk affect Stock Market Liquidity

The Estimation and Power of Alternative Discretionary Accruals Models

Discretionary accruals remain decade’s long measures to detect earnings management in empirical accounting research. The correctness of the specifications and test power of the information content for the models remains unexplored based on samples of most emerging market firms. Yet, country’s-based researchers have increasingly used different Jones-based discretionary accruals to proxy earnings management. The paper aims to evaluate four discretionary accruals models and to decide the most appropriate one for the detection of earnings management. For the aim, we apply regression methods to estimate and evaluate four Jones-type discretionary accruals models – simple Jones, modified Jones, extended Jones cash flow model and working capital accruals – based on evidence of a final sample of 1,852 firm-year of 102 firms in Nigeria during 2001–2020. The results disclose that all models are well-specified such that the likelihood of Type I errors is minimum and below the significance level of 5%. In order to demonstrate the power of the test, the simulations completed identify that the modified Jones model exhibits the highest power capability. The implication of this finding is that the modified Jones model is the most appropriate model to detect earnings management based on the Nigerian sample.

Pengaruh Struktur Modal Terhadap Manajemen Laba

The purpose of the study was to analyze and determine the impact of capital structure as measured by the debt-to-asset ratio (DER) and the debt-to-asset ratio (DAR). financial ratios on earnings management calculated using the Jones and Modified Jones discretionary accruals models. The secondary data used is the financial statements of PT. Piranti Jagad Raya for the 2018-2022 period. The data analysis technique uses simple linear regression with the help of SPSS Statistics 25. The results and findings of the study show that capital structure has a significant positive effect on earnings management. This indicates that the higher the equity of a company, the more efficient use of earnings management. Implications for PT. The Jagad Raya tool is to avoid agency problems and information asymmetry between agents and principals. Companies can implement more efficient earnings management or suppress the use of earnings management to avoid opportunistic actions so that companies have healthy financial reports.
 Keywords: Earnings Management, Capital Structure, Agency teori

Benchmark Beating and Earnings Manipulation in Nigerian Firms

Earnings management among firms remains a central focus for academics, auditors and regulatory bodies. Benchmark-motivated earnings management occurs when managers engage in opportunistic activities, including flexible use of accounting standards to misrepresent the information in a firm’s financial reports. Academic research has focused on how firms manage earnings to beat benchmarks, but the evidence regarding firms in emerging African stock markets is scarce and none is available for Nigeria. We applied both accruals quality and discretionary accruals models to detect whether firms that beat earnings benchmarks report earnings differently from others. Using 161 firms listed on the Nigerian Stock Exchange from 2002 to 2019, the study verifies how benchmark beaters manage earnings under the framework of two earnings thresholds – earnings (level) and positive earnings changes. Earnings persistence tests were carried out to verify whether benchmark beaters are consistent manipulators relative to non-beaters. The findings indicate that positive earnings benchmarks differ among the dichotomized groups. The evidence is not sufficient to validate that the change in earnings benchmarks motivates earnings discretions. However, the evidence may improve for larger samples. The study offers insights for informed decisions on the expectation of investment returns for investors, creditors, and other market partakers that require earnings information.

The Empirical Study of the Effect of Corporate Governance on earnings management based on FTSE350, UK

While the interests of shareholders contradict with the interests of the managers, agency problem appears. However, the principle of the agency theory is to establish the relationship between the shareholders and managers; and this paper relies on the involvement of corporate governance who can resolve the issues between earnings management and the underlying causes. The main aim of this study is to identify the impact of corporate governance on controlling the discretionary accruals based on the FTSE350 by considering the performance matched discretionary accruals model. It has considered the OLS regression model and tested the hypotheses. The findings of this paper reveal the mixed results as board independence, the presence of female in the board, non-executive director’s fees and block holder have significant impact whereas board size and board meeting do not have significant impacts on controlling discretionary accruals.

The Supervision Role of Independent Commissioner in Decreasing Risk From Earnings Management and Debt Policy

Purpose : This study examines the effect of earnings management and debt policy on financial distress. In addition, this study examines the role of the independent commissioner as a moderating variable in the relationship between the independent and dependent variables. Financial distress in this study employs the Altman model (1968) modified by Graham et al. (1998) which has a high prediction rate, above 60 percent, and its size has been used in various countries. Earnings management in is study employs the model of Kothari et al. (2005), known as the Performance-Matched Discretionary Accruals model. The advantage of the model is that it can measure earnings management more accurately. Using independent commissioners as a moderating variable in the association between earnings management and debt policies on financial distress is rarely used in previous studies.
 Method : This study uses a quantitative method approach. The research data is sourced from consumer goods sector companies listed on the Indonesia Stock Exchange (IDX) financial statements. Research data sourced from www.idx.co.id and www.idnfinancials.com. Based on purposive sampling, the research sample consisted of 138 observations from 46 companies from 2018 to 2020. Hypothesis testing was carried out using multiple linear regression for panel data.
 Findings : The results of this study indicate that earnings management has a negative effect on financial distress, while debt policy has a positive effect on financial distress. This study also finds that independent commissioners can attenuate the negative effect of earnings management on financial distress. Still, independent commissioners cannot have a moderating effect on the relationship between debt policy and financial distress.
 Novelty : This study places independent commissioners, which have greatly influenced a company’s management performance, as a moderating variable in testing earnings management and debt policies on financial distress, which are rarely used in previous studies.
 Keywords: Financial Difficulties; Earnings Quality; Capital Structure; Corporate Governance

Residuals from two‐step research designs

AbstractA number of studies have begun to question the appropriateness of the widespread and pervasive usage of regressions in two‐step research designs in the accounting literature to obtain variables. The use of residuals from a first‐step model as a dependent variable in a second step has been used in contexts such as earnings management and unexpected audit fees. In this paper, I provide a discussion of the issues within the use of residuals from a first‐step model in a second step. Taking the case of discretionary accruals models, I demonstrate some of the model specification issues explicitly and implicitly considered within these criticisms. I then add a discussion over some concerns regarding the economic interpretation in the use of first‐step residuals.

Effect of Transfer Pricing, Capital Intensity and Earnings Management on Tax Avoidance

Taxation is a mechanism for collecting state revenues and an instrument of a country's fiscal policy. However, tax is a burden for the company. So the company's management is interested in maximising profits by avoiding taxation. This study aims to determine the effect of transfer pricing, capital intensity, and earnings management on tax avoidance in manufacturing companies listed on the Indonesia Stock Exchange for the 2015–2019 period. The determination of the research sample was made using the purposive sampling method, with a total sample of 66 companies, to obtain 330 data. The software used is E-views 9. Tax avoidance was proxied by the cash effective tax rate; transfer pricing was proxied by the ratio of related party sales transactions to total sales; capital intensity was proxied by the percentage of total fixed assets to total company assets, and earnings management was proxied by the modified Jones discretionary accrual model. The results show that transfer pricing, capital intensity, and earnings management significantly affect tax avoidance simultaneously or partially.

Pengaruh Audit Tenure, Rotasi Audit, dan Spesialisasi Auditor Terhadap Kualitas Audit Pada BUMN Go-Public

<p><em>This study was conducted to examine the effect of audit tenure, audit rotation, and auditor specialization on audit quality. Where the study of audit quality is useful for users of financial statements and auditors in particular, as well as to add empirical evidence related to several factors that affect audit quality. The measurement of audit quality used in this study uses the discretionary accrual model of Kasznik (1999). This research is different from previous research, where this research was conducted in a Go-Public BUMN company listed on the Indonesia Stock Exchange. Samples were taken from the period 2016-2020 with</em><em> a </em><em>purposive sampling method. The research method used is a quantitative method, using secondary data from Go Public BUMN Companies listed on the Indonesia Stock Exchange. The results of the regression analysis show that audit tenure and audit rotation have no effect on audit quality. Meanwhile, auditor specialization has a positive effect on audit quality.</em></p>

How Do Financial Distress Risk and Related Party Transactions Affect Financial Reporting Quality? Empirical Evidence from Iran

The paper aims to investigate the effects of financial distress risk (FDR) and related party transactions (RPT) on financial reporting quality (FRQ) in an emerging market called Iran. In this study, the ordinary least squares regression (OLS) method is employed to test the hypotheses; moreover, Jones’ discretionary accruals model is used to assess the financial reporting quality (FRQ). The results show financially distressed companies have a lower financial reporting quality because they try to mislead other stakeholders about the corporate actual performance to attract more investors and lenders. Consistent with the “tunneling” or “conflict of interests transaction” assumption, our findings confirm there is a positive association between related party transactions through loan and accrual-based profit management. In other words, Iranian managers participate in loan-related party transactions to expropriate their firm’s resources and then manipulate financial statements to mask such expropriation. Finally, additional analysis indicates that financial reporting quality is seen well among firms having higher sale growth and more institutional owners, whereas the variables of ROA and financial leverage negatively affect financial information quality.

Earnings and discretionary accruals

Earnings management is a concerning issue for investors and regulators as it reduces the informativeness of financial reporting. Discretionary accruals are acknowledged to be proxies for earnings management. The study is conducted on firms in the US markets from 1975 to 2012, and the quantitative methodology is applied. Earnings management is revealed by an abnormal level of accruals relative to the firm's business activity. This paper investigates the earnings pattern and earnings management of the firm based on different models of discretionary accruals as proxies for earnings management: modified Jones, performance‐matched discretionary, and growth‐based cash flow discretionary accruals. Using a novel approach to detect the earnings pattern of firms, we find that firms in the negative earnings group are more involved in earnings management activity.

A diagnostic for earnings management using changes in asset tuırnover and profit margin: evidence from Palestine Exchange

Purpose - This paper aims to evaluate whether the earnings management diagnostic using changes in asset turnover and profit margin as proposed by Jansen et al., (2012) is informative in identifying earnings management Methodology - Two tests were employed: firstly, the association between the diagnostic and discretionary accruals using Kothari et al., (2005) model, was tested by using Pearson correlation and contingency tables. Secondly, by using future profitability reversals as an indicator of earnings management, the investigation of whether the diagnostic has incremental information in identifying earnings management as compared to Kothari et al., (2005) model was performed using multivariate regression analysis. Data was collected for the period from 2006 to 2017 and comprises a total of (3,108) firm-year observations from the Palestinian stock exchange. Findings- The results indicate that the diagnostic proposed by Jansen et al., (2012) is a useful indicator for earnings management, as well as this diagnostic, provides higher information content in identifying earnings management than the discretionary accruals model i.e. Kothari et al., (2005) model. Conclusion- This study contributes to the limited earnings management literature in emerging economies generally, and in the Palestinian context particularly. The results of the study benefit financial statement users to have diagnostics for earnings management that are informative.

Is there any interaction between real earnings management and accrual-based earnings management?

This research aims to investigate whether firms employ real earnings management (REM) and accrual-based earnings management (AEM) as substitutes for each other when managing earnings to meet earnings benchmarks. It specifically looks at the sequential nature of both forms of earnings management. REM is proxied by an abnormal amount of operating cash developed by Dechow et al. (1998), while AEM is proxied by the discretionary accrual model by Dechow, Sloan, & Sweeney (1995). The data was obtained from the Economics and Business Data Center, Faculty of Economics and Business, Gadjah Mada University, focusing on manufacturing and mining companies during the period from 2005 to 2013, which resulted in 754 firm-years data. Using correlation tests and an empirical model developed by this research, which captures the interaction between REM and AEM, this research shows that firms use both forms of earnings management sequentially; managers more often engage in accrual-based earnings management if the earnings produced by real manipulations do not meet the earnings target. This finding is important as REM and AEM occur sequentially instead of simultaneously, and earnings performance is not only driven by accrual-based earnings management but also by real earnings management.

نقش مدیریت سود در شناسایی صورتهای مالی متقلبانه در شرکتهای پذیرفتهشده در بورس اوراق بهادار تهران

هدف: ارائۀ گزارش‌های سالانه منبع باارزشی برای سرمایه‌گذاران، اعتباردهندگان و سایر استفاده‌کنندگان اطلاعات حسابداری است؛ با این حال، بخشی از گزارش‌ها به دلایل مختلف به‌صورت واقعی ارائه نشده است و این موضوع سبب کاهش سودمندی گزارش‌ها می‌شود. مسئلۀ مهم در حسابداری، پیش‎‌بینی و کشف صورت‌های مالی متقلبانه است. روش: این پژوهش برای کمک به شناسایی این صورت‌های مالی، رابطۀ مدیریت سود و صورت‌های مالی متقلبانه را در شرکت‌های پذیرفته‌شده در بورس اوراق بهادار تهران بررسی کرده است. برای سنجش توانایی الگو‌های مدیریت سود در شناسایی صورت‌های مالی متقلبانه، داده‌های 1303 سال – شرکت (شامل 21 شرکت متقلب و 168 شرکت غیرمتقلب) طی سال‌های 1388 تا 1394 انتخاب و تجزیه و تحلیل با استفاده از روش‌های داده‌کاوی شامل درخت تصمیم، شبکه‌های عصبی و روش بیزین انجام شده است؛ بدین منظور 7 معیار مشهور مدیریت سود استفاده‌شده در پژوهش‌های قبلی بررسی شده است. نتایج: نتایج پژوهش نشان می‌دهد از بین الگو‌های پژوهش، الگوی درخت تصمیم و از بین الگو‌های اقلام تعهدی، الگوی اقلام تعهدی تعدیل‌شدۀ جونز1 (1991) با نسبت ارزش دفتری، بیشترین ارتباط را با صورت‌های مالی متقلبانه دارد.

Does Sharia compliance affect financial reporting quality? An evidence from Muslim majority countries

PurposeSharia compliance states that the compliant company operates not only under regulations but also to the restrictions and permission of Islam. This study aims to reveal whether Sharia compliance enhances the financial reporting quality.Design/methodology/approachThe sample is constructed from 15 Muslim majority countries, 2,300 companies for the periods between 2005 and 2017 with 23,810 firm*year observations. Financial reporting quality is measured with discretionary accruals and audit aggressiveness. Discretionary accruals is the absolute of Kothari, Leone and Wasley’s (2005) “performance matched discretionary accruals model.” Audit aggressiveness is calculated with Gul, Wu and Yang’s (2013) model.FindingsThis study reveals the behavioral differences in financial reporting quality between Sharia-compliant and non-compliant companies. According to the analyzes, Sharia compliance increases the financial reporting quality by decreasing the discretionary accruals and audit aggressiveness. This result is supported by the robustness tests.Practical implicationsSharia compliance is not limited to business activity, financial restrictions and supervisory board for Sharia-compliant companies. It also enhances the companies’ financial reporting quality. Robustness analysis also showed that the International Financial Reporting Standards (IFRS) increases the financial reporting quality by reducing discretionary accruals and audit aggressiveness.Originality/valueThis study contributes to the accounting literature by providing an insight on the use of Islamic financial instruments. The empirical results also show that the use of IFRS and Islamic financial instruments decreases the discretionary accruals and audit aggressiveness.

Does Sharia Compliance Affect the Earnings Management of Companies in Muslim Majority Countries?

Purpose – Sharia compliance states that the compliant company operates not only under regulations but also to the restrictions and permission of Islam. This research aims to reveal whether Sharia compliance enhances financial reporting quality. Design/methodology/approach – The sample is constructed from 15 Muslim majority countries, 2,300 companies for the periods between 2005 and 2017 with 23,810 firm*year observations. Financial reporting quality is measured with discretionary accruals and audit aggressiveness. Discretionary accruals is the absolute of Kothari, Leone, and Wasley’s (2005) “Performance Matched Discretionary Accruals Model”. Audit aggressiveness is calculated with absolute of Gul, Wu, and Yang’s (2013) model. Findings – This research reveals the behavioral differences on financial reporting quality between Sharia-compliant and non-compliant companies. According to the analyses, Sharia compliance increases the financial reporting quality by decreasing the discretionary accruals and audit aggressiveness. The robustness tests support this result. Practical implications – Sharia compliance is not limited to the business activity, financial restrictions, and Supervisory Board for Sharia-compliant companies. It also enhances the companies’ financial reporting quality. Robustness analysis also showed that IFRS increases the financial reporting quality by reducing discretionary accruals and audit aggressiveness. Originality/value – This research contributes to the accounting literature by providing insight into the use of Islamic financial instruments. The empirical results also show that the use of IFRS and Islamic financial instruments decreases the discretionary accruals and audit aggressiveness.