Level Of Discretionary Accruals Research Articles

Analisis Perbedaan Tingkat Discretionary Accrual Sebelum dan Sesudah Adopsi IFRS

The purpose of this study is to analyze whether there are differences in the level of discretionary accruals before and after the adoption of IFRS. In this study, only one variable is used, namely discretionary accruals. The population in this study are manufacturing companies in the consumer goods industry sector listed on the Indonesia Stock Exchange in the period 2009 to 2018 with a sampling technique using the purposive sampling method. The test method uses the one sample Kolmogorov Smirnov test because the data is normally distributed and processed using IBM SPSS Statistics 26. The results of this study indicate that there are differences in the level of discretionary accruals before and after the adoption of IFRS proved by paired sample t-test.

Political–economic instability and earnings management in an emerging market: the case of the 2016 Presidential Impeachment in Brazil

PurposeThis study analyzes earnings management among Brazilian public firms during the 2016 Presidential Impeachment.Design/methodology/approachThe sample comprises, as a treatment group, 721 firm-quarter observations relating to Brazilian listed firms. It also considers a control group of listed firms from Mexico, which were not affected by the exogenous shock analyzed (i.e. the 2016 Presidential Impeachment in Brazil). The firms' quarterly financial data cover the period between 2013 and 2018.FindingsConsidering several proxies related to earnings management by accruals, the main findings suggest a negative relationship between the 2016 impeachment event and the level of discretionary accruals, suggesting that Brazilian firms tended to reduce their earnings management levels during the impeachment process. The results are robust whether the control group is considered or not.Originality/valueThis study brings new empirical evidence to the literature on accounting information quality about the role of the economic and political environment in earnings management, especially in weak institution countries characterized by institutional voids and higher levels of corruption.

Apakah Perekayasaan Laba Dipengaruhi oleh Akuntansi Lingkungan, Kapitalisasi Pasar, dan Asimetri Informasi?

This study aims to examine the effect of the quality of environmental accounting disclosures, good corporate governance, and information asymmetry on the level of discretionary accruals. The specific target of this research is to empirically examine the effect of the quality of environmental accounting disclosures, good corporate governance, and information asymmetry on the level of discretionary accruals. The population of this research is all mining sector companies listed on the Indonesia Stock Exchange for the 2016-2020 period as many as 47 companies. Determination of the sample was selected based on the Slovin method and purposive sampling criteria with a quantitative descriptive approach. This study uses secondary data from company financial reports, company annual reports and sustainability reports. Data analysis was performed using multiple linear regression analysis using SPSS version 26.0. By using multiple linear regression analysis as a research method, the results show that partially the quality of environmental accounting disclosures, good corporate governance, and information asymmetry have a significant effect on the level of discretionary accruals. Furthermore, based on the results of simultaneous testing, it is found that the quality of environmental accounting disclosures, good corporate governance, and information asymmetry together have a significant effect on the level of company discretionary accruals.

Insider trading and informed trading patterns

This paper aims to examine how corporate insider trading influences trading patterns of foreign and institutional investors especially in firms with high discretionary accruals and low book-to-market ratios as proxies for information uncertainty. This study uses methods such as trading patterns of informed traders who are considered to gather more precise information before and after insider trading and tests how insider trading affects informed traders. The results of this study provide evidence that insider trading is likely to influence informed traders’ trading patterns. After controlling for firm-specific factors, this study finds that the event and the amount of insider trading affect significantly foreign and institutional trading patterns. Furthermore, the relation between informed trading and insider trading is more enhanced when firms have a high level of discretionary accruals and a low book-to-market ratio. Prior studies have focused on the association between abnormal returns of insider trading and types of insider information disseminated, while informed trading patterns and insider trading with information uncertainty have not been specifically considered. This study enables practitioners to interpret corporate insider trading with information uncertainty on informed trading patterns.

Earnings Management

This study aimed to analyze the influence of powerful CEOs on earnings management (EM) considering the presence of social connections between the CEO and members of the board of directors (CA). The sample consisted of 183 Brazilian companies listed in [B]³ in the period 2011 to 2017, totaling 881 observations. EM was measured by the Jones (1991) and Modified Jones (1995) models and considered the dependent variable, under which the effect of (i) a CEO power metric developed by principal component analysis was analyzed from a multidimensional perspective of power (structural power, ownership power, power of specialization and power of prestige), (ii) an index that measures the level of social connections between the CEO and the Board members based on indicators already reviewed by the literature (educational, professional and family relationships background), and (iii) the interaction between these variables. The results of 6 linear regression estimates (MQO) with cross-section pools and robust errors indicate that powerful CEOs are related to higher levels of discretionary accruals, while social connections mitigate EM. When the interaction between these variables is included, both CEO power and social connections lose their significant effect on EM, indicating that in the presence of social connections, powerful CEOs may fail to engage in EM practices. This result contributes to the discussion about the interference of social factors on economic decisions, drawing attention to the impact of social factors on the quality of profits and the CG of companies.

ARE CORPORATE SOCIAL RESPONSIBILITY ACTIVE FIRMS LESS INVOLVED IN EARNINGS MANAGEMENT? EMPIRICAL EVIDENCE FROM CHINA

This paper investigates whether corporate social responsibility active (CSR active) firms operate dissimilarly from other firms in their financial reporting. Specifically, we examine whether the corporate social responsibility (CSR) attitude of a firm sways its reporting incentives, in respect of the extent of earning management. To test our predictions, we use a sample of 25,861 year-company observations, corresponding to 3538 Chinese listed companies, for the period 2009–2019. We find a significant positive association between CSR activity and earning management assessed by the level of discretionary accruals in Chinese listed companies. Moreover, we document that Chinese CSR active firms engage more in earnings management through discretionary accruals than CSR inactive firms. These findings are consistent with the opportunistic financial reporting hypothesis: advances in CSR used by managers to safeguard their position by evading scrutiny from stakeholder activists. This study contributes to the growing awareness among investors, stakeholders and researchers that we should distinguish between CSR active firms and socially responsible firms and that being the latter entail something more than just mechanically produce CSR reports.

Earnings management and initial public offerings among Indonesian manufacturing companies

Earnings management (EM) refers to the common use of accounting techniques in various economic settings, such as Initial Public Offerings (IPOs), to produce financial statements. This study, therefore, analyzes the effect of firm size, operating cash flow, the used IPO proceeds, earnings changes, and leverage on EM of manufacturing companies on the Indonesia Stock Exchange from 1989 to 2013. This sector comprises the essential chemical industry, miscellaneous organizations, and consumer goods, with 63 firms being used to meet the selection criteria. The regression analysis showed that the intended use of funds and leverage had a negative and significant impact on EM. Furthermore, the process is measured using Friedlan’s (1994) Discretionary Current Accruals model with similar results found in each industry group and their insignificant differences used to regulate the level of discretionary accruals between the three sectors. This study implies that the EM level is qualitatively similar among IPO companies in the three sub-sectors examined. AcknowledgmentsThe authors are grateful to the audience for their comments during the 11th Environmental and Sustainability Management Accounting Network-Asia Pacific (EMAN-AP) Conference held at the Danang University of Economics, Danang, Vietnam, 12-13 August 2019. The early draft was titled “Earnings Management and Initial Public Offerings on Manufacturing Sectors Companies”.

External Auditors and Earnings Management: Palestinian Evidence

Managers in large companies may manipulate earnings reports to suit their desire at the detriment of shareholders and other stakeholders. This may obstruct the companies and their sustainability. The objective of this study is to examine a relationship between external audit characteristics and Earnings Management (EM) in Palestine. Secondary data is collected for a sample of 480 observations of companies listed in the PSE for the period of 2010-2019. Earnings management is measured by the level of discretionary accruals using the modified Jones model (1995). The results show that external auditors’ type is negative and significantly related to discretionary accruals and may reduce EM. However, external auditors’ independence is positive and significantly related to discretionary accruals and may increase EM. Studying the impact of external auditors’ characteristics on EMhave not been well researched in the past literature, especially in the Palestinian context.

Is overreaction/underreaction chosen by managers Evidence from Greece

This paper models overreaction/underreaction as being the outcome of company managers' choices to manipulate earnings in response to perceived mispricing of their company. One of the more prominent attempts to reconcile observed short-term overreaction and consequent secular underreaction to earnings news interprets earnings announcements as 'selective' events. In financial markets events are 'selected' when contrived in response to perceived asset mispricing. We interpret earnings management by managers as a process requiring a selection of earnings in response to perceived mispricing of their corporation's stock. Post-earnings announcement drift is then interpreted as one consequence of this form of managerial choice. We devise and test a trading strategy, implemented at the earnings announcement date, based on the level of discretionary accruals in relation to past mispricing. The profitability of such a strategy is tested and conclusions for attempts to reconcile short-term overreaction with secular underreaction are drawn.

The Impact of Discretionary Accruals on Corporate Investment Decisions: Evidence from GCC Countries

The aim of the article is to examine the relationship between the level of discretionary accruals and corporate investment decisions by using the data of listed production firms from six Gulf Cooperation Council (GCC) countries for the period 2009-2015. We firstly generated discretionary accruals using performance adjusted model introduced by Kothari, et al. (2005). Secondly, we constructed six models to see the relationship between discretionary accruals and investment decisions. To control for country and time effects, we added GDP growth rates of countries as a macroeconomic indicator in all models. Our findings reveal a weak emphasis of discretionary accruals on two dependent variables. Mean accruals are negative for all years and for all countries, and it shows that companies tend to engage in earnings management practices in order to understate income. The use of PPE as an indicator of investment rates for companies provide more precise results than the use of total assets.

The association between corporate governance reform and earnings management: empirical evidence from a unique regulatory environment

This study takes advantage of a natural experiment to detect the existence of earnings management and identify some of the regulatory and institutional factors that might contribute to it. A panel dataset of 1322 firm-year observations of non-financial firms listed at the Amman Stock Exchange is investigated. The results suggest that the capital market regulations of Jordanian firms have spurred managers to use adjusted earnings to remain trading in the first market, as well as convert from the second to the first market. It also finds that the level of discretionary accruals is reduced significantly with the passage of the corporate governance code. This study supports positive accounting theory by adding new evidence to the ongoing debate about how governmental regulations may create an incentive for firms to manipulate their earnings. It also corroborates the assumptions of agency theory and extends its application to some developing capital markets.

The association between corporate governance reform and earnings management: empirical evidence from a unique regulatory environment

This study takes advantage of a natural experiment to detect the existence of earnings management and identify some of the regulatory and institutional factors that might contribute to it. A panel dataset of 1322 firm-year observations of non-financial firms listed at the Amman Stock Exchange is investigated. The results suggest that the capital market regulations of Jordanian firms have spurred managers to use adjusted earnings to remain trading in the first market, as well as convert from the second to the first market. It also finds that the level of discretionary accruals is reduced significantly with the passage of the corporate governance code. This study supports positive accounting theory by adding new evidence to the ongoing debate about how governmental regulations may create an incentive for firms to manipulate their earnings. It also corroborates the assumptions of agency theory and extends its application to some developing capital markets.

CEO pay ratios and financial reporting quality

We address the Dodd Frank Act controversy about the usefulness of the CEO pay ratio to investors by investigating the relationship between that ratio and financial quality, measured by the level of discretionary accruals and the likelihood of restating previously issued financial statements. We test two conflicting explanations of pay disparity: (1) competition for CEO talent and (2) managerial rent-seeking. Though we find that the unconditional relationship between the CEO pay ratio and financial quality is negative, the sign of this relationship is sensitive to CEO power and competence. Our findings suggest that the pay ratio does shed light on the fairness of compensation structures.

Do Audit Clients Prefer Watchdogs or Lapdogs? The Effect of Strictness on Audit Offices’ Market Shares

Regulators frequently interpret a high audit market concentration as a threat to audit quality and want to foster competition. However, both the direction and the sign of the link between quality and concentration are unclear. This paper investigates the link between audit offices’ market shares and two dimensions of their strictness: The probability to issue going concern opinions and the tolerance for earnings management. We develop an analytical model in which the information content of the audit outcome for the addressees of financial statements and the financial statements preparers’ preferences drive the client firms’ demand for audit services of a certain strictness. The model predicts an inverse u-shaped relation between an office’s strictness and its market share. In the empirical part of the paper, we use U.S. data from 2000 to 2016 to test the model’s prediction. For the Big 6 as well as for the non-Big 6 market and according to both dimensions of strictness, we find lower market shares for the strictest offices compared to offices with average levels of strictness. Moreover, relative to Big 6 offices with average strictness, we find lower market shares of Big 6 offices that are lenient in their going concern decisions, but not if they are lenient in terms of discretionary accruals. In contrast, non-Big 6 offices that allow for high levels of discretionary accruals have lower market shares, but not if they issue going concern opinions only rarely.

Effective audit committee, audit quality and earnings management: evidence from the Ghana Stock Exchange

The purpose of this paper is to investigate the influence of audit committee effectiveness and audit quality (auditor size) on earnings management by firms listed on the Ghana Stock Exchange (GSE). The study uses 180 firm-year observations for the period 2013-2017 for firms listed on the Ghana Stock Exchange. Descriptive analysis was performed to provide the background statistics of the variables examined. This was followed by regression analysis, which forms the main data analysis. The results of multivariate regression analysis indicated that audit committee financial expertise, audit committee prior experience, audit committee size and audit quality have significant negative relationship with discretionary accruals (DACC) as a proxy for earnings management. On the other hand, no significant relationship was found between audit committee independence and audit committee meeting (ACMT) and the level of discretionary accruals. This paper is important because it offers useful information that is of great value to policy makers, academics and other stakeholders. This study is one of the few to measure the influence of audit committee effectiveness and audit quality (auditor size) on earnings management.

Effective audit committee, audit quality and earnings management: evidence from the Ghana Stock Exchange

The purpose of this paper is to investigate the influence of audit committee effectiveness and audit quality (auditor size) on earnings management by firms listed on the Ghana Stock Exchange (GSE). The study uses 180 firm-year observations for the period 2013-2017 for firms listed on the Ghana Stock Exchange. Descriptive analysis was performed to provide the background statistics of the variables examined. This was followed by regression analysis, which forms the main data analysis. The results of multivariate regression analysis indicated that audit committee financial expertise, audit committee prior experience, audit committee size and audit quality have significant negative relationship with discretionary accruals (DACC) as a proxy for earnings management. On the other hand, no significant relationship was found between audit committee independence and audit committee meeting (ACMT) and the level of discretionary accruals. This paper is important because it offers useful information that is of great value to policy makers, academics and other stakeholders. This study is one of the few to measure the influence of audit committee effectiveness and audit quality (auditor size) on earnings management.

CEOs’ extensive term of office inhibits discretionary accruals

PurposeCEOs’ (chief executive officer) term of office may explain discretionary accruals as a result of opportunistic behavior arising during certain periods of the term of office. Therefore, CEOs, in their early years of office, have incentives to report results that meet market expectations. In turn, CEOs in their senior year may be motivated to use discretionary accruals to gain private benefits. In this scenario, corporate governance mechanisms play an important role in monitoring relationships. Hence, the purpose of this study is to verify the influence of monitoring mechanisms on the relationship between CEOs’ term of office and discretionary accruals.Design/methodology/approachDescriptive statistics, multiple cross-sectional regression to estimate the accruals and regression of panel data to test the hypotheses were used. The sample comprised 195 companies listed on BM&FBovespa.FindingsThe results indicated that CEOs’ long term of office has a negative impact on the level of discretionary accruals, and thus, Brazilian CEOs with a longer term of office tend to establish a certain reputation in the stock market. On the other hand, it is concluded that CEOs’ intentions, in the first years of term, are positively related to the use of accruals and that the monitoring mechanisms can minimize these CEOs’ opportunistic practices.Originality/valueThe results broaden the literature on corporate governance, pointing that different systems of variable remuneration may influence CEOs’ willingness to manage results in their last year of term.

Regulatory incentives and financial reporting quality in public healthcare organisations

1. Introduction 2. Prior literature 3. Regulatory setting and hypothesis development 4. Research design 5. Findings 6. Discussion and conclusions References  Full Article  Figures & data References  Citations Metrics  Reprints & Permissions  PDF Abstract English National Health Service Foundation Trusts are subject to a regulatory regime in which the level of monitoring and intervention is determined by performance against two key performance metrics: a ‘financial risk rating’, based on a number of performance metrics, such as the reported surplus margin and return on assets, and a ‘prudential borrowing limit’. In this paper, we investigate the variation in financial reporting quality, proxied by discretionary accruals, with the incentives introduced by this regime. We find: first, that discretionary accruals are managed to report small surpluses; second, that, consistent with the avoidance of regulatory intervention in both the short and medium term, discretionary accruals are more positive when pre-managed performance is below intervention triggering thresholds and more negative when well above threshold; third, that, despite a move away from financial breakeven as the primary performance objective, there remains an aversion to small loss reporting. We further find that the level of discretionary accruals is driven by two metrics of strategic significance: the surplus margin (a measure of retained earnings) and the prudential borrowing limit (a measure of borrowing capacity).

Business group affiliation, earnings management and audit quality: evidence from Bangladesh

PurposeThis study aims to investigate the moderating role of audit quality on the association between business group affiliation of firms and earnings management in the South Asian emerging economy of Bangladesh.Design/methodology/approachA usable sample of 917 firm-year observations was drawn from companies listed on the Dhaka Stock Exchange from 2005 to 2013. Data were collected from the annual reports of sample companies. Earnings management was measured using the absolute value of discretionary accruals, and two proxies were used to measure audit quality: auditor size and industry specialisation.FindingsResults showed that the level of discretionary accruals is positively associated with business group affiliation status, and higher audit quality reduces this association. This suggests that in environments without strong investor protection, complex ownership structures create opportunities for controlling shareholders to expropriate minority shareholders. The controlling shareholders could then mask this practice through earnings management. The findings also show that in environments lacking strong investor protection, audit quality can help improve earnings quality for group-affiliated firms.Practical implicationsThe results suggest that financial statement users need to consider audit quality for a reasonable evaluation of the earnings quality of business groups. The study also informs regulators by illuminating audit quality as a key area of focus in any effort directed at enhancing stock market efficiency through improved earnings quality in environments where business group affiliation is prevalent.Originality/valueThis study documents empirical evidence on the moderating effect of audit quality on the positive association between business group affiliation and earnings management.

Earnings Management and Social Capital

I examine social capital’s impact on financial reports. Based on the social capital literature, I predict that the quality of the financial reports is higher when a firm is headquartered in a region with high social capital. Consistent with this prediction, I find that the firms that are headquartered in this type of region in the USA have a lower probability of committing fraud by misrepresenting financial information. Further, I find that the firms in regions with high social capital have lower levels of discretionary accruals and much more readable annual reports.