Earnings Management Activities Research Articles

Auditors’ view on acceptability of clients’ earnings management practices

The purpose of this paper is to assess the views of auditors on earnings management in Malaysia. This study uses a questionnaire designed by Merchant and Rockness (1994), which consists of thirteen (13) short scenarios. Each scenario describes a potentially questionable earnings management activity undertaken by the general manager. The respondents were asked to judge the acceptability of each of the scenarios using a five-point (5) Likert scale. Based on responses, this study finds that acceptability varies with the type of earnings management. The auditors believe that discretionary accrual manipulation is more unethical than real activities manipulation, while the consistency with MFRS and the direction of effect on earnings management do not seem to be an issue to the respondents regarding the acceptability of earnings management

The effects of earnings management and corporate tax avoidance on firm value

This paper analyses the implications of earnings management and corporate tax avoidance on the value of firm. Using a sample of non-financial firms listed on the Ghana Stock Exchange over a period of ten years (2003-2012), the study focuses on two pertinent issues: first, it analyses the relationship between earnings management (EM) and corporate tax avoidance (CTA). Second, it empirically tests the effect of the interactions between the two variables on the value of the firm. The results suggest a pervasiveness of EM activities among sampled firms. It further reveals that managers employ avoidance techniques to manage earnings. Our sensitivity analyses suggests that, despite the positive influence of corporate tax avoidance on firm value, the effect is not significant to offset the negative impact of earnings management on firm value, thereby resulting in an overall negative effect on the value of the firm.

Detecting Earning Management: Deferred Taxes vs Accruals: A Pakistani Perspective

Objective: Earning Management has been one of the major areas of accounting research which has received a great attention in the past and also quite recently. Detecting earning management has always been one of the major areas of concern for the researchers. Earnings Management is pervasive. There are a number of models available to Detect and measure the earnings management activity.
 Methodology: The accrual models are the most used models to proxy the discretionary accruals and the earnings management. The effectiveness of the accrual models is somewhat skeptical at times when researchers found some inconsistencies in results while using the accrual models. The researchers are still finding some better and effective model that can be used to better measure and capture the earnings management activity. The focus of this study is to find out as to whether a deferred tax as compared to accrual models is more useful in measuring or detecting the earnings management in Pakistani perspective. The study is based on the Pakistani companies listed on the Karachi Stock Exchange (KSE). This study is expected to be an addition to the existing research as to whether the models used for detecting earnings management through deferred taxes by Philips et al (2003) are also applicable to Pakistani Scenario which is a developing country. The study used Probit Regression Model with pooled cross sectional data to measure the usefulness of both; accruals and deferred taxes (the proxies) used as better measure for Earnings management.
 Results: The results of the study are inconsistent with the Philips et al. (2003) study. Based on this study it is concluded that deferred tax is not incrementally useful along with the other accrual measure. The accruals models show significant results and are more powerful metric to detect earnings management as compared to the deferred taxes in Pakistan.

Accrual-based and Real Earnings Management Activities to Avoid Losses : Empirical Evidence on KOSPI and KOSDAQ Listed Firms

Accrual-based and Real Earnings Management Activities to Avoid Losses : Empirical Evidence on KOSPI and KOSDAQ Listed Firms

Does Enforcement Change Earnings Management Behavior? Evidence from the EU after Mandatory IFRS Adoption

We examine the expected preventive function of enforcement of financial reporting which has been subject to reforms in several EU member states in the years following mandatory IFRS adoption. Specifically, we are interested in the question whether accounting quality – proxied by several earnings management metrics – improved in countries with substantive changes in their enforcement setting. For this reason, we compare the development in earnings management activities for a treatment sample of firms from 7 countries with enforcement changes with two control samples from 13 countries in total that do not exhibit comparable enforcement reforms. In contrast to prior literature, we cannot provide consistent evidence for a decrease in earnings management activities; however, some results indicate less upwards and more downwards earnings management after a strengthening of enforcement, arguably as an overcautious counter reaction of responsible managers. Given the limited numbers of observations, we regard our findings as a preliminary inventory in the attempt of assessing the effectiveness of accounting enforcement in the EU.

Earnings Management -- Does Corporate Sustainability Performance Matter?

This study investigates the relationship between corporate sustainability performance and earnings management practices in a European setting. We measure earnings management based on discretionary accruals (cash flow approach) and real activity management. Corporate sustainability performance is a multi-dimensional construct that is measured based on data provided by the CSRHub database. Employing a European sample of 1,426 firm-year observations, our results reveal a negative relationship between corporate sustainability performance and earnings management activities. This finding supports the notion that a broad and integrated approach of sustainability performance constrains the use of earnings management practices. The results are consistent with recent research on U.S. non-financial companies (Kim et al. 2012), indicating the application of similar principles in U.S. and European settings. Additional analyses reveal that this relationship is particularly applicable to the environmental and community dimensions of sustainability, whereas we find only limited empirical evidence on this relationship for the employee dimension. Taken together, our study provides further evidence regarding the relevance of corporate sustainability in the financial context.

Prospect theory, industry characteristics and earnings management

Purpose – This paper aims to detect earnings management activity in different industries in Malaysia by using the earnings distribution model. Further, the prospect theory and the possible influence of various industry variables are tested to understand the role of the industry in the motivation to manage earnings among firms in Malaysia. Design/methodology/approach – A sample of 538 firms from 15 different industries over the years 2005-2011 is used for this purpose. The earnings distribution model is used to detect earnings management activity across industries, and various regression techniques are used to test the influence of the prospect theory and various industry variables on earnings management activity. Findings – The findings indicate the presence of earnings management practices in Malaysian industries, but the prevalence of earnings management activity and the motivation to do so are found to differ across industries. The prospect theory is found to be a possible motivation for earnings management overall but not when industries are considered separately. Industry competitiveness, capital intensity and profitability are found to influence both motivations to manage earnings while industry leverage is found significant only in the case of motivation to manage earnings to avoid reporting losses. Finally, earnings volatility and size are insignificant in influencing the propensity to manage earnings. Originality/value – To the authors’ knowledge, this is the first study which documents the role of various industry characteristics in influencing earnings management activity. It highlights the importance of considering industry level variables in a study on earnings management and, hence, adds to the growing literature on earnings management.

PENGARUH KONSENTRASI KEPEMILIKAN INSTITUSIONAL , UKURAN PERUSAHAAN DAN KOM POSISI DEWAN KOMISARIS TERHADAP MANAJEMEN LABA

Concentration on institutional ownership is share ownership by institutions (institutions or companies) which can control management through an effective monitoring process so that it can influence management in taking earnings management actions. According to Stapledon (1999: This research is an empirical study, namely the study of real facts or data that is systematically collected and tested. This analysis aims to find a relationship between the dependent variable and one or more independent variables. Partially, the concentration of institutional ownership has an effect. negative to earnings management This can be interpreted that the greater the concentration of institutional ownership, the smaller the company's earnings management. The variable company size as measured by total assets has a negative effect on earnings management. Generally, companies that have relatively large total assets can operate with a higher level of efficiency compared to companies with lower total assets The composition of the board of commissioners has a negative effect on earnings management. This means that the greater the composition of the board of commissioners, the smaller the earnings management involved do company. Conversely, the smaller the composition of the board of commissioners, the greater the company's earnings management.

Mandatory Disclosures and Earnings Management: Evidence from IFRS Adoption

We examine how changes in mandatory disclosure requirements affect firms’ earnings management practices. Drawing on Ewert and Wagenhofer 2005, we predict that if the increase in mandatory disclosures reduces accrual-based earnings management firms will rely more on real earnings management. We test this prediction using the event of mandatory adoption of International Financial Reporting Standards (IFRS) among UK public firms. We find that after IFRS adoption firms disclose significantly more information in annual reports. Using mediation analysis we document that the increase in the amount of disclosures is a mechanism through which IFRS reduces accrual-based earnings management. Finally, we demonstrate that after IFRS adoption firms rely significantly more on real earnings management. Analysis of earnings management practices around IFRS adoption among firms with a specific incentive to manage earnings (among firms issuing equity) shows similar results. However, comparing earnings management among public and private firms, we find that the substitution between accrual-based and real earnings management around IFRS adoption occurs only among public firms. Overall, our results show that the initiatives towards restricting accrual-based earnings management can lead to a more costly way of managing earnings and thus can have adverse consequences to firm value. Obtained evidence also sheds light on the mechanism through which the adoption of accounting standards can impact earnings management activities of a firm.

Book-Tax Income Differences and Major Determining Factors

Book-tax income differences frequently serve as a key proxy in studies investigating earnings management and tax sheltering activities. This is reasonable because managers can manage either book income or tax income to accomplish their personal agendas. However, because a substantial portion of the book-tax differences are affected by unidentified factors, researchers should use them with caution and include additional relevant variables that could augment their findings.

Management Changes, Reputation, and “Big Bath”—Earnings Management

We study the effects of managerial turnover on earnings management activities in a model in which managers care about their external reputation. We develop an overlapping generations model showing that both outgoing and incoming managers bias reported earnings such that typically very low returns are reported in the first period after a manager has been replaced. Outgoing managers shift earnings forward to their last period in office as they will not benefit from earnings realized after that. Incoming managers can have an incentive to shift earnings to the second period in office as reported earnings will, immediately after a management change, only be partly attributed to their own ability. Deferred compensation can reduce incentives for earnings management.

Stock-Based Compensation and Earnings Management Behaviors

The purpose of this paper is to investigate whether a CEOs stock-based compensation incentive, that is one of the main corporate governance dimensions, has different impacts on accruals-based earnings management (AEM) and real activities earnings management (REM) which have different economic costs. Empirical results show that CEOs stock-based compensation incentive has a positive impact on AEM but a negative impact on REM, implying stock-based compensation incentive leads executives to use more AEM but less REM. Given that the SOX places additional compensation risk on executives, the stock-based compensation is an incentive to significantly encourage managers for using more AEM during the pre-SOX period and less REM during the post-SOX period. The evidence implies that managers change their risk perceptions for AEM and REM after the enactment of SOX, and then their earnings management behaviors indeed change for avoiding wealth-destroying pitfalls. These results bring a new insight into the ability to prevent managers from increasing personal wealth at shareholders' expense.

Accrual-based and real earnings management and political connections

This study examines whether the trade-off between real and accrual-based management strategies differs between firms with and without political connections. We argue that politically connected firms are more likely to substitute real earnings management for accrual-based earnings management than non-connected firms. Although real earnings management is more costly, we expect that politically connected firms prefer this strategy because of its higher secrecy and potential to mask political favors. Using a unique panel data set of 5493 publicly traded firms in 30 countries, our results show that politically connected firms are more likely to substitute real earnings management strategies for accrual-based earnings management strategies than non-connected firms. We also find that when public monitoring and, therefore, the risk of detection increases, politically connected firms are more likely to resort to less detectable real earnings management strategies. Our finding that political connections play a significant role in the choice between accrual-based and real earnings management strategies suggests that focusing only on accrual-based measurements underestimates the total earnings management activities of politically connected firms.

DETEKSI PEWAKTUAN MANAJEMEN LABA MELALUI AKTIVITAS RIEL DAN KAITANNYA DENGAN PERSISTENSI LABA

By analyzing the quarterly financial report, this research aims to provide empirical evidence about the timing of earnings management activities based riels (activities-based real earnings management) and profits related to alignment and the persistence of profits. Hypothesis are: (1) riels earnings management more done in the fourth quarter, (2) flattening profits through earnings management riel a positive impact on the persistence of earnings and (3) companies that allegedly made a profit through the manipulation of leveling riel activity has the persistence of profit higher in the fourth quarter than in any other quarter.
 This study tested three earnings management proxy riel operating cash flow is abnormal, abnormal discretionary expenses, and abnormal production boarding. Riel profit management is calculated by summing the three standardized proxy. The number of companies that serve as a sample according to the criteria is a company with 63 research period from 2004 to 2008. Of this amount, the company entered into a profit-based criteria grader Eckel model is as much as 26 companies. The collection of data with purposive sampling method. Testing the first and third hypothesis was tested with different test or indendent sample t-test while the second hypothesis was tested with regression.
 The first hypothesis test results showed that the average abnormal operating cash flow, abnormal discretionary expenses, and lodging in the abnormal production of the fourth quarter is statistically greater than in any other quarter. Standardize the amount of the three proxy in the fourth quarter is also statistically greater than in any other quarter. This study failed to support the second hypothesis which states that the flattening of profit through the manipulation of positive affect riel activity against the persistence of profits. In contrast, this study proves that the act of leveling a profit through the manipulation of riels activities negatively affect the persistence of profits. The third hypothesis test results show that the average difference between the persistence of profits in the fourth quarter with the other quarter was not statistically significant. So that it can be said that there is no difference in the persistence of profits in the fourth quarter with another quarter.
 
 Keywords: Activities-Based Real Earnings Management, Quarterly Financial Report.

Listed companies’ income tax planning and earnings management: Based on China’s capital market

Purpose: The Ministry of Finance issued the new China accounting standards on February 15, 2006(CAS2006), which require the listed companies to use the balance sheet liability method for the income tax accounting. Thus, it give us an opportunity to investigate the earnings management of listed companies from the perspective of income tax. Under the balance sheet liability method, because conforming earnings management strategies and nonconforming earnings management strategies have different income tax cost and the current income payable will also vary, the listed companies need to choose conforming earnings management and nonconforming earnings management. Our research just try to investigate the relationship between the listed companies’ income tax planning and earnings management on the background of this new system. Design/methodology/approach: Our research approach combines theoretical analysis and empirical analysis. This paper first make a deep theoretical analysis on the listed companies’ choice between pretax earnings management activities that have current income tax consequences (book-tax ‘conforming earnings management’) and earnings management activities that do not have current income tax consequences (book-tax ‘nonconforming earnings management’),and then we exemplify our theory. Next, we come up with two hypotheses based on the theoretical analysis, build up a restatement model and conduct the empirical examination. The empirical analysis employs the method of descriptive statistics and logistic regression. Findings: When engaging in earnings management, listed companies will trade off conforming and nonconforming earnings management from the perspective of income tax cost. We find that managers’ motivations and purposes will influence the choice. On the one hand, when companies are facing the punishment of the suspension or termination of the listing for three consecutive losses, they will have a great incentive to manage earnings in order to turn losses into gains. In this case, companies can’t wait to manage earnings to increase incomes and won’t consider income tax cost too much. And if they employ nonconforming earnings management bringing greater book-tax differences, it may increase the probability of being detected and earnings management behavior may also be found. Thus, in this motivation, listed companies will employ more conforming earnings management. On the other hand, when companies engage in fraudulent activities, they will avoid the use of earnings management strategies which bringing greater book-tax difference to avoid penalty cost associating with fraud being found, since greater book-tax difference will possibly attract regulatory agencies’ and auditors’ attention therefore lead to the fraud being found. In this motivation, listed companies will employ more conforming earnings management. In summary, the main conclusion is when the company has motivations to turn losses into gains and has the motivation to avoid penalty cost associated with fraud being found, the company prefers to employ more conforming earnings management strategies. Research limitations/implications: The limitation in our research is as follows. First, we mainly focus on the conforming and nonconforming earnings management when the listed companies restate their financial statements. However after the issue of CAS2006, many listed companies still not disclose income tax account, which restrict our sample. Second, without the acquisition of private companies’ data, our empirical results may have some errors. We will solve these problems in our future study. Practical / social implications: Based on the sample of restatement companies, our research explores the listed companies’ choice of conforming and nonconforming earnings management under different motivations, which provides our study with new perspective and theoretical evidence. Meanwhile, because this paper focuses on restate firms’ earnings management, the results are helpful for regulators to strengthen the administration of listed companies’ restatement, as well as decrease the damage of restatement on our capital market. Finally, our results indicate that when the company has motivations to turn losses into gains and has motivations to avoid penalty cost associated with fraud being found, the company prefers to employ more conforming earnings management strategies. It will help us to deeply understand the impact of the accounting processes of income tax under the balance sheet liability method on the listed companies, therefore provide companies’ income tax planning with essential empirical and theoretical evidences. Originality/value: So far, earnings management researches in academia mostly focus on the cost, motivations, means and results of earnings management, there are few studies discuss the choice of earnings management strategies and how different purposes and motivations affect the choice from the perspective of income tax. The issue of CAS2006 offers an opportunity for this research. This paper use restatement as sample to investigate the choice of conforming earnings management and nonconforming earnings management under different motivations and purposes for the first time. And not only study the effect that earnings management have on income tax, but also study the effect of different earnings management motivations on the choice of earnings management strategies.

The Effects of the Information Disclosure and Transparency Rankings System on Earnings Management

In an attempt to achieve greater transparency and disclosure, the Taiwan Stock Exchange Corporation (TSEC) and the GreTai Securities Market (GTSM) implemented an information disclosure and transparency rankings system (IDTRS) for all listed companies in Taiwan. This study examines whether the implementation of IDTRS reduces earnings manipulation by firms and whether the manipulation practice changes after the ranking scheme was revised in 2005. Furthermore, we analyze the impact of information disclosure rankings on earnings manipulation in different ranking schemes and investigate the relationship between changes in disclosure rankings and changes in earnings management. The empirical results indicate that accruals-based earnings management and real activities manipulation can be effectively reduced by the ranking system and that the level of information disclosure in different ranking schemes is negatively related to earnings management. Comparing firms with a transparency ranking downgrade, we show that firms with a ranking upgrade tend to exhibit a significant decrease in their earnings management activities.

Real Earnings Management and Future Performance

Managers manipulate firm’s earnings through real activities to show good performance in the current period. This article determines whether there is any impact of these earnings manipulation in future financial performance or not. A panel data analysis technique generalized least square (GLS) method was used for analysis. The sample includes 119 firms listed in Karachi Stock Exchange (KSE) for the years 2004–2011. The article provides evidence that firms engaged in real earnings management (REM) activities through sales manipulation to report higher earnings have worse financial performance in future. It reveals that earnings manipulation seems helpful and appealing in current situation but creates problems in future.

Do auditor-provided tax services improve the relation between tax-related internal control and book-tax differences?

This study investigates whether companies purchasing tax services from auditors can improve the relation between tax-related internal controls and book-tax differences. We employ permanent book-tax differences as a proxy of tax avoidance and temporary book-tax differences as a proxy of earnings management via pre-tax accruals. Our findings show that companies with a higher probability of reporting a material weakness regarding tax-related internal controls have larger permanent and temporary differences (i.e. a higher degree of tax avoidance and earnings management activities); however, companies purchasing auditor-provided tax services can mitigate the positive relation between tax-related internal control weaknesses and permanent differences in the post-SOX period, but no effect on temporary differences.

Keeping up the Fame: Celebrity CEOs' Engagement in Earnings Management and CSR activities

This study examines whether celebrity CEOs engage in earnings management and corporate social responsibility (CSR) activities more than non-celebrity CEOs. We argue that a firm's engagement in earn...

The detection of real earnings management in MENA countries: the case of Tunisia

This paper examines the real earnings management activities of 76 Tunisian public offering firms before and after the implementation of the financial security law, over the ten-year period (2003 to 2012). We measure real earnings management through sales manipulation and sales investments and assets following Roychowdhury (2006) and Zang (2012). The results show that after the implementation of the Financial System Reform Actin 2005, Tunisian managers started using sales manipulation as tools of real earnings management. The sale of assets or investment has no effect on their behaviour. These results suggest that Tunisian firms tend to use real activities manipulation in a tightened regulatory environment.