Incidence Of Earnings Management Research Articles

The impact of female directors on earnings management and the moderating effect of board quality: enabler or deterrent?

Purpose The authors motivate this research on the gender diversity of the board because of the recent increases in the number of women in top executive teams (Francis et al., 2015), which has probably been the result of the adoption of legislation for gender quotas as well as the establishment of corporate governance recommendations for gender diverse boards in several countries. The purpose of this study is to consider the quality of board directors when examining the effect of female directors on earnings management. Design/methodology/approach The analyses follow the system generalized method of moment to address endogeneity concerns (e.g. a board with higher quality is more likely to have female directors on board and vice versa). Besides the lags of the endogenous variables, the authors use the female industry ratio as an additional instrument (Liu et al., 2014), as female directors might be inspired by other female directors according to industrial sectors (measured by the two-digit industry codes), where competitors are likely to follow gender diversity practices of other firms within the same industrial sector. Findings The authors’ findings show a negative and significant association between board gender diversity and earnings management (EM), suggesting that independent female directors are the drivers of such effect. High-quality boards decrease the incidence of EM but hinder the potential involvement from female directors towards reducing EM. The incumbent effect of high-quality boards on female director’s contribution on EM reverses with less powerful CEOs. Originality/value The authors contribute to the extant literature by recognizing that the effectiveness of a female director on decreasing EM is a function of the environment in which decision-making takes place (i.e. board quality/powerful CEOs).

Examining the Relationship Between National Culture and Earnings Management

This study investigates the relationship between national culture and the incidence of earnings management across thirty-one nations while controlling for the strength of corporate governance and type of legal system. The results indicate the importance of national culture in explaining the difference in the incidence of earnings management across nations. Earnings management is found to be higher in countries with low scores on the Individualism dimension and high scores on the Uncertainty Avoidance and Long-Term Orientation dimensions. This study confirms the relationship between national culture and earnings management and contributes to the literature through the inclusion of the Long-term Orientation and Indulgence dimensions of national culture. The potential impact of national culture on earnings quality highlights the need for caution in assuming that the harmonization of accounting standards alone will lead to comparability and consistency of financial reporting.

Governance Issues on Earning Management: A Case of Manufacturing Industry

Earnings management is a technique used by the management of an organization to intentionally manipulate a company's profits in such a way that the figures suit the agreed target and to generate financial results that provide an excessively optimistic view of the company's operation and finances. Due to poor performance, companies are using different strategies to exploit and provide a positive picture of financial and management profitability to look better in the eyes of shareholders and stakeholders, and this is generally referred to as earnings management. This study aims to examine the potential factors of pressure (financial stability and financial target), opportunity (board independence and audit committee), and arrogance (CEO duality and the CEO's picture) that cause earnings management in manufacturing companies in Malaysia. This study used organizations as the unit of analysis while manufacturing companies from the Public Listed Companies (PLCs) were chosen as the research sample. This study found that the proxies of board independence, audit committee, and CEO's picture have a positive relationship with earnings management. Adversely, the indicators of financial stability, financial target, and CEO duality have negative effects on the incidence of earnings management.

Earnings management and corporate governance: an analysis based on the adoption of IFRS in Brazil

Purpose: This paper aims to analyze whether the adoption of the International Financial Reporting Standards (IFRS) strengthened the negative relationship among earnings management and corporate governance best practices, which are: B3’s differentiated levels of corporate governance, the presence of a board of independent directors and whether the company is audited by a Big Four or not.
 Methodology: We applied panel data regression with a sample of 92 companies listed in B3 during the period 2002-2007, for the period prior to IFRS and 2010-2015, for the period after IFRS. Data were collected from the explanatory notes, company reference form and in the Economatica® database. In order to measure the dependent variable earnings management, we applied the model proposed by Dechow, Hutton, Kim and Sloan (2012).
 Results: Results show that when there is an independent administrative committee, the levels of earnings management are lower, and this relationship is driven by the IFRS adoption. We cannot affirm that companies at the highest levels of corporate governance and audited by a Big Four have a lower incidence of earnings management after the application of IFRS.
 Contributions of the Study: This paper contributes to a better understanding of how variables related to governance can influence the quality of accounting and financial information. It also contributes to the literature that investigates how IFRS can influence the quality of accounting information.

Corporate governance factors as predictors of earnings management

Unlike developed markets, emerging markets like India have greater imperfections, have information asymmetry, and are particularly different in terms of accounting transparency, corruption, and corporate governance (CG). Also, concentrated ownership structure of Indian firms is more conducive for opportunistic earnings management (EM). There has been high incidence of financial frauds and EM in India particularly through related party transactions. The CG regulations were revised and enhanced in the year 2014 but increasing cases of financial frauds and CG violations indicate insufficiency of CG laws in the country. Linking CG to financial information in a context where investor protection laws are still evolving is important. The contributions of the present study are: first, it assesses earnings quality (EQ) as a key outcome of EM to confirm, in the Indian context, one of the two opposing perspectives of EM, namely opportunistic and informational. Second, it creates empirical evidence on those firm attributes and CG mechanisms which can predict EQ for investors in India. Third, it provides inputs on the effectiveness of the revised regulations in controlling EM, and finally, it puts forward theoretical rationale for EM and CG practices in India.

The Impact of Corporate Governance Quality on Earnings Management: Evidence from European Companies Cross‐listed in the US

AbstractThe study reported herein examines the impact of two central corporate governance mechanisms (internal audit function quality and board of directors’ quality) on the incidence of earnings management. Unlike most prior studies in the area, focused mainly on US firms, this study looks at European firms that are cross‐listed in the US and covers a long time span – before and after major changes were implemented in corporate governance policies (Sarbanes‐Oxley Act in the US and the 8th Company Law Directive in the European Union). Using novel and comprehensive measurement approaches for internal audit function quality and board of directors’ quality, we find that both mechanisms have a negative direct effect on the incidence of earnings management, while their interactive effect is positive. A longitudinal analysis of both mechanisms also reveals that internal audit function quality and the quality of boards of directors have increased significantly since the policy changes.

Earnings Management And Privatisations: Evidence From Pakistan Evidence From Pakistan

This study examines the incidence of earnings management around the time of the privatisation of State Owned Enterprises in Pakistan during 1991-2005. Using the modified Jones model and a sample of large privatisations (minimum US$1 million), it shows that the sampled firms experienced increase in earnings, decrease in cash flows, and increase in current discretionary accruals in the year prior to and/or in the year of privatisation. The SOEs used both short term and long term accruals to inflate reported earnings. These accruals were reversed in the post-privatisation period. These findings suggest that managers of the firms slated for privatisation were engaged in earnings management to inflate their firms‘ financial worth to maximise the privatisation proceeds. Hence, we cannot reject the incidence of earnings management during privatisations in Pakistan. The results imply that the investors should carefully evaluate the to-be-privatised firms and keep in view the possibility of earnings management by the SOEs. JEL Classification: G14, G34, G38, L33, M41 Keywords: Earnings Management, Privatisations, SOEs, Pakistan, Accruals

The incidence of earnings management on information asymmetry in an uncertain environment: Some Canadian evidence

In this study, we investigate the association between earnings management and information asymmetry considering environmental uncertainty. Results show that a complex and dynamic environment weakens the relationship between discretionary accruals and information asymmetry measured as share price volatility and bid-ask spread. More specifically, the positive relationship between earnings management and information asymmetry is weakened for diversified firms, those intensively investing in R&D, and those facing high sales volatility. This highlights the difficulty for investors to assess earnings management in an uncertain environment. Finally, in such a context, discretionary accruals are more likely to be detected by investors for firms cross-listed on a U.S. stock exchange, a more liquid and transparent stock market compared with the Canadian stock market.

The Effect of Nonaudit Fees and Family Owned Businesses on Earnings Management in the Indian Industry

This paper extends the findings of Frankel, Johnson, and Nelson (2002) by providing empirical evidence on the relation between nonaudit fees and earnings management for a sample of Indian firms. In addition, we investigate whether there is a greater incidence of earnings management in family owned firms versus non family owned firms. Our tests are motivated by concerns about decreasing auditor independence due to a greater economic bond between the firm and the auditor in the presence of nonaudit fees. These concerns are reflected by the SEC, who issued auditor independence rules in November 2000 that required firms to file proxy statements on or after February 5, 2001 that disclose the amount of total audit fees paid along with a breakdown between audit fees and nonaudit fees. We find a positive association between nonaudit fees and the magnitude of absolute discretionary accruals. We also find a positive association between family owned firms and the magnitude of discretionary accruals.

The Malaysian Listing Requirement Reforms and Earnings Management Practices of Public Listed Firms

This study examines the impact of Bursa Malaysia Listing Requirement reforms on the incidence of EM practices among Malaysian public listed companies. The sample used are the top 50 and bottom 50 companies listed on the corporate governance index issued by the Minority Shareholders Watchdog Groups and Nottingham University Business School. The required data was collected from the year 1994 to 2007 to reflect the Listing Requirement reforms. The Modified Jones (1991) model was used to detect earnings management practices of the sampled companies. It was found that earnings management practices in the post-reform period are lower than the pre-reform period, implying that the reforms had the intended impact of reducing the incidence of earnings management. Regression of discretionary accruals, control and corporate governance variables reveals that corporate governance variables have significant association with the proxy of earnings management i.e. discretionary accruals. Big four auditors, board independence and audit committee independence were significantly associated with earnings management. The findings suggest that the corporate governance initiatives taken by the regulatory agencies did improve the quality of corporate governance among listed firms specifically in mitigating the incidences of earnings management and therefore improving the quality of information in financial reports.

‘FAMILY’ OWNERSHIP, TUNNELLING AND EARNINGS MANAGEMENT: A REVIEW OF THE LITERATURE

Abstract In this review paper, we bring together a number of aspects of family firms that are ubiquitous in a number of institutional contexts, often as part of larger business groups. We pay particular attention to the mechanisms by which families retain control over firms, and the incentives of the families in control to expropriate other stakeholders by way of tunnelling. We examine the role of earnings management in facilitating tunnelling, and evidence about the incidence of earnings management in family firms. Our review suggests that while the literature on these aspects of family control is rich, the contexts in which the empirical exercises are undertaken are relatively few, and hence there is considerable opportunity to expand it to other contexts, in particular in the form of cross‐country comparisons of the relative impact of agency conflicts and institutions on these issues.

Board Monitoring and Earnings Management: Do Outside Directors Influence Abnormal Accruals?

Abstract: This paper examines whether the incidence of earnings management by UK firms depends on board monitoring. We focus on two aspects of board monitoring: the role of outside board members and the audit committee. Results indicate that the likelihood of managers making income‐increasing abnormal accruals to avoid reporting losses and earnings reductions is negatively related to the proportion of outsiders on the board. We also find that the chance of abnormal accruals being large enough to turn a loss into a profit or to ensure that profit does not decline is significantly lower for firms with a high proportion of outside board members. In contrast, we find little evidence that outside directors influence income‐decreasing abnormal accruals when pre‐managed earnings are high. We find no evidence that the presence of an audit committee directly affects the extent of income‐increasing manipulations to meet or exceed these thresholds. Neither do audit committees appear to have a direct effect on the degree of downward manipulation, when pre‐managed earnings exceed thresholds by a large margin. Our findings suggest that boards contribute towards the integrity of financial statements, as predicted by agency theory.

An Assessment of the Change in the Incidence of Earnings Management Around the Enron‐Andersen Episode

In 2001 Enron filed amended financial statements setting off a chain of events starting with its bankruptcy filing and including the conviction of Arthur Andersen for obstruction of justice. The end of 2001 and the first half of 2002 included a heightened level of publicity for the accounting practices of listed companies. This paper addresses whether there was a detectable change in the incidence of earnings management around this time period. Earnings reports released in 2001 and 2002 were analyzed. The results showed that revenue numbers were subject to upwards management. Benford's Law was used to detect such manipulations. Earnings Per Share (EPS) numbers showed a marked discontinuity in the distribution around zero which is consistent with upwards management. The results also showed a tendency towards neat round EPS numbers such as 0.10, 0.20, etc. The overall results are consistent with a small but noticeable increase in earnings management in 2002. Enron's reported numbers are reviewed and these show a strong tendency towards making financial thresholds.

Earnings Management, Corporate Governance and the Market Performance of Seasoned Equity Offerings

This paper examines whether pre-issue discretionary current accruals predict post-issue earnings performance and returns. We find evidence suggesting that offering firms borrow future income to manage earnings in pre-issue years and consequently earnings decrease in post-issue year 2. The information content of pre-issue discretionary current accruals is reflected in one-year buy and hold abnormal returns for the rights offering firms. Our paper also examines whether the incidence of earnings management around SEOs depends on corporate governance structures. Our results show that SEO firms that have larger board size have a higher degree of earnings management around SEOs. This result is consistent with Jensen's (1993) view that smaller boards provide more of a controlling function than do larger boards.

Board Monitoring and Earnings Management: Do Outside Directors Influence Abnormal Accruals?

This paper examines whether the incidence of earnings management in the UK depends on board monitoring. We focus on two aspects of board monitoring: the role of outside board members and the audit committee. Results indicate that the likelihood of managers making income-increasing abnormal accruals to avoid reporting both losses and earnings reductions is negatively related to the proportion of outsiders on the board. Further tests indicate that this association is confined to firms where the separation of corporate ownership and decision control is greatest. In contrast, we find little evidence that outside directors influence income-decreasing abnormal accruals when pre-managed earnings are high. While we are unable to find evidence that the existence of an audit committee directly influences the level of earnings management (either income-increasing or income-decreasing), tests indicate that the monitoring role of outside directors in relation to income-increasing earnings management is more pronounced in cases where an audit committee exists. Our findings suggest that boards contribute towards the integrity of financial statements, as predicted by agency theory.