Earnings Management Techniques Research Articles

Audit quality weakens earnings management effect on company value

Managers frequently use earnings management techniques to boost company value by making financial reports appear good to investors. Because of this earnings management, investors may choose the wrong investments, and share prices may fall that lowering the company's worth. Theoretically, audit quality can minimize earnings. Yet, whether audit quality can reduce the impact of earnings management on company value has not been clearly disclosed. This study aims to provide an answer to this topic by applying the agency theory, signal theory, and market efficiency theories. Companies in the primary consumer goods industry that list on the Indonesia Stock Exchange (IDX) in 2018–2020 are the objects used. 141 businesses in total were chosen as samples using the purposive sampling methodology. The study's use of moderated regression analysis (MRA) demonstrates that earnings management has a detrimental impact on business value. Additionally, it was discovered that the detrimental impact of earnings management on firm value might be mitigated by audit quality. Practically, this study confirms that the use of reputable auditors can minimize earnings management and protect against a decline in firm value. Subsequent research can examine whether a company's reputation can reduce public suspicion of earnings management. Plagiarism Check

Gender diversity and earnings management: Evidence from Bangladesh

This study aims to evaluate the impact of Gender-diversity on earnings manipulation using both accrual and real earnings management techniques. All the data has been gathered from yearly reports of recorded non-financial organizations in Bangladesh from 2011 to 2019; after necessary diagnostic checking, this study finally uses the OLS regression model to evaluate the relationship. Findings show that the non-financial organizations of Bangladesh are practicing both forms of earnings management simultaneously. Evidence illustrates that female directors on the board have no significant association with any proxies of accrual earnings management but are significantly positively associated with abnormal discretionary expenses. Moreover, the gender diversity of CEOs is negatively connected with abnormal production costs and positively associated with abnormal cash flow from operating activities, and the relationship is statistically significant. Policymakers and other stakeholders can use these findings to give more concentration on the issue of women's involvement at the corporate level and the development of governance issues. IIUC Business Review Vol. 9, Dec. 2020 pp. 111-133

The Effect of CSR Policy on Earnings Management Behavior: Evidence from Visegrad Publicly Listed Enterprises

A corporate socially responsible-focused approach adds value to a firm in the form of financial benefits in addition to improving its corporate image. To meet the demands of various stakeholders, including consumers, employees, and shareholders, and to produce high-quality financial reporting, some managers participate in CSR initiatives. The investigation of the relationship between corporate social responsibility and earnings management in publicly listed Visegrad companies is the main aim of the paper. The purpose is to identify the correlation between the CSR concept (measured by ESG score) and earnings management behavior determined by discretionary accrual levels (using the modified Jones model). To ascertain the association between CSR and earnings/discretionary accrual levels or to describe the major changes in the development of these variables, several statistical techniques were applied (correlation analysis, one-way ANOVA, and one-way ANOVA with repeated measures). As this is a pioneering study in the Visegrad environment (analyzing 35 publicly listed enterprises reporting ESG score), the research findings may have significant policy implications for decision-makers, regulators, auditors, and investors in their efforts to restrict earnings management techniques and enhance the quality of financial reporting.

Earnings Management and Corporate Performance in the Scope of Firm-Specific Features

Various models have been created all around the world to identify enterprises that manipulate their earnings. These earnings management techniques aid businesses in enhancing their financial performance or gaining some competitive advantages. The primary goal of this article was to identify the firm-specific characteristics that affect how businesses manage their earnings using a sample of 15,716 businesses from various economic sectors in the Slovak environment during a 3 year period. The level of earnings management was measured by discretionary accruals using the Kasznik model. In this paper, a correspondence analysis using the chi-square distance measure was applied to find the dependence between the earnings management practices and firm-specific features (firm size, legal form, and sectoral classification). The results of the study indicate that aggressive (income-increasing) earnings management practices are typical of small enterprises with a public limited ownership structure, mostly in sectors R and M (using the NACE sectoral classification). Conservative (income decreasing) practices can be observed in enterprises in the sectors J or F, and they are also used by medium-sized enterprises and those with private limited ownership structure. The results revealed that large enterprises do not tend to manipulate their earnings, as well as enterprises operating in sector K. The insights of this study may provide important and useful information for shareholders and regulators in evaluating determinants that are effective in mitigating earnings management practices. Authorities, regulators, analysts, and auditors may find the importance of the discovered variances helpful in identifying various strategies and techniques for earnings manipulation that may differ among industries according to their typical characteristics.

Earnings manipulation behavior in the banking industry of Bangladesh: the strategical implication of Beneish M-score model

PurposeThis study aims to determine the number of companies involved in earnings manipulation. Additionally, this study has empirically investigated the common manipulation items among the companies.Design/methodology/approachBangladesh's listed commercial banks are selected as a sample for this study, and financial data from 2009 to 2018 were collected. The likely and nonlikely manipulator Beneish model (1999) divides the sample into two groups. Based on the M-score of the model, the banks are put into two groups. To identify the most influential variables, an independent samplet-test was done with the help of Statistical Package for Social Sciences (SPSS).FindingsThe findings show that banks in Bangladesh have an unstable trend in making manipulated financial reports. Results of thet-test reveal that overstating revenues, increasing intangible assets, lessening cost and accruals are the most appealing items for preparing a fraudulent financial report. The findings of this research work will help the investors take the right decision having the idea of manipulation in the banking sector of Bangladesh.Originality/valueIn the presence of many irregularities in the banking sector Bangladesh, very few studies have been carried out in forensic accounting and fraudulent financial reporting practices. Much research has focused on earnings management techniques. This research specifically focuses on identifying earnings manipulation in financial statements for micro-level variables like accounting accruals, intangible assets, etc. This will help policy-makers and financial statement readers to be proactive while reading financial statements and taking any investment decision.

Earnings management in public hospitals: The case of Greek state-owned hospitals

IMPACT This article has multiple implications for state-owned hospitals. The authors show that state-owned hospitals will try to meet the financial targets required by the supervisory authorities. When the central government expects a certain financial outlook, hospitals will manage their accounts to comply with these expectations. Oversight authorities and legislators need to be aware of this tendency and its implications for audits. The article identifies the factors that affect the manipulation of earnings so that strategies can be set to predict and avoid such behaviours.

Comparing earnings management and creative accounting. A general review

Purpose: The aim of this article is to compare the concepts of earnings management and creative accounting and to determine their similarities and differences. Methodology/approach: In the study, it is assumed that earnings management and creative accounting are two different phenomena. A comparative study is carried out in three stages using theoretical study methods. In the first stage, by applying the genetic and historical approaches, the origin and development of earnings management and creative accounting are compared. The purpose of the comparison is to assess the ori-gins, period, and causes of earnings management and creative accounting, and to de-termine the differences in origin and the points of contact. In the second stage, the def-initions of phenomena are compared using comparative analysis methods. In the third stage, using comparative analysis and analogy methods, earnings management tech-niques and creative accounting methods are compared. Findings: The results of the study show that earnings management and creative ac-counting are two terms that describe the same phenomenon. To avoid confusion and ambiguity of the terminology, it is recommended that the term “earnings management” be used. Practical implications: By abandoning the term “creative accounting” and using only the term “earnings management”, a contradiction between the academic community and practitioners, as well as terminological confusion, would be eliminated. Originality/value: The terms “earnings management” and “creative accounting” are used in both different and similar contexts in the literature, and it is difficult to identify which actions describe earnings management and which ones describe creative account-ing. A comparative study of earnings management and creative accounting assists in solving the terminological problems in the literature.

The effect of debt maturity structure on earnings management strategies

PurposeThe aim of this study is to investigate whether debt maturity matters for the choice of earnings management strategy (i.e. accruals earnings management and real earnings management).Design/methodology/approachThe sample involves 486 American listed firms extracted from fortune 1,000 over the period 2006–2014. Panel data regression models are employed to empirically test the impact of short-term debt and long-term debt on manager's choice of earnings management form. The generalized least square technique is applied to estimate the parameters of the regression models.FindingsThe results show that managers are more likely to manage earnings through real activities and reduce their use of accruals earnings management once short debt is increasing because the latter induces heavy lender's scrutiny. The managers move hence to real earnings management due to a lower possibility of being discovered. Moreover, the results reveal a simultaneous use of accruals earnings management and real earnings management for firms with high long-term debt. This finding highlights that long-term debt does not produce regular lender's enforcement allowing managers to use both earnings management techniques to reach earnings targets.Research limitations/implicationsThis research has two limitations. Like many other studies, the measure of discretionary accruals is subject to measurement errors. Moreover, the sample exclusively involves large firms extracted from Fortune 1,000. Therefore, the attained results may be not available for small and medium firms.Practical implicationsThe findings have implications for both researchers and lenders. For researchers, the present work points out that the decision about the debt maturity structure is crucial for all managers because they establish their earnings management policy accordingly. For lenders, the findings imply that increasing scrutiny effectively constrains accounting manipulations but does not eliminate earnings management activities altogether. The managers move to another earnings management strategy (i.e. real earnings management). This evidence may support the lenders and the creditors in their decision-making processes.Originality/valueThis paper adds to the accounting literature by providing new and interesting evidence on the role of debt maturity on the trade-off between the earnings management tools. Prior studies provided mixed finding for the issue of earnings management in levered firms. The findings of this study should be viewed as a first step to understand the mixed results on this issue. While most papers focus on one earnings management form when they examine the earnings management in levered firms, the authors highlight the impact of debt on both accruals and real earnings management simultaneously.

Sudden loss, corporate governance structure, and big bath behavior: Evidence from Egypt

This study investigates the effect of sudden loss on corporate governance structure (CGS), and its implications on earnings management technique “big bath” in the Egyptian context. A matched sample of 208 firm-year observations in the Egyptian Stock Exchange (EGX) has been examined. Using the same methodology as in Mulcahy and Donnelly (2015) and Cheng, Park, Pierce, and Zhang (2019), the difference-in-differences (DID) approach is applied to measure the response of CGS to sudden loss versus profit incident, while binary logistic regression is used to investigate big bath following. Results indicate a significant association of sudden loss on changes in the loss firms’ CGS following the loss, although these changes do not significantly differ from those made by profit firms. This indicates that sudden loss may trigger changes in corporate governance (CG), but other conditions also play a role in evoking such changes. Results also show a significant positive association of sudden loss on increasing the likelihood of engaging in a big bath behavior. The findings of this study are expected to help Egyptian firms’ managers to improve firms’ performance and governance structure that lead to high-quality earnings and provide financial reports that rationalize investors’ decisions. This study is the first to test the influence of sudden loss on CGS and link it to big bath in Egyptian setting.

Earnings management and fraudulent financial reporting: Distinctive criteria of suspicious accounting practices

The financial reports, as the final product of the accounting information system, need to be accurate in order to maintain the main purpose of financial reporting. Applied methods and techniques of recognition and measurement of financial positions should be in the purpose of realistic and transparent presentation of the financial performances of the entity. However, creative accounting techniques are often used in the process of preparing and presenting financial statements in order to manage earnings and manipulate financial values. Manipulation of financial statements seems to be a generally present phenomenon, and the paper aims to identify the criteria used by members of the accounting profession in the Federation of Bosnia and Hercegovina (FBiH) to distinguish earnings management techniques from fraudulent financial reporting. The research reflects the perception of accountants and auditors in the FBiH regarding the possibility of recognizing suspicious accounting practices in business entities. The research is based on distinctive criteria used in developed economies of the world: measurement subjectivity, the materiality of financial item and compliance of financial reporting with generally accepted accounting principles, but identifies specific distinctive measures used by respondents, too. The results of the research reveal that the accounting professionals in the FBiH rely on distinctive criteria: materiality and compliance of reporting with International Financial Reporting Standards, including two additional measures: compliance of financial reporting with generally accepted practices and confidence of financial information. Respondents did not recognize subjectivity in assessment as a relevant measure of the distinction between earnings management and fraudulent financial reporting.

The Role of Institutional Ownership in Moderating the Determinants of Earnings Management (A Study on Manufacturing Companies in Indonesia)

The purpose of this study is to examine the effect of deferred tax expense, tax planning, and managerial ownership on earnings management moderated by institutional ownership in manufacturing companies listed on the Indonesia Stock Exchange (IDX) in 2015-2018. The number of research samples is 16 companies. The sampling technique used in the study is purposive sampling method. This study uses multiple linear regression analysis and Moderated Regression Analysis (MRA) assisted by the IBM SPSS 24 program. The results of this study show that deferred tax expense and managerial ownership haveno effect on earnings management, while tax planning has an effect on earnings management. Institutional ownership is not able to moderate the effect of deferred tax expense and managerial ownership on earnings management, but institutional ownership is able to moderate the effectof tax planning on earnings management. The limitation of this study is that the measurement technique used for earnings management is only accrual earnings management. In addition, researchers do not measure earnings management from real earnings management techniques so that the results obtained cannot explain the extent of deviations from normal business practices. The results of this study are expected to provide considerations for potential investors who wish to invest in a company so that they do not experience losses on their invested capital. Company managers are expected to be able to reconsider everything so that there will be no more fraud that can cause losses to the company and have a bad impact in the future.

The Effect of the Investors’ Sentiment on the Trade-Off Between Earnings Management Strategies: The Case of Tunisian Market

The aim of this study was to provide evidence to the benefit of an emerging market on whether and how the prevailing investors’ sentiment influences the earnings management tactics i.e. accrual earnings management and real earnings management. used data related to Tunisian listed firms over the period 2009–2018. We measure the investors’ sentiment index using Google search volume approach. We estimated a recursive equation system to investigate the effect of the investors’ sentiment on the trade-off decision between accrual earnings management and real earnings management. First, in line with the catering theory we found that optimistic period is an opportune occasion that encourages Tunisian managers to upward their earnings whether by accrual earnings management or by real earnings management. Indeed, Tunisian managers are likely to rely on abnormal cashflows. Second, we found that the Tunisian managers, use both techniques as complementary rather than substitutes. However, during high sentiment period, this complementary relation decreases which may be explained by total cost of earnings management tools. Our results give the investors and the financial analysts, within emerging markets, important insights and requires them to adopt necessary adjustments to their expectations when evaluated from an optimistic market’ perspective. During such periods, they should be more cautious to the possible distortions of reported earnings made by managers. Our research differs from previous studies dealing with the implication of behavioral biases emerging contexts, which is still embryonic. Such contexts have their uniqueness regarding the economic, social and political environment making evidence drawn from developed contexts questionable. Second, we address this query in a more comprehensive way. We were interested in examining the effect of the investors’ sentiment on each of earnings management technique taken individually as well as on the possible trade-off between them.

Motives and techniques of earnings management used in a global environment

Research background: From a research perspective, it is very important to point out motives and used techniques of earnings management because it allows better identify the factors that drive the decision to practice earnings management. Motives of earnings management can be organized thematically into contractual obligations, asset pricing, or influencing external parties which are carried out through the use of various earnings management techniques. Purpose of the article: The article aims to identify all possible motives leading to the practice of earnings management in companies in a global environment and to point out the individual techniques of earnings management, which are used to realize the individual motives. Methods: The method of description and the method of classification of technical terms are used to specify in more detail the motives and techniques of earnings management used in the global environment. Findings & Value added: In a global environment exist strong motives for managers to practice earnings management. These motives include better pricing of securities, beating analysts’ expectations, avoid negative earnings, show better performance than past, better compensation of managers, tax evasion, external finance attraction, concealment of poor performance, favorable contracts from suppliers, customers, lenders, and employees and avoiding technical default on debts covenants. Another dimension of earnings management is the stress level of managers builds up due to expectations of better performance by stakeholders. In a global environment, there are several techniques used to practice motives leading to earnings management. These techniques are described in more detail in the article.

A Review of Management Earning and Real Transaction Manipulations Pre and Post IFRS Adoption in Nigeria

The paper examined the accounting quality in the financial statement, concerning earnings management practices by managers. The financial statements provide critical information that is useful to various groups, investors, standard setters, shareholders and government. The practices of various methods of earnings management are classified into accounting-based and market- based earnings management. The study classified the earnings management techniques in various ways that affect the quality of financial statements in the pre and post-IFRS adoption. The introduction of IFRS and its accompanying standards in the area of earnings management might imply real improvements in the financial statements about the quality. The earnings management techniques include the following: earnings management towards a target, earnings smoothing, discretionary accruals, accruals quality, and timely loss recognition as against other proxies of accounting quality. These are opportunities managers have to get quality Financial Statements that accomplish their intentions. The essence is that they use them to achieve their objectives either getting the desired level of profit or not recording losses for the business. The review results are that in the pre-IFRS the earnings management in use was the accrual-based earnings technique in which managers adjust assumptions and estimates the accounting system. In the post-IFRS, managers revert to real transactions based earnings management which involves the timing and structuring actual business activities to achieve a desired financial reporting result (for example, the timing of the sale of equipment that will result in a gain in a quarter in which extra earnings are needed, delaying major repairs, advertising, research, and development expenses write–off, and foregoing capital projects that positive net present value).

The Effect of Financial Leverage and other firm’s characteristics on Real Earnings Management and Accrual‌ Earnings Management: An Empirical Study on listed Firms in the Egyptian Stock Exchange

This research empirically examines the effect of financial leverage and other firm’s characteristics on the Real and Accrual based earnings management using a sample of Egyptian listed firms for 3 year’s period starting from 2015 till 2017. The research investigates whether Egyptian firms use the Real earnings management (REM) to replace the Accrual-based earnings management (AEM) for earnings manipulation. The empirical results indicate that Egyptian firms use both the REM Real and the AEM to achieve its earnings objectives. In addition, the empirical results have found positive relationships between the financial leverage and both forms of earnings management techniques (the REM and the AEM); which is consistent with the debt hypothesis. The empirical results have also found a negative relationship between the both forms of earnings management (the REM and the AEM) and the firm’s Audit quality, and the firm’s size. However, the relationship is insignificant between the both forms of earnings management (the REM and the AEM) and the firm’s age, dividends, and growth. Moreover, the results indicate that highly leveraged firms engage more in Accrual based earnings management than the Real earnings management.

Accrual-Based Earnings Management: A Case Study in V4 Focusing on Mining And Quarrying Sector

The aim of the contribution is earnings management detection by using a model with the highest explanatory power, as well as verifying hypotheses about the existence of a statistically significant relationship between earnings management and country, as well as firm size within companies operating in the mining and quarrying sector in 2019 and 2018. Data were obtained from the Amadeus database. The sample contains 348 financial reports of companies from 2019 to 2017. Research is focused on V4 companies that have the sum of total assets higher than 2,000,000 EUR, as well as the sum of operating revenue is higher than 100,000 EUR. Three recommended models were used, namely the modified Jones model, Industry model, and Kothari model. The explanatory power of these models was tested by using several criteria. Based on the results, the modified Jones model was chosen for earnings management detection. According to the results, companies in the mining and quarrying sector in V4 use earnings management techniques to manage the profit. It is not possible to clearly determine in which direction they manage their profit more often. Different values were measured in the two observed periods. Based on the results, Czech and Slovak companies used earnings management techniques to increase their profit. On the other hand, Poland and Hungarian companies used earnings management techniques to decrease it. Very large as well as large companies used earnings management techniques to decrease their profit; medium-sized companies used earnings management techniques to increase it.

The Impact of the Financial Stability on the Earnings Management Practices

Research background: In recent years, the world economy has changed. Earnings management, as a modern phenomenon, plays an important role within the financial world under the condition of globalization. The academic community deals with the issue of the informative value of the reported financial results. The informative value of these results becomes questionable when we realize that managers have not only the motivation but also the ability to use the earnings management techniques to influence these results. Purpose of the article: The aim of the contribution is earnings management detection by using a model with the highest explanatory power, as well as verifying hypotheses about the existence of a statistically significant relationship between earnings management practices and financial stability within a sample of companies. Methods: Based on the results of the explanatory power examination, the modified Jones model is recommended for earnings management detection within the sample of V4 companies. Data were obtained from the Amadeus database. The sample contains 1,480 financial reports of companies from 2019 to 2017. Research is focused on V4 companies that have the sum of total assets higher than 2,000,000 EUR, as well as the sum of operating revenue is higher than 100,000 EUR. Also, the Pearson correlation coefficient was used to test the hypotheses about the existing statistically significant relationship between financial stability and earnings management practices. Findings & Value added: The article provides an overview of the earnings management issue within V4 countries. It examines the earnings management practices and the impact of financial stability on the level and direction of earnings management practices.

How Do Reporting Frequency and Analyst Perceptions of Real Activities Manipulation (RAM) Influence Managers' RAM Behavior?

ABSTRACT Real Activities Manipulation (RAM) is an earnings management technique that is increasingly being used by managers. RAM is a purposeful action by managers to manipulate earnings by altering operations, finances, and investments. In this study, we investigate the effects of reporting frequency and the knowledge that financial analysts view RAM negatively on the likelihood of management engaging in RAM. Based on the results of an online experiment with 73 experienced managers and MBA students, we find that more frequent financial reporting significantly reduces managers' likelihood to engage in sales-related RAM when they are also informed that analysts view RAM negatively. As a result, the combination of more frequent reporting and the knowledge that analysts view RAM negatively, taken together, may assist in deterring managers' engagement in sales-related RAM.

Influence of financial indicators on earnings management behavior: evidence from Vietnamese commercial banks

The quality of financial disclosures is of great importance than ever, as Vietnam’s international economic integration has been accelerating recently. This issue is currently particularly worrying for the banking sector in Vietnam, as banks play a vital role in economic development. However, there is a growing concern that managers tend to manipulate financial information using earnings management techniques to meet analyst expectations and to enhance the firm value in the short term. Such behavior can lead to inappropriateness in the decision-making process of financial statement users, as well as impair firm value in the long term. Therefore, this study examines the impact of factors related to financial indicators on earnings management of Vietnamese commercial banks to give more insight into the issue. The data of this study was collected from a sample of 30 Vietnamese commercial banks during a 5-year period from 2015 to 2019. By using the Ordinary Least Square (OLS) regression method through Eviews 10.0, the findings revealed that financial leverage and loan loss provision have a positive and significant impact on earnings management. Also, bank size and profitability were negatively associated with earnings management. Based on these findings, in the context of Vietnam, the study proposed policy suggestions to improve the quality of accounting information and to assist users of financial statements in recognizing and restricting earnings management in commercial banks.

Profit status of microfinance institutions and incentives for earnings management

We theorize that for-profit microfinance institutions (MFIs) have higher incentives to use earnings management techniques when compared to their not-for-profit counterparts. Indeed, we show empirically that, when facing a distress period, for-profit MFIs are more likely to recognize impairment loan loss provisions than not-for-profit ones in about 0.8% of assets. This is consistent with the notion that those institutions are employing “big bath” accounting practices. Finally, using the 2008 crisis as an exogenous shock and country-level recessions as an exogenous measure of distress, we replicate our results.