Discretionary Accruals Research Articles

Corporate social responsibility and earnings management: The moderating effect of CEO personality traits

ABSTRACTThe debate surrounding the influence of corporate social responsibility (CSR) on earnings management (EM) remains inconclusive, featuring two opposing perspectives. The opportunistic viewpoint suggests that CEOs use CSR as a tool for manipulating earnings, employing it as a strategic shield to conceal opportunistic behavior. Conversely, the ethical viewpoint posits that CSR aims to cultivate trust with stakeholders, promoting long‐term performance while avoiding EM. This paper aims to address this question by considering the role of psychological traits. Specifically, we examine the relationship between CSR and EM and investigate whether psychological traits moderate this relationship. Using a sample of 318 firms from the S&P 500 index from 2015 to 2019, the results show that CSR has a positive impact on EM, indicating that CSR creates more favorable conditions for EM and supporting the opportunistic behavior hypothesis. Furthermore, CEO narcissism moderates the relationship between CSR and EM, influencing an increase in income. Finally, CEO hubris positively moderates the relationship between CSR and both the absolute value of discretionary accruals and positive discretionary accruals. Our findings lead us to the conclusion that narcissistic or hubristic CEOs reinforce the opportunistic behavior hypothesis.

Climate policy uncertainty and earnings management

I investigate how climate policy uncertainty (CPU) influences earnings management (EM). The analysis reveals that high levels of CPU are associated with a reduction in the absolute value of abnormal discretionary accruals. This relationship remains robust across two instrumental variable approaches, several internal and external governance factors, and various alternative measures of EM. Additionally, I find that the negative association between CPU and EM is more pronounced in firms with a higher likelihood of financial distress, greater institutional investor monitoring, and stronger corporate social responsibility (CSR) practices.

ESG SCORES, EARNINGS MANAGEMENT AND FINANCIAL PERFORMANCE: EVIDENCE FROM POLAND

The paper's main aim is to investigate the relationship between the ESG activities scores and profitability metrics of 33 public companies listed on the Warsaw Stock Exchange. By utilizing the Refinitiv methodology, we answer whether a company's environmental, social and governance performance perspectives positively affect the ROA, ROE and ROC ratios or whether there is a negative relationship. A secondary objective of the research is to investigate the relationship between profitability and the magnitude of aggregate-based earnings management in the tested sample. The moderating effect of earnings manipulation on the links between ESG performance and a company's profitability metrics is a research gap that has not been well-studied to date.This research demonstrates contradictory results: a positive relationship between the social dimension of ESG activities and the financial performance of companies was observed regarding ROE and ROC ratios. The negative impact of the environmental pillar rank on the ROA ratio was captured only in selected regression analyses. The governance pillar score did not statistically affect the tested profitability metrics. On the other hand, we gathered evidence that public companies with a high range of non-financial disclosures tend to alter earnings via accruals, and discretionary accruals statistically affect the ROA, ROE and ROC ratios. This finding contrasts previous research claiming that the earnings management phenomenon is a typical agency problem and that the policy of non-mandatory disclosures following the ESG assumptions could constrain the asymmetry of information and managerial information advantages.

Pengaruh debt to equity ratio (DER), long-term debt to asset ratio (LDAR), dan discretionary accrual terhadap pajak penghasilan badan terutang (Studi pada perusahaan jasa transportasi dan logistik di Bursa Efek Indonesia periode 2019-2023)

This study aims to examine the significant effects of the debt to equity ratio (DER), long-term debt to asset ratio (LDAR), and discretionary accrual on corporate income tax payable in transportation and logistics sector companies listed on the Indonesia Stock Exchange during the 2019–2023 period. The study employs a quantitative approach with purposive sampling, resulting in a sample of 11 companies from a total population of 37 companies. Data analysis was conducted using multiple linear regression analysis with the assistance of IBM SPSS 26 software. The results indicate that, partially, the debt to equity ratio (DER) has a positive and significant effect, the long-term debt to asset ratio (LDAR) has no significant effect, while discretionary accrual has a negative and significant effect on corporate income tax payable. Simultaneously, the debt to equity ratio (DER), long-term debt to asset ratio (LDAR), and discretionary accrual have a significant impact on corporate income tax payable.

The Influence of External Audit Quality on Discretionary Accruals and Real Earnings Management Practices: An Analysis of Malaysian Firms

This paper aims to analyse the mitigating effects of external audit quality (EAQ) factors on earnings management (EM) practices. Data were collected from firms listed on Bursa Malaysia’s main market, covering the years 2011 through 2022. Panel regression was employed to analyse the data. The findings of this study confirmed a significant negative association between audit reputation, audit quality, audit opinions, and EM of listed firms in Malaysia. Audit fees and audit tenure were found to be not significant in relation to EM. The study included five control variables in the analysis, and only economic value added (EVA) was found to be significant. The findings suggest that a number of audit quality factors are indicative of EM among listed firms. The authors extend, as well as contribute to, the growing literature on the EAQ, and therefore, wider corporate governance literature. Thus, it provides originality by presenting empirical evidence and outcomes to fully understand how discretionary accrual and real EM affect EAQ in the Malaysian context. Therefore, stakeholders should place higher concern on the selection of an external auditor, and investors should take into account the external audit factors when making investment decisions. Measuring the effectiveness of EAQ allows decision-makers to evaluate how effective employed governance measures are in improving shareholders’ perceptions of financial information quality and mitigating EM practices.

Discretionary Accrual in the Knowledge-Based Economy

The modern economy transit from manufacturing to knowledge-based industries that are dependent on investments in R&D, advertising, and employee talents. These investments and much of the value that they generate cannot be capitalized as assets. As these intangible assets are off-balance-sheet, a firm’s book value might be low. When book value fails to present a firm’s true value, we stipulate that management has incentive to manage its earnings to convey information that is not reflected in the balance sheet. We find that firms with negative book value and in the New Economy use more discretionary accruals.

Determinant state earnings qualities better than Private Pharmaceutical Companies

Purpose: Comparative Earning Quality of State and privately pharmaceutical companies listed on Indonesian Stock Exchange (BEI) between 2019-2023 period with liquidity, profitability, solvency and efficiency ratio. Methodology/approach: After collecting the necessary data, appropriate financial ratios and descriptive statistical techniques are used to analyze, interpret and provide a brief overview of the data collected. the comparison involves two state-owned and two privately-owned pharmaceutical discretionary accruals and earnings persistence for earnings quality, and net profit margin, current ratio, debt-to-equity ratio, and total asset turnover for financial performance measurements. Findings: net profit margin, current ratio, debt to equity ratio, dan total asset turnover have significant differences in the variables private are superior to those of state pharmaceutical companies. This recommends the importance of improving earnings quality of State pharmaceutical companies Practical implications: these companies should refrain from earnings manipulation to foster strong and high-quality financial performance, particularly within Indonesia's pharmaceutical sector. Originality/value: This comparison aims to contribute to financial management research by providing insights into the performance of different types of pharmaceutical companies based on earnings quality and financial statement ratios, thus offering academic contributions to the field.

Aggressive Earnings Management And Stakeholders Protection In Profit Listed Organizations

Investors want to know that their interests come first, thus they place a high value on the public perception of the companies in which they have invested. The problem of stock market and share price performance, which is a major concern for shareholders and investors in the Nigerian capital market and indeed any other stock markets, is unpredictable. This study investigated the relationship between aggressive earnings management and shareholders' interest in profitable publicly listed corporations. The study employed an ex-post facto research design. The population of the research consisted of 35 manufacturing companies listed on the Nigerian Exchange Group as of December 31, 2020. Purposive Sampling technique was adopted to select 10 companies from 2011- 2020. Data were obtained from publicly available yearly reports, and they were certified by the NSE and outside auditors. Both descriptive and inferential statistics were utilized to analyze the data using regression analysis. According to the findings, aggressive profits management had no discernible effect on business protection (FStat (2,97)=11.994, p > 0.05, Adj R2=0.43), but it had a discernible effect on creditors' protection (F- Stat (2,97)=2.74, p <0.05, Adj R2=0.39). In contrast, based on the study's findings, it was advised that management of businesses develop measures to help increase their profitability, which would in turn have an effect on shareholders' return on equity and earnings per share. Significant relationships between discretionary accruals, unusual production costs, and irregular levels of operational cash flow and stakeholders' interest in profit-listed firms were discovered. Second, business owners should use profits measurement methods that have been validated via testing on a global scale, like the numerous indicators included in this study that were gleaned from accounting and finance literature

Accruals and Long-Term Nonfinancial Assets and Liabilities

ABSTRACT This study proposes improvements to accrual models. Existing models explain how working capital maps cash flows from operations into earnings and how this mapping reflects accounting conservatism. However, except for fixed asset depreciation, accruals associated with long-term nonfinancial balance sheet accounts (e.g., intangible assets, goodwill, deferred revenues) are not modeled. We show that these unmodeled accruals have grown in importance over time and that a significant portion of them can be explained by utilizing a fundamental property of accrual accounting: most nonfinancial assets and liabilities will eventually be transferred to earnings as accruals, especially during bad times. Using a large U.S. sample for the 1988–2019 period, we document that beginning-of-year long-term nonfinancial assets and liabilities are significantly associated with total accruals and that, consistent with conditional conservatism, a greater proportion of long-term nonfinancial assets is expensed as accruals when current performance is poor. In simulations, compared to traditional models, models that include long-term nonfinancial assets and liabilities as regressors are more likely to detect seeded discretionary accruals between 2% and 20% of total assets, suggesting that these expanded models should be used to decrease the likelihood of making erroneous inferences.

Political connections of independent directors and earnings quality: The case of French firms

This paper examines the impact of political connections of independent board directors on earnings quality. We used two proxies of earnings quality, namely, discretionary accruals and real earnings management. Based on a sample of 1,936 firm-year observations from 2012 to 2022, our results reveal that firms with politically connected independent directors are more likely to display lower earnings quality in higher discretionary accruals and greater real activities manipulation. These results suggest that the monitoring role of independent directors in constraining earnings management practices, as emphasized by the agency theory, may be compromised by political connections.

Auditor mood and audit quality: evidence from music sentiment measure

PurposeExtant studies propose music sentiment as a novel measure of individuals’ sentiment. These studies argue that individuals’ choice of music reflects their emotional condition in real time and influences their cognitive ability, making it a powerful tool for assessing their mood. This study aims to use music sentiment as a proxy for auditors’ mood and explore its impact on audit quality.Design/methodology/approachA sample of the US firms from 2017 to 2020 is used in the study. The authors apply the ordinary least squares regressions and the logit regressions to the audit quality models. The authors use absolute discretionary accruals and the propensity to meet or beat earnings forecasts as proxies for audit quality and calculate a stream-weighted average sentiment measure for Spotify’s Top-200 songs of each day during the audit period of a client firm to capture the sentiment of auditors.FindingsThe authors find that music sentiment is positively associated with audit quality. The result is consistent with the mood maintenance hypothesis, which suggests that a positive mood can induce auditors to be more careful in risky situations. Furthermore, the result is robust to various sensitivity analyses.Originality/valueThe study contributes to the scarce literature that focuses on auditors’ emotional state and highlights the importance of monitoring auditor mindset during the audit period.

The Impact of Changing External Auditors, Auditor Tenure, and Audit Firm Type on the Quality of Financial Reports on the Saudi Stock Exchange

The purpose of this study is to examine the influences of external auditor firm type, auditor tenure, and external auditor changes on the quality of Saudi Arabian financial reports. In particular, this study examines the quality of financial reports of companies listed on the Saudi Stock Exchange using a widely accepted evaluation model modified by JonesThis study aims to determine whether Big Four and non-Big Four audit firms, auditor tenures of three or more years, and external auditor changes have any impact on the quality of financial reports of Saudi-listed companies. This study uses 175 firm-year observations of 35 companies listed on the Tadawul Saudi Stock Exchange between 2017 and 2021. Using discretionary accruals (DACC) as modified by Jones to measure the quality of financial reports, the findings illustrate that there is a significant negative relationship between Big Four audit firms and DACC. However, the study also shows a significant positive correlation between auditor tenure and DACC. The research revealed that there is no significant relationship between auditor change and DACC. These results have practical implications for policy development. According to the outcomes of this research, there are numerous ramifications for both companies and the government in Saudi Arabia in terms of enhancing the relationship between companies and audit firms and determining the most suitable auditor tenure to improve the quality of financial reports.

Non-Audit Services (NAS) and Auditor Independence (AI): Moderating Role of Regulatory Environment

Objectives: This study aimed to examine the influence of non-audit services (NAS) on audit independence (AI) among non-financial companies listed on the Nigerian Stock Exchange (NSE). Specifically, it investigated the relationship between NAS fees and AI, with a focus on how regulatory quality moderates this relationship. Theoretical Framework: The study is grounded in agency theory, which suggests that conflicts of interest may arise when auditors provide NAS, potentially compromising their independence. The research also explores the role of regulatory quality in mitigating such conflicts, contributing to the broader understanding of corporate governance in emerging markets. Method: An ex-post facto research design was employed, analysing secondary data from 280 firm-year observations across 20 companies in nine industry groups on the NSE over a 15-year period (2006-2020). Audit independence was proxied by discretionary accruals, while NAS was measured using the NAS fee ratio (NFR) and the natural logarithm of NAS fees (LNNF). The hypotheses were tested using Autoregressive Distributed Lag (ARDL) models with the aid of Stata v15. Results and Discussion: The findings reveal that higher NAS fees (LNNF) are significantly associated with reduced audit independence, as indicated by increased discretionary accruals. However, this negative impact is moderated by the quality of the regulatory framework, which helps preserve AI. Contrary to initial expectations, the NAS fees ratio (NFR) was found to be positively associated with discretionary accruals, further emphasizing the critical role of regulatory quality in safeguarding audit independence. Research Implications: The study underscores the importance of robust regulatory frameworks in maintaining audit independence in the presence of NAS. It offers practical insights for policymakers and regulators to enhance corporate governance and financial reporting integrity in Nigeria. Originality/Value: This research contributes to the literature by providing empirical evidence from an emerging market, demonstrating the significance of regulatory quality in moderating the relationship between NAS and audit independence. It offers valuable guidance for policymakers, regulators, and practitioners aiming to strengthen corporate governance practices.

Pengaruh Free Cash Flow, Kualitas Audit, dan Pertumbuhan Laba Terhadap Manajemen Laba Dengan Ukuran Perusahaan Sebagai Variabel Moderasi

The purpose of this research is to determine whether there is an effect of free cash flow, audit quality, and earnings growth on earnings management with company size as a moderating variable. The data in this study uses discretionary accruals calculated using the modified jones model. This study uses consumer cyclicals and consumer non-cyclicals companies listed on the Indonesia Stock Exchange for the period 2020 to 2022 and uses purposive sampling method. The data analysis method used in this study is multiple linear regression.The sample in this study amounted to 192 data and minus 1 data due to outliers, so that in this study the data used amounted to 191. The results of this study concluded that free cash flow and earnings growth have a negative effect on earnings management, while audit quality has a positive effect on earnings management. In addition, company size does not weaken and strengthen the effect of free cash flow and earnings growth on earnings management, but company size can weaken audit quality on earnings management.

The Influence of Supervisory Board Composition on Discretionary Accruals in China

The Influence of Supervisory Board Composition on Discretionary Accruals in China

Study of the Relationship between the Rotation of External Auditors and Audit Quality

Purpose - The objective of this research is to study the relationship between external auditor turnover and audit quality. To do this, we chose two measures of audit quality, namely discretionary accruals and the auditor's opinion. Design/methodology/approach - Using a sample of 37 Tunisian companies listed during the period from 2015 to 2021, the paper uses a logistic regression to investigate the association between the quality of the audit and the rotation of the auditors. Findings - The results obtained based on linear and logistic regression invalidate the two hypotheses which assume on the one hand that a long-term mandate negatively influences the quality of the audit, on the other hand the assumption that the rotation of the auditors has a positive impact on the quality of the audit. Contrary to what was expected in our research, the results of the logistic regression show that a long-term audit mandate has a positive effect on audit quality. Research limitations/implications – This research may be of interest to many developing countries that has not a lot of studies on the audit turnover. Future research should focus on the link between audit turnover consequences to overcome the gap which might exist in the literature. Practical implications – Previous studies has shown how it is important to focus on audit opinion to reduce asymmetric information between managers and stockholders. And, this study offers some insights about audit shipping that should be analyzed to understand audit turnover. Originality/value – This research highlights the role of audit opinion in the rotation of auditors in emerging markets. Consideration of this relationship may contribute to the understanding of the auditor turnover in developing countries.

The Influence of Labor Market Power in the Audit Profession

ABSTRACT This paper examines the influence of labor market power in the audit profession. Using a dataset of online job postings, we confirm that audit offices in more concentrated labor markets have greater labor market power and exercise it in the form of higher skill requirements and greater required effort from their auditors, at similar or slightly lower wages. We then show that client firms of audit offices in more concentrated labor markets are less likely to restate their earnings and have lower absolute discretionary accruals. These findings are only present when employees have lower mobility across professions and geographies, consistent with audit offices’ power in the local labor market explaining the results. Collectively, our findings highlight the importance of labor market power in understanding audit quality. Data Availability: Data are available from the sources cited in the text. JEL Classifications: J31; J40; J42; M42; M55.

Signing auditors’ experience gap and audit quality

This study investigates how interactions between signing auditors with different levels of experience affect audit outcomes. Using the unique data from China, we find that a higher experience gap between signing auditors is associated with higher audit quality, as indicated by lower absolute discretionary accruals and a smaller likelihood of restatements. Further analyses suggest that the positive association between signing auditors' experience gap and audit quality is more pronounced for client firms that are more complex, have weaker corporate governance and higher information asymmetry, are audited by smaller audit firms, and are more economically important to auditors. Our results are robust to alternative research designs, alternative measures of auditor experience and audit quality, and other sensitivity tests. We contribute to the literature on auditor experience and audit team diversity with implications for audit firms’ personnel assignment.

Non-Big 6 audit firms’ access to external resources through inter-organisational relationships

Small audit firms try to reduce their resource constraints in serving clients by creating inter-organisational relationships (IORs) through membership in accounting networks or in agreements with individual firms. Through these relationships, firms have access to audit manuals/methodology, personnel, and may perform joint audits and joint marketing of their audit services. We identify the existence of IORs from PCAOB Form 2 filings and test whether audit quality and fees vary cross-sectionally as a function of the specific resource obtained from the IOR. We find evidence that firms with access to audit technology through IORs charge higher audit fees and provide higher quality audits, in terms of smaller clients’ performance-matched discretionary accruals, higher auditors’ likelihood of issuing going concern opinions to financially distressed clients, and fewer audit deficiencies identified in PCAOB inspection reports. The findings highlight the importance of access to audit technology through IORs in improving small audit firms’ real and perceived audit quality.

Bank-affiliated directors' monitoring, earnings management, and financial reporting quality in emerging markets: Evidence from India

In this novel investigation of creditor governance in an emerging market, this paper examines the monitoring by Indian lenders of firms' earnings management and financial reporting quality through the appointment of a bank-affiliated director to the borrower's board. Specifically, we study the effect of having a bank-affiliated director on the board (a “BDB”), prior to the implementation of India's Insolvency and Bankruptcy Code (IBC). This setting represents a business environment characterized by underdeveloped financial institutions, a weak legal system, and inefficient bankruptcy resolutions. Unlike the U.S., where BDBs play a limited monitoring role, our evidence suggests bank-affiliated directors played an active role in firm governance and lowered earnings management as well as improving financial reporting quality in India during the period of our study. Specifically, we find lower discretionary accruals among firms with BDBs in cross-sectional, pre-post, performance matched, and propensity score matched analyses – signaling higher reporting quality and less earnings management. This finding holds after controlling for endogeneity and when measures of accounting conservatism or earnings persistence are utilized as additional measures of reporting quality. Further, the dampening effect of BDBs on discretionary accruals is more pronounced for companies subject to greater information asymmetry and those prone to agency problems. In addition, firms with BDBs on the board have less volatile ROAs and lower idiosyncratic risk, consistent with BDBs encouraging borrowers to pursue less risky investments to safeguard creditors' interests. As the first examination of the monitoring influence of BDBs on financial reporting quality – and earnings management in particular – in an emerging market, our results provide unique insights for policymakers and creditors seeking to enhance governance and reporting quality of firms in evolving business environments.