Earnings Management Practices Research Articles

Analysis of accruals earnings management using the Jones Model. The case of Romania listed companies

Research Question: To what extent earnings management operations are used by Romanian entities listed on a regulated market and what is the impact of these operations on the quality of reported financial information? Motivation: The financial statements reported by each entity are intended to provide useful information all the users, they are intended to describe clearly and honestly presents the financial position and performance and cash flows respectively. There are cases where, out of a desire to gain the trust of stakeholders (investors and other equity providers), some entities tend to commit manipulations in financial reporting using earnings management. Idea: The study aims to assess the extent to which the operations of earnings management are used by the Romanian entities listed on a regulated market and the impact of these operations on the quality assurance of the reported financial information. Data: This study was conducted based on the information collected from the annual financial statements of the entities that are listed on the Bucharest Stock Exchange, for the period between 2019-2021 Tools: The collected data were analyzed using the Jonse model based on the linear regression analysis. Findings: Using the Jones model based on the linear regression analysis, the results of the study indicate a distortion of the results presented by the analyzed companies, a solid reason being given by the negative effects of the Covid-19 pandemic with a strong impact on the economic environment. Contribution: This study provides an overview of the concept of earnings management based on information from the specialized literature. The analysis of earnings management practices was undertaken on the listed entities in Romania.

Plural form business strategy and financial reporting quality in hospitality firms

This paper analyzes how the plural form business strategy (i.e., simultaneously pursuing a fee-oriented and an equity-based strategy) impacts financial reporting quality of international hospitality firms. Drawing on the agency theory perspective, we analyze a sample of global hospitality companies over 2010–2019 using OLS, entropy balancing, and Heckman two-stage estimations. Our results suggest that greater use of the plural form is positively associated with higher earnings management (i.e., lower financial reporting quality). The plural form induces financial reporting complexity, which increases the likelihood of earnings management. However, the presence of large shareholders, aiming at reducing earnings management practices for reputation purposes, offsets this effect. This study identifies a specific feature of the hospitality industry, namely the pursuit of the plural form business strategy, as triggering more complexity, which results in detrimental lower reporting quality for investors.

How Audit Fees Impact Earnings Management in Service Companies on the Amman Stock Exchange through Audit Committee Characteristics

The primary objective of this research was to investigate the potential moderating role of audit fees in the relationship between audit committee characteristics and earnings management. Specifically, this study aimed to establish connections between audit committee features, such as committee size, member independence, and financial expertise, and the practice of earnings management. To address these research questions, a convenient sample of 46 service providers listed on the Amman Stock Exchange between 2016 and the subsequent year was employed. Descriptive statistical methods were applied to characterize the variables under investigation, while a multiple regression model was utilized to assess the study’s hypotheses. The findings of the study revealed that there was no significant correlation between the size of the audit committee and earnings management. However, a negative correlation was observed between the audit committee’s independence and the financial expertise of its members. Importantly, when audit fees were introduced as a moderating variable, the relationships between committee member independence and earnings management, as well as between committee member financial expertise and earnings management, were found to be weakened. These results have potential implications for policymakers and regulators in Jordan. They may offer valuable insights into corporate governance reforms that could assist Jordanian businesses in enhancing their earnings management practices.

Earnings Management: Boon or Bane for Growth in Indonesia Consumer Sector?

This study investigates the relationship between earnings management and financial risk on company growth in the Primary Consumer Goods Industry sector listed on the IDX from 2017 to 2021. The findings show that earnings management practices positively and significantly impact company growth, indicating that companies implementing management profits tend to experience higher growth (Growth Companies). Enhancing positive and efficient earnings management practices can improve company performance and overall business growth. The statistically significant effect indicates that this relationship is not coincidental, emphasizing the strong relationship between earnings management and firm growth. However, financial risk does not significantly affect company growth and cannot moderate the relationship between earnings management and company growth. This observation highlights the complexity of the impact of financial risk on corporate growth, which various unmeasured factors, including changes in interest rates, market fluctuations, and credit risk, may influence. Other internal and external factors that affect the relationship between financial risk and firm growth may not be considered in this regression model, limiting its ability to capture the subtleties of this relationship fully. Nonetheless, this study shows that Financial Risk and Earnings Management significantly affect the dependent variable, Company Growth. The results show that companies that apply better earnings management practices in their financial reporting experience better or higher growth. However, this study had limitations, and future research should explore a different sector, as this may yield different results. In addition, future research may consider including control variables such as firm size, liquidity, leverage, industry growth, and other economic factors to understand their impact on firm growth better

PENGARUH KESULITAN KEUANGAN, MOTIVASI PAJAK, DAN KARAKTERISTIK PERUSAHAAN TERHADAP MANAJEMEN LABA

This research aims to determine whether financial distress, tax motivation, return on asset, financial leverage, sales growth, company size, and free cash flow have an influence on earnings management. The sample used in this study consists of consumer cyclicals and consumer non-cyclicals companies listed on the Indonesia Stock Exchange (IDX) during 2019 - 2022, totalling 62 selected companies as the research sample. The sample selection is conducted by using purposive sampling method, resulting in 62 companies for this research. The analysis utilized a multiple linear regression model. The findings indicate that financial distress, financial leverage, and sales growth have a positive impact on earnings management. This implies that higher levels of financial distress, financial leverage, and sales growth increase the likelihood of earnings management within a company. On the other hand, asset returns and free cash flow show a negative influence on earnings management. This implies that higher levels of, asset returns and free cash flow reduce the likelihood of earnings management practices within a company. Furthermore, variables such as tax motivation and company size do not affect earnings management, indicating that regardless of the figures related to tax motivation and company size, they do not influence the likelihood of earnings management within a company.

Assessing the Practice of Earnings Management in COVID-19 Era. Landscape of European Companies: An International Comparison

Beginning of 2020, the COVID-19 crisis holds for firms all over the world. Under these circumstances, the purpose of this paper is to evaluate the landscape of the European countries in terms of the earnings manipulation in COVID-19 era. Therefore, we compared companies from 15 European countries. The results show that the deteriorating economic conditions caused by COVID-19 are reflected in the managers’ activity for earnings management in the context of European companies. Moreover, the panorama of earnings management activities in Europe is quite heterogeneous and inconsistent as we observe significant differences between European countries in the practice of earnings management. Additionally, rather than a single incentive or factor, we find a wide range of variables that affected managers’ decisions to engage in earnings manipulation in COVID-19 times. Indeed, the results show that lack of growth opportunity caused by the pandemic, increased amount of debt, volatility of cash flow or sales, even size, age, or book value, were variables that influenced managers’ decisions to manipulate earnings in pandemic. In addition, the industry effect cannot be separated from the impact of COVID-19.  Surprisingly, institutional mechanisms of control, including audit quality or board monitoring, which are widely documented in the literature as limiting earnings management, were ineffective in the COVID-19 period. The presence of mechanisms of control is considered essential variables that limit the practices of earnings management, but even these can occasionally fail, as confirmed our study.

The Relationship between Accounting Comparability and Earnings Management Practices under IFRS: An Empirical Study for Egyptian Firms listed on Egy

The Relationship between Accounting Comparability and Earnings Management Practices under IFRS: An Empirical Study for Egyptian Firms listed on Egy

Directors’ Compensation and Earnings Management Practices: Evidence from the Nigerian Banking Sector

Compensation contracts is one of the tools recommended by theorists and scholars towards ensuring that directors perform their function of effective monitoring of an organisation. However, this may induce earnings management (EM) practices as a result of being tied to accounting earnings or stock prices. The study thus evaluated the effect of directors’ compensation on EM practices within the Nigerian banking sector anchored on the Agency Theory. Adjusted population of eleven listed commercial banks was used as the census sampling method was employed. Directors’ compensation was measured using a mix of executive directors and non-executive directors (NEDs) compensation while EM practices was proxy by discretionary provision for loan loss (DPLLs) measured using the Beaver and Engel (1996) model. Using the ordinary least square (OLS) regression, all forms of directors’ compensation except executive compensation were found to have positive effect on EM practices. However, only NEDs fees and allowances was found to have a significant effect on EM practices necessitating the regulation of directors’ compensation. The study concluded that directors’ compensation does affect EM practices of listed banks in Nigeria though to varying extent depending on the kind of compensation. The study recommended a shift of focus from just Chairman compensation to include the totality of NEDs compensation and an institution of guidelines for mandatory disclosure of directors’ compensation. The study thus provides practical contribution for regulatory authorities towards ensuring that the accounting process is rid of EM practices as well as investors by consolidating confidence in the Nigerian banking sector.

Does the board of directors play a role in mitigating real and accrual-based earnings management in the MENA context?

PurposeIn light of the key role attributed to the board of directors as a monitoring tool to constrain earnings management practices, this study aims to examine the effect of some board attributes on accrual-based earnings management and real earnings management in the Middle Eastern and North African (MENA) context, whose institutional, economic and legal environment is markedly different from that of most organization for economic cooperation and development countries.Design/methodology/approachThe authors selected a sample of 161 nonfinancial companies from nine MENA countries between 2014 and 2021 (corresponding to an unbalanced data panel of 486 observations). The authors used the generalized least squares regression test to examine the relationship between board attributes and earnings management.FindingsThe authors found that three board attributes (size, independence and gender diversity) have no effect on both types of earnings management practices, while CEO duality has no effect on accrual-based earnings management but has a significant and negative effect on real earnings management. Overall, the results suggest that most board attributes do not play a crucial role in reducing earnings management.Research limitations/implicationsThe results provide valuable insights into the universal role of corporate governance mechanisms and raise questions about the role of the board of directors in improving reporting quality in the MENA context.Practical implicationsRegulators should adapt corporate governance mechanisms to the characteristics of the institutional context in which they are inserted.Originality/valueTo the best of the authors’ knowledge, this study is the first to examine the effect of various board characteristics on both types of earnings management practices in the MENA context. It also provides the first empirical evidence of the relationship between board gender diversity and earnings management in the MENA region.

DOES INDEPENDENT COMMISSIONER CONTRIBUTE TO DECREASE EARNINGS MANAGEMENT AND TAX AVOIDANCE ACTIVITIES

This study examines the independent commissioner's role in moderating earnings management's effect on tax avoidance practices in the building construction industry. This study uses data from building construction sector companies listed on the Indonesia Stock Exchange during 2017-2020. Of the 15 companies observed, 42 samples were obtained using purposive sampling to be used in the study. They are processing data using regression analysis with cross-sectional data. The study results show that the company's earnings management positively affects tax avoidance activities carried out by building construction companies. Meanwhile, an independent commissioner does not affect the relationship between earnings management practices and corporate tax avoidance. Keywords: Corporate Governance, Earnings Quality, Tax Planning

Management skills and the quality of accounting information in Brazil

This study aims to analyze managerial skills in the practice of earnings management via earnings smoothing and accruals in B3 companies. To this end, a quantitative and descriptive study was conducted using data from the Economática database, with a sample of 966 observations from 2010 to 2020. Demerjian et al.’s (2012) model was used to measure managerial skill. Its efficiency parameters are the manager’s characteristics in using resources to generate revenue. The models by Leuz et al. (2003) and McNichols (2002) were used to measure smoothing and levels of earnings management. The results showed that, on average, more skillful managers tend to smooth and manage earnings at higher levels than less skilled managers, indicating that in Brazil, on average, more skillful managers reduce the quality of Brazilian firms’ earnings. This paper contributes to the literature and fills a gap regarding managerial skills and the impact on the results of Brazilian companies. It shows that, in Brazil, managerial skill is associated with smoothing and earnings management practices and sheds light on interested parties regarding the influence of the profile of managers and their ability to influence the numbers released in the Brazilian market.

Apakah Komisaris Independen Memoderasi Hubungan Koneksi Politik, Kepemilikan Institusional, Dan Manajemen Laba?

Purpose: This research aims to empirically prove the influence of political connections, institutional ownership and independent commissioners on earnings management in non-cyclical consumer sector manufacturing companies listed on the IDX in 2018 - 2022. Methodology/approach: this research uses quantitative methods whose data is obtained from the official website of the Indonesia Stock Exchange (BEI). The method used in sampling was purposive sampling, so that the sample obtained in this research was 17 companies with 85 observation data. The data analysis method used is multiple regression analysis with the help of SPSS version 25 data processing application software. Findings: The results of this study found that the presence of independent commissioners in the company will create tighter and more objective supervision of the financial reporting process so that it will prevent earnings management actions carried out by politically connected managers and with high institutional ownership within the company the institutions will be able to control company and will avoid earnings management practices. Practical and theoretical contributions/Originality: this research provides benefits for related parties such as investors. The results of this research provide new knowledge and insight for investors when they want to invest in a company. With this research, investors are able to assess and analyze a company whether the company is worthy of investment or not. Research limitations: this research has limitations, namely the difficulty in accessing data on each company's website because there are several companies whose data is incomplete. Apart from that, the sample used was too small due to certain criteria so that the sample was limited and the researcher only focused on one sector.

Impact of Financial Distress on Earnings Management with the Moderating Role of Audit Quality: Evidence from Pakistan

The core aim of the financial reports is to provide a firm’s annual results of financial performance and position to stakeholders on time. Several accounting scandals led to the default of many large-scale corporations, leading to investors’ lack of confidence in the reliability of financial information and also putting a question mark on the effectiveness of internal control mechanisms and external audits. Business managers of financially distressed firms use the choice of accrual accounting methods which gives them leverage to misuse their powers and expropriate stakeholders by showing good financial results. So, this study fills this gap by investigating the presence of Financial Distress (FD) and its effect on Earnings Management (EM) with the moderating role of Audit Quality (AQ). The sample of this study contains the data of 96 non-financial listed companies for the period 2017-2022 on the Pakistan Stock Exchange (PSX). This study uses the discretionary accruals as a proxy for the EM and Z-score for FD. The results and analysis find that FD and EM have a significant positive relationship, which reveals that corporate managers of distressed companies do EM while AQ weakens this relationship. This study recommends that professional bodies, regulatory authorities, and corporate governance institutions must design policies that restrict corporate managers from getting involved in earning management practices, especially in the time of FD.

Effect of Audit Quality on Earnings Management Practices

Purpose: The aim of the study was to assess the effect of audit quality on earnings management practices.
 Methodology: This study adopted a desk methodology. A desk study research design is commonly known as secondary data collection. This is basically collecting data from existing resources preferably because of its low cost advantage as compared to a field research. Our current study looked into already published studies and reports as the data was easily accessed through online journals and libraries.
 Findings: Research indicates that higher audit quality is associated with reduced earnings management practices. High-quality audits lead to improved financial reporting, fraud detection, and lower costs of capital. Market reactions are positive when reputable audit firms are involved. However, outcomes may vary by industry and country, depending on regulatory and institutional factors.
 Implications to Theory, Practice and Policy: Agency theory, signaling theory and information risk and auditor reputation theory may be use to anchor future studies on assessing the effect of audit quality on earnings management practices. Audit firms should invest in ongoing training and professional development programs to enhance the skills and knowledge of auditors. Regulatory authorities should continue to strengthen their oversight of the audit profession. This includes periodically reviewing and updating auditing standards, enforcing compliance with auditing regulations, and imposing penalties for audit failures.

Do corporate reputation concerns constrain real earnings management practices? A multidimensional analysis

Purpose: This study integrates Eisenegger and Imhof's (EI) reputation theory and the reputation-building hypothesis to explore how corporate reputation (CREP) concerns constrain real earnings management (REM). Motivation of the study: This study empirically tests the combined and individual effects of the dimensions of Eisenegger and Imhof's corporate reputation theory on real earnings management practices. Design/methodology/approach: The study used the least-square dummy variable (LSDV) two-way fixed effects estimator on a panel data constructed from 203 non-financial firms listed in 12 sub-Saharan African stock exchanges from 2014 to 2020. Main findings: The study provides empirical evidence that CREP, consistent with Eisenegger and Imhof’s reputation theory, curtails REM practices. Functional, social, and expressive reputation concerns reduce the managerial tendency to manipulate real activities, while considering other REM influencing factors. This result is consistent across REM components, country-level analysis, and endogeneity tests. Practical implications/Managerial impact: The results of this study are anticipated to motivate the use of corporate reputation building as a preventive strategy against REM, as it deters managers from manipulating business operations. The findings provide managers with a valuable approach to evaluating a firm's various reputations and how they can be leveraged to curb REM. Novelty/Contribution: The study offers new perspectives on assessing firm reputation from various stakeholder viewpoints and how CREP serves as a complement to existing CG mechanisms to mitigate managerial opportunism.

The impact of board gender diversity on the accrual/real earnings management practice: evidence from an emerging market

This paper examines the impact of gender diversity on financial reporting quality (accrual and real earnings management). We use a sample of 78 Egyptian listed companies over the period 2009–2021. The quality of financial reporting is measured using different models of earnings management (accrual and real earnings management). Accrual earnings management (AEM) is detected through four different models developed by modified Jones model, the Kasznik model, Kothari model, Raman and Shahrur model, while real earnings management (REM) is measured using six different model which are abnormal cash flows from operations (ABCFO), abnormal production costs (ABPROD), abnormal discretionary expenditures (ABDISEXP) and three aggregate proxies (RM1, RM2, RM3). Using the system generalized method of moments, companies with more gender diversity are more effective in reducing accrual earnings manipulation (AEM). The exception is the modified Jones model. Moreover, we find that gender diversity is positively and significantly correlated with financial reporting quality based on proxies of real earnings-based activity, except for RM2. The study found a non-significant and negative relationship between board diversity and RM2 as a proxy for REM. Overall, the empirical results based on accrual and real earnings management models (AEM and REM) support the notion that enterprises with more gender diversity on the board are more effective in controlling earnings manipulation practices. The predictions of corporate governance theories are confirmed. Policy makers should continue to promote and support gender diversity in leadership positions within organizations. This can be achieved through initiatives such as diversity quotas, mentoring programs, and leadership development opportunities for women.

The Nexus between Corporate Lyfe Cycle and Earnings Management at Companies Listed on the Bucharest Stock Exchange

This research investigates the nexus between the corporate life cycle (CLC) and accrual-based earnings management (AEM) and real earnings management (REM) practices. Companies listed on the main segment of the Bucharest Stock Exchange between 2007 and 2021 are analyzed through fixed effects and random effects models. The regression analysis uncovers that earnings management practices vary based on the developmental stage of the company. In the introduction stage, Romanian companies tend to prefer AEM techniques, while in the growth and maturity phases, REM practices are more prevalent. The conditions in which firms operate, the pressure from the capital market and the discretion over costs characteristic of each stage of development explain the preference for a certain method of earnings management. Overall, this investigation helps clarify CLC's role in adopting earnings management techniques (AEM/REM) and signals the need to pay particular attention to the quality of financial reporting of companies in the early stages of development. The findings hold significance for auditors, financial analysts, investors, lenders, and regulators alike.

Earnings management using classification shifting of revenues: evidence from Chinese-listed firms

PurposeThis study aims to investigate earnings management practice of classification shifting of revenues in Chinese-listed firms.Design/methodology/approachThe study employs a dataset of 2,920 A-listed firms from Chinese stock exchanges of Shanghai and Shenzhen for the period of 2003–2019. We apply both univariate and panel regression analysis by using fixed effect estimation with robust standard errors.FindingsOur findings reveal that firms misclassify revenues by taking advantage of the flexibility provided by applicable financial reporting standards. The empirical evidence obtained through regression analysis suggest that managers reclassify non-operating revenues as operating revenue to alter the economic reality while seeking the advantage of financial reports users’ vulnerability for valuing the upper half of income statement items more as compared to lower part. The results further indicate that international financial reporting standards adoption inhibits the earnings management practices using classification shifting of revenues. It is also concluded that firms, which are suffering losses or having low growth, are more persistently involved in misclassification of revenues.Originality/valueThe study is unique from the point of view that it investigates earnings management from the prospective of revenue’s classification in an emerging market characterized by various market imperfections such as lower investor protection and higher information asymmetry.

EARNING MANAGEMENT FROM THE PERSPECTIVE OF INSAN KAMIL

This article aims to analyze earnings management actions from the perspective of Insan Kamil, characterized as an ideal and perfect human figure. In the portrayal of Insan Kamil, there exist strength, insight, deeds, and wisdom. The interpretative method is employed to analyze earnings management actions ontologically, epistemologically, and axiologically. From an ontological standpoint, earnings management is regarded as a science that can be observed and measured based on empirical evidence. In the epistemological context, Insan Kamil is considered to have a profound understanding of ethical and moral values, such as honesty, integrity, transparency, and adherence to professional ethical standards. Earnings management practices involving manipulation or concealment of information are viewed as violations of these values. Axiologically, earnings management actions may be considered as a potential failure to align rationality with moral values, unless such practices do not violate principles of morality and ethics.

Reversal of impairment losses and earnings management

Although the impairment test is relevant to the quality of accounting information, it requires subjective estimates that allow discretion to manage companies and give rise to earnings management, especially when losses can be reversed. In this context, this research aimed to investigate whether there is a relationship between the reversals of impairment losses evidenced by Brazilian companies listed on B3 and the practice of earnings management between 2010 and 2019. For this, descriptive and quantitative research was conducted, which tested three hypotheses initially developed in the work of Duh et al. (2009) to analyze whether the companies that most recognize impairment losses reverse these losses in the future to avoid the decrease in accounting earnings and whether this behavior is more pronounced in higher levels of indebtedness or when their managers are paid for performance. The findings revealed that, although companies that recognize more losses conduct more significant reversals in the future, these reversals did not occur in the context of declining earnings and were not significantly influenced by indebtedness and the managers’ pay-performance sensitivity. Considering the scarcity of empirical evidence on this topic in Brazil and the need to observe this phenomenon in different institutional and regulatory environments, it is expected that this study will contribute to stimulating the conducting of other similar studies, as well as to foster discussions on how the possibility of reversing impairment losses affects the quality of accounting information.