Indication Of Earnings Management Research Articles

MANAJEMEN LABA, RETURN SAHAM, DAN KINERJA OPERASI SEBAGAI PEMODERASI

The purpose of this study was to determine the indications of the practice of earnings management at the time of the IPO, one year after the IPO, and two years after the IPO. This study also examined the effect of earnings management on stock returns and operating performance in moderating the relationship between earnings management and stock returns.The study sample comprised 33 firms that go public in the year 2007 to 2011 using a purposive sampling method. Earnings management is proxied by discretionary accruals using the Modified Jones Model, which used proxy for the stock return is cummulative abnormal returns (CAR), while for the company’s operating performance used proxy for the return on assets (ROA).The results showed that there were indications of earnings management at the time of the IPO, one year after the IPO, and two years after the IPO with a lower profit rate. No effect on earnings management is proxied by stock return cummulative abnormal returns (CAR). Operating performance of the company also can not moderate the relationship between earnings management with stock return.

MANAJEMEN LABA DAN PERUBAHAN TARIF PPH UNDANG-UNDANG NO. 36 TAHUN 2008 (Studi Empiris pada Perusahaan BUMN dan Non-BUMN di BEI Tahun 2007-2010 )

Income Tax Act current in Indonesia is marked by the issuance of Law No. 36 of 2008. These laws regulate some fundamental changes in the calculation of corporate income tax for companies in Indonesia. One of the most fundamental changes is the change in the rate used in calculating the tax for the company, which was originally using progressive rates (maximum rate of 30%) to 28 % in 2009, and will be 25 % in 2010. 
 
 This study is a descriptive study with a quantitative approach. Based on predefined criteria sample, then the total number of samples studied is 193 samples. The variables of study include the discretionary accrual earnings management use with Jones model are current asset changes, cash changes, changes in current liabilities, changes in short-term debt, and changes to the income tax paid. Methods of data collection with secondary data are obtained through documentation of ICMD years 2007-2010. Analysis use parametric statistical with t -test and the non-parametric with Wilcoxon test.
 
 The results showed all the company showed indications of earnings management before and after the tax law No. 36 in 2008. State-owned companies showed no difference in earnings management prior to the year after adoption of Law No. 36 in 2008, meanwhile the non-SOE companies show indication of earnings management. 
 
 Keywords: The issuance of Law No. 36 of 2008, income tax, earnings management, discretionary current accruals.

Earnings management by top Chinese listed firms in response to the global financial crisis

Purpose The main aim of this study was to examine the earnings management behaviours, including both accrual-based and cash flow-based earnings management, of Chinese firms during the Global Financial Crisis (GFC). Design/methodology/approach A data set of 1,392 firm-year observations derived from a large sample of China's top listed firms (based on total assets) was constructed and investigated via univariate and ordinary least squares regression analyses. Findings Two distinct conclusions can be drawn from the results of the study. First, the top Chinese listed firms did engage in earnings management, as indicated by comparisons of the means of the absolute values of both accrual-based and cash flow-based earnings management indicators in the periods before and after 2008 when the GFC started. Second, investigation of earnings management directions revealed that in response to the GFC, the firms from construction-related industries and the airline industry manipulated earnings upwards through either accrual-based and/or cash flow-based earnings management activities. On the other hand, firms in the household durables industry engaged in earnings-reducing activities. These findings reflect the effect of the stimulus package launched by the Chinese Government in an effort to combat the GFC. In addition, the results indicate that firm characteristics such as size, leverage, profitability and growth affected the earnings management behaviours of the firms analysed in the study. Originality/value The empirically derived findings of this study contribute to the literature pertaining to the effects of the GFC on earnings management practices in China, which has remained relatively scant to date.

Falsification of Corporate Financil Statements: Analysis of Connection between Income Efficiency and Earnings Management

Standard earnings management models detect the presence of earnings management but do not attempt to quantify it. In this work, we continue building the quantitative indicator of earnings management. We move from overall detection model and attempt to determine which element of the income statement (revenue or expenses) played the most prominent role in detected earnings management case.

Determinants of earnings management in the hotel industry: An international perspective

This paper analyzes the determinants of the level of earnings management in a wide sample of listed firms from the hotel industry in 15 countries. The empirical study relies on the discretionary accruals, as an indication of earnings management, and examines the firm and country characteristics that are potentially associated with those discretionary accruals. The results suggest that firm characteristics, including the leverage ratio, cash flow from operations, investment opportunities and the frequency of losses, are the major determinant of earnings management in the hotel industry around the world. Our results also show that firms with five star hotels have different incentives to manipulate earnings, when compared to firms holding lower quality hotels. The hotels’ star rating also seems to play a different role in explaining the level of earnings management in common-law countries, when compared to code-law countries. This paper contributes to the accounting literature by examining the determinants of earnings management of a large panel of firms from the hotel industry and by focusing on the characteristics of the firm and its institutional environment.

External investigations and disciplinary sanctions against auditors: the impact on audit quality

In this paper, we provide empirical evidence for the impact of disciplinary sanctions imposed on Spanish auditing firms and their engagement partners. The disciplinary sanctions resulted from external investigations, which revealed misapplications of auditing standards. In particular, we evaluate (a) the efficacy of the external supervisory board in identifying low-quality auditors and (b) the effectiveness of the disciplinary system in improving the quality of subsequent statutory audits performed by the sanctioned auditors. We employ two earnings management indicators as proxies for audit quality: loss avoidance through extraordinary items and abnormal accruals. And we compare these measures in the financial statements of client companies (auditees) audited by sanctioned and non-sanctioned auditors between 1995 and 2007. Our evidence is mixed. The results show that companies audited by Non-Big 4 sanctioned auditors in the pre-inspection period are less likely to avoid bottom-line losses. Additionally, we conclude that use of this earnings management tool decreases in the post-investigation period for all sanctioned auditors, whether Big 4 or Non-Big 4 firms. Contrary to our expectations, the enhancement performance on this measure of audit quality is observed only for smaller fines. The discretionary accrual approach to earnings management does not offer significant results, however. Therefore, the conclusions are not robust, and further investigation is needed. A feasible explanation for the elusive conclusion may be based on the strong incentives for private firms to avoid bottom-line losses for financing purposes and to manipulate earnings to minimize tax payments.

Entropy-Balanced Discretionary Accruals

Extant research in accounting raises issues with the specification and power of discretionary accrual measures. We propose entropy balancing, a recently developed matching technique, as a means to improve the measurement of a normal accrual. Entropy balancing identifies weights for each control sample observation such that the distributions of underlying fundamental determinants of accruals are designed to be identical across treatment and control samples. We show that entropy-balanced accruals are well-specified within samples of extreme financial performance, are significantly associated with ex post indicators of earnings management, and, based on simulations, exhibit sufficient power for detecting earnings management. Finally, in contrast to existing discretionary accruals measures, we find that entropy-balanced discretionary accruals are insignificant (significantly positive) in the year of an initial public offering (seasoned equity offering).

MANAJEMEN LABA DAN KINERJA KEUANGAN PERUSAHAAN PENGAKUISISI SEBELUM DAN SETELAH MERGER

PT. Dwikarya Indonesia MandiriE-mail: novipl_biru2511@yahoo.co.idABSTRACTThe purpose of this study is to obtain empirical evidence of whether the acquirers perform earningsmanagement prior to implementation of the acquisition. This type of research is a comparative studywhich compares the financial performance before and after the company making acquisitions. Analysisof financial performance is using financial ratios, including profitability, and activity. The results ofdata analysis shows that there was no indication of earnings management before the acquisitions conductedby the acquirer with Increasing income accruals. Furthermore, the company’s financial performanceas measured by the ratio of total asset turnover, net profit margin, returns on assets after theacquisition has a difference in the negative direction. The conclusion is that the acquirers before theacquisition are not convicted of earnings management with increasing income accrual. Acquirer’s financialperformance before and after the acquisitions have a difference, but the condition of thecompany is in sound condition.Keywords: Acquisitions, earnings management, financial performance

Accounting standard attributes and accounting quality: Discussion and analysis

We explore accounting quality attributes of 19 general-purpose accounting standards implemented over the past thirty years to increase our understanding of the US standard-setting process in terms of improving accounting quality and the principles vs. rules-based debate. Our study is timely given recent criticism of US standard setting. Evidence on how US accounting standards may impact accounting quality helps evaluate the overall standard-setting process. Our analysis of the accounting standards suggests that the standards contain both principle- and rule-based features. We also perform an analysis of the impact on earnings management (an indication of accounting quality). We find that earnings management indicators decrease following new standards implemented over this time period. These results are consistent with FASB’s increasing focus on the balance sheet and enhanced disclosures in implementing standards during this period. Our findings, based on existing standards, can be used to assess the merits of US standard setting and to evaluate proposals on the direction of future standard setting.

Corporate Governance, Auditing and Earnings Management Through Accounting Choices and Operational Decisions in Brazil

This article examines whether enhanced corporate governance, auditing by one of the Big Four and auditors’ opinions, are associated with the propensity to engage in earnings management through accounting choices or operational decisions in Brazil. Although there are some studies on earnings management by Brazilian companies, very few have examined the presence of operational decisions in this practice and none has addressed how to minimize this. Using our own models to infer earnings manipulation by accounting choices and operational decisions, we investigate if firms that manage earnings through discretionary accruals also make operational decisions for the same purpose. The evidence from a sample of Brazilian firms suggests that listing on the Novo Mercado (New Market) segment of the Sao Paulo Stock Exchange, which requires enhanced corporate governance practices, among other requirements, and auditing by one of the Big Four firms reduce earnings management by accounting choices, and that an auditors’ opinion with reservations is an indicator of earnings management. However, except in special cases, listing in the Novo Mercado segment and auditing by the Big Four do not assure less earnings management by operational decisions.

Quarterly Earnings Patterns and Earnings Management*

This paper investigates whether the pattern of quarterly earnings changes provides a signal of earnings management. We identify firms for which the sign of (seasonal) earnings changes observed in interim quarters reverses in the fourth quarter. We hypothesize that a firm performing poorly in interim quarters may attempt to increase earnings of the fourth quarter to achieve a desired annual earnings target, while a firm performing well in interim quarters may attempt to decrease earnings of the fourth quarter to build reserves for the future. Our results show that reversal of earnings changes in the fourth quarter is a common phenomenon and its occurrence is greater than would be expected by chance. Other indicators of earnings management, such as the size and direction of discretionary accruals, reversals in subsequent accruals, the use of special items in the income statement, and adjustment of R&D spending, suggest that firms with earnings reversals are more likely to have managed earnings than industry and performance matched control firms. The capital market appears to attach lower credibility to earnings reported by the reversal samples. Our collective evidence leads us to suspect that fourth-quarter reversals on average reflect earnings management behavior. We recommend that analysts use earnings reversals as a heuristic to detect potential cases of earnings management in conjunction with other indicators, such as the magnitude of discretionary accruals. We further find that firms in the reversal samples significantly overlap with the sample of firms reporting small profits and small EPS increases. These results provide an interesting insight - that at least one-fourth of the sample of firms that meet or just beat earnings targets are attempting to smooth annual earnings by managing earnings downward in the fourth quarter.

Earnings Management and Mispricing of Allowance for Funds During Construction in the Electric Utility Industry

The deregulation experienced by the electric utility industry in recent years has dramatically increased the competition from new suppliers of electric power. This changing environment puts managers in the electric utility industry under increasing pressure to improve financial performance. We hypothesize and find that there is an indication of earnings management in a discretionary income account, Allowance for Funds Used During Construction (AFUDC). The level of AFUDC increases with the magnitude of discretionary accruals. In addition, the stock market overestimates the impact of AFUDC in predicting one-year-ahead earnings. A subsequent hedge-portfolio test based on the mispricing insight earns significant abnormal returns, and these abnormal returns cannot be fully explained by either the three Fama-French (1992) risk factors, or the earnings-price anomaly (Basu, 1977). The results stay robust through various sensitivity tests.

Audit Fees, Non-Audit Services and Auditor-Client Economic Bonding

We investigate whether auditor independence is compromised by either the mix of audit and non audit services (NAS), or simply unusually large or audit fees. The results help reconcile apparently conflicting evidence in prior studies linking and indicators of earnings management, as well as providing new insights on the relation between the incentive structures faced by auditors and variation in audit quality. Using the unexpected accrual component of earnings as a proxy for the effect of impaired auditor independence, we initially find that client firms purchasing an unexpectedly large fee mix (i.e., relative to audit fees) display some evidence of aggressive accounting. However, when we explicitly allow for the possibly endogenous nature of unexpected accruals and unexpected NAS, this no longer holds. In contrast, similar evidence of a positive relation between the magnitude of unexpectedly large audit fees and positive unexpected accruals still occurs (albeit more weakly) after explicitly allowing for possible endogeneity. A significant positive association between unexpected total fees (audit plus NAS) and the magnitude of positive unexpected accruals is even more robust. However, further tests shows that these result are confined to clients of Non-Big 6 auditors. We therefore conclude that for large audit firms, the incentive to protect larger than expected fees is outweighed by the importance of their reputation for providing high quality audits relative to smaller audit firms. The results also highlight how sensitive conclusions about possible NAS effects are to the choice of proxy for economic bond as well as the precise experimental design.

Quarterly Earnings Patterns and Earnings Management

This paper investigates whether the pattern of quarterly earnings changes provides a signal of earnings management. We identify firms for which the sign of (seasonal) earnings changes observed in interim quarters reverses in the fourth quarter. We hypothesize that a firm performing poorly in interim quarters may attempt to increase earnings of the fourth quarter to achieve a desired annual earnings target, while a firm performing well in interim quarters may attempt to decrease earnings of the fourth quarter to build reserves for the future. Our results show that reversal of earnings changes in the fourth quarter is a common phenomenon and its occurrence is greater than would be expected by chance. Other indicators of earnings management, such as the size and direction of discretionary accruals, reversals in subsequent accruals, the use of special items in the income statement, and adjustment of R&D spending, suggest that firms with earnings reversals are more likely to have managed earnings than industry and performance matched control firms. The capital market appears to attach lower credibility to earnings reported by the reversal samples. Our collective evidence leads us to suspect that fourth-quarter reversals on average reflect earnings management behavior. We recommend that analysts use earnings reversals as a heuristic to detect potential cases of earnings management in conjunction with other indicators, such as the magnitude of discretionary accruals. We further find that firms in the reversal samples significantly overlap with the sample of firms reporting small profits and small EPS increases. These results provide an interesting insight - that at least one-fourth of the sample of firms that meet or just beat earnings targets are attempting to smooth annual earnings by managing earnings downward in the fourth quarter.

MANAJEMEN LABA DAN STATUS KETERLAMBATAN PERUSAHAAN DALAM MENYAMPAIKAN LAPORAN KEUANGAN TAHUNAN

The purpose of this study is to evaluate whether companies who are behind schedule in submitting theirfinancial statement to Bapepam tend to do more earnings management than those who are on time. This study also evaluates other factors of earnings management, such as leverage, firm size, availability of audit committee and independent board, and audit quality. Using the proxy of discretionary accruals as the indicator of earnings management, this study finds that behind-schedule companies show higher average of discretionary accruals than on-time companies. Statistics also show thatfinancial indicators for these companies are significantly different. Further, this study finds that leverage has a negative relation with discretionary accruals while firm size has a positive relation with it. This study also finds that companies in compliance to Bapepam regulation about audit committee have lower average of discretionary accruals than those not complying to Bapepam regulation and/or without audit committee. Finally, this study finds that big-4-audited companies have lower average of discretionary accruals than other companies. This study, however, does not provide any empirical evidence to support any relation between the proportions of independent board to discretionary accrual level

The impact of audit quality on earnings rounding-up behaviour: some UK evidence

Previous studies (see, for example, Carslaw, 1988; Thomas, 1989; Niskanen and Keloharju, 2000; Kinnunen and Koskela, 2002; Van Caneghem, 2002) clearly suggest that public companies' managers tend to round up the first digit of reported earnings (i.e. for companies reporting profits). Based on a sample of listed UK companies and employing earnings rounding-up behaviour (henceforth ERUB) as an indication of earnings management, I attempt to determine the impact of differences in audit quality on earnings management. When I rely on the very popular brand-name proxy (i.e. BigFive versus non-BigFive auditors) to capture differences in audit quality, findings are inconsistent with BigFive auditors constraining earnings management practices (i.e. findings suggest ERUB for both BigFive and non-BigFive clients). Employing an alternative proxy (i.e. based on auditors' industry expertise), findings are only weakly consistent with specialist BigFive auditors constraining earnings management (i.e. ERUB) practices.

Fourth Quarter Reversals in Earnings Changes and Earnings Management

This paper investigates potential cases of earnings management by observing the pattern of quarterly earnings changes. We identify firms for which the sign of (seasonal) earnings changes observed in interim quarters reverses in the fourth quarter. We hypothesize that a firm performing poorly in interim quarters may attempt to increase earnings of the fourth quarter to achieve a desired annual earnings target, while a firm performing well in interim quarters may attempt to decrease earnings of the fourth quarter to build reserves for the future. Our results show that reversal of earnings changes in the fourth quarter is a common phenomenon and its occurrence is greater than would be expected by chance. Other indicators of earnings management, such as the size and direction of changes in fourth quarter accruals, reversals in subsequent earnings performance, and the use of special items in the income statement, suggest that firms with earnings reversals are more likely to have managed earnings than a control sample of nonreversal firms. Our results also indicate that the reversal firms may have debt-contracting and political costs-related incentives to manage earnings and a significant percentage of them may manage earnings to avoid reporting a decrease in annual earnings. Capital market participants and financial analysts both appear to attach lower credibility to earnings reported by the reversal samples. Our collective evidence leads us to suspect that fourth quarter reversals reflect earnings management behavior rather than some other phenomena, such as mean reversion of earnings or fourth quarter settling up.

The Relation between Auditors' Fees for Nonaudit Services and Earnings Management

This paper examines whether auditor fees are associated with earnings management and the market reaction to the disclosure of auditor fees. Using data collected from proxy statements, we present evidence that nonaudit fees are positively associated with small earnings surprises and the magnitude of discretionary accruals, while audit fees are negatively associated with these earnings management indicators. We also find evidence of a negative association between nonaudit fees and share values on the date the fees were disclosed, although the effect is small in economic terms.

The Relation Between Auditors' Fees for Non-Audit Services and Earnings Management

This paper examines whether auditor fees are associated with earnings management and the market reaction to the disclosure of auditor fees. Using data collected from proxy statements, we present evidence that non-audit fees are positively associated with small positive earnings surprises, the magnitude of absolute discretionary accruals, and the magnitude of income-increasing and income-decreasing discretionary accruals. In contrast, audit fees are negatively associated with these earnings management indicators. These results are robust to a variety of alternative variable definitions and model specifications. Specifically, contrary to the claims of Ashbaugh et al. (2002), the results are robust to the use of performance-matched discretionary accruals. Moreover, contrary to the claims of Francis and Ke (2002), the results for small positive earnings surprises are robust regardless of whether the comparison group is all other earnings surprises or small negative earnings surprises. Our final set of results provide evidence of a significant negative association between non-audit fees and share values on the date the fees were disclosed, although the effect is small in economic terms.

Accounting information and corporate governance: Market and analyst reactions to earnings of firms engaged in proxy contests

This paper studies market and analyst reactions to earnings (i) during a proxy contest for board seats and (ii) after a proxy-contest-induced management change. Despite indications of earnings management during the proxy contest, market and analyst reactions are more pronounced than in prior periods, and earnings surprises explain more of the cross-sectional variation in these reactions. Market and analyst reactions to earnings released after a successful proxy contest are less pronounced than in prior periods and earnings surprises explain less of the variation in these reactions, perhaps due to new managements' tendency to take an earnings ‘bath’.