Lower Earnings Management Research Articles

Risk management committee and earnings management: evidence from an emerging market

PurposeThis study examines whether the risk management committee (RMC) mitigates earnings management (EM) in Nigeria.Design/methodology/approachThe study used a sample of 365 firm-year observations of Nigerian-listed nonfinancial companies from 2018 to 2022. Driscoll and Kraay’s fixed-effect standard error regression model is used to test the hypotheses.FindingsThe study finds that RMC size, expertise, meeting frequency and membership overlapping with the audit committee have a negative effect on both accrual earnings management (AEM) and real earnings management (REM). While RMC independence is found to have a negative effect on REM. Moreover, additional tests reveal that RMC effectiveness is significantly associated with lower EM practices. Further analysis using the industry level finds that RMC attributes mitigate EM practices in some industries. The results remain after rigorous, robust analysis for endogeneity and alternative regressions.Research limitations/implicationsThis study is limited to a sample of Nigerian-listed nonfinancial service companies for a period of five years, resulting in the non-generalizability of the findings to different contexts as the countries’ internal policies and regulations varied.Practical implicationsThe findings have important implications for regulators, policymakers and investors that a stand-alone RMC can effectively help to evaluate potential risk activities and implement a proper risk management system, thereby mitigating EM practices. The result can help investors, analysts and other stakeholders across the international community in considering RMC information to evaluate potential risk and earnings management practices.Originality/valueFollowing the NCCG 2018 reform in Nigeria that requires listed firms to create a standalone RMC, this study is among the earliest that examines the effect of RMC attributes on EM practices and emerging markets. As such, the findings may draw the attention of regulators and policymakers across the African market and the international community to the monitoring role of RMC attributes in mitigating EM practices.

Does the Effectiveness of Risk Management Committee Mitigate Earnings Management Practices?

Recently, there has been a lot of debate on the issues of earnings management practices. Most of these arguments have been confirmed by past studies in developed economies, where their regulations and institutional settings of corporate governance varied from those of emerging markets. Accordingly, corporate governance best practice has been considered an effective monitoring mechanism for strengthening the credibility and reliability of financial reporting. This study examines the effectiveness of risk management committee (RMC) attributes in mitigating earnings management (EM) practices in Nigeria. The study used a sample of 365 firm-year observations of listed non-financial companies from 2018 to 2022. Driscoll and Kraay’s fixed effect standard error regression model was used to test the hypotheses. The study finds that RMC size and expertise have a negative effect on both AEM and REM. However, RMC independence is found to negative effect on REM only. Moreover, additional test validates that RMC scores (effectiveness) are significantly associated with lower EM practices. Our results are robust under alternative regression and measurements for endogeneity. The findings provide enormous insight to regulators, policymakers, and investors on the ongoing debate surrounding the effectiveness of the RMC attributes in mitigating EM practices, and the effectiveness of the revised NCCG 2018. Besides, the findings will provide important intuition to shareholders, financial analysts, and academia about the effective role of stand-alone RMC

Corporate social responsibility, CEO characteristics, and earnings management: Evidence from China

AbstractThis study examines the relationship between corporate social responsibility (CSR), earnings management (EM), and the characteristics of chief executive officers (CEOs) within the context of China's economic transformation. Drawing on stakeholder theory and upper echelon theory, this study investigates the influence of CSR on EM and the role of CEO characteristics. The empirical analysis is based on a sample of 1,980 Chinese firm‐year observations from the Shenzhen and Shanghai stock markets, between 2013 and 2017. The findings reveal a negative relationship between CSR performance and discretionary accruals (DA), suggesting that higher CSR is associated with lower EM. Moreover, this relationship is more pronounced among firms with highly educated CEOs (postgraduates) and mature CEOs (approaching retirement age). Notably, the negative CSR–EM relationship is strengthened in firms with mandatory CSR reports. This study expands prior research by exploring the impact of CEO characteristics on the CSR–EM relationship, incorporating CEO attributes alongside ownership structures and governance mechanisms. The findings offer insights for organizations in terms of selecting ethically committed CEOs, as well as guidance for shareholders in understanding CEO selection criteria. Furthermore, this study highlights the importance of mandatory CSR disclosure (CSRD) for policymakers evaluating CSR performance according to the disclosure type.

Corporate political donations and audit fees: Some evidence from Australian audit pricing

We examine whether corporate political donations (CPDs) are associated with audit fees in the Australian setting. Our baseline results based on observations of Australian top 500 non‐financial companies show that, on average, firms with CPDs are associated with about 9% lower audit fees than firms without CPDs consistent with the strategic investment or resource dependency view. Using path analysis, we next show that high earnings quality resulting from strategic benefits of CPDs explains the association. Overall, these results confirm that firms use CPDs as strategic investments that are associated with lower earnings management, which leads to lower audit risk and hence reduced audit fees.

Comparison of the effects of earnings management on the financial cost between companies in developed and emerging European countries

AbstractEmpirical studies found that earnings management (EM) explains firms’ cost of capital both in companies in emerging and developed countries, but until now, it has not been analyzed whether the effect of EM on the financial cost is different among emerging countries inside or outside an economic area (Eurozone). Our results show that the cost of debt and the idiosyncratic component of the cost of equity are related to discretionary accruals and abnormal values of operating cash‐flows, that the emerging country effect is more relevant on the cost of debt, that there is a Eurozone effect that makes discretionary accruals more relevant than abnormal values of operating cash‐flow and that firms in emerging countries inside the Eurozone benefit from a lower EM penalty on the cost of debt than firms in other emerging European countries.

Joint board management meetings and earnings management

PurposeJoint board management meetings bring boards of directors and top management teams together to share information and discuss company matters. The authors investigate whether these joint meetings are associated with higher agency costs or information sharing benefits in the context of firm earnings management.Design/methodology/approachUsing publicly disclosed data on the frequency of joint board management meetings in Indonesian firms, the authors examine the relationship between joint board management meetings and earnings management during 2010–2017.FindingsThe authors find that more joint board management meetings are associated with lower earnings management. This is consistent with joint board management meetings providing net information sharing benefits. Additional testing indicates that the results are the strongest when firms hold more joint board management meetings than regular board meetings.Originality/valueThe findings suggest that in addition to holding regular board and audit committee meetings, formal meetings between boards of directors and top management teams are beneficial to shareholders by restricting opportunistic accounting choices by firm management.

Systematic Literature Review: Kecurangan Laporan Keuangan Di Indonesia Dan Malaysia

This study aims to identify and analyze literature related to financial statement fraud in Indonesia and Malaysia. The method used in this study is the Systematic Literature Review (SLR) of journal papers for the 2016-2021 period. The literature review process consists of three stages, namely planning, implementation and reporting using the PRISMA (Preferred Reporting Items for Systematic Review and Meta Analyses) research design which includes several processes. The initial study found 121 research articles using the Scopus database with the Publish or Perish application, and the total study used was 10 articles based on inclusion and exclusion criteria. There are four research questions raised in this study. The results of research published in journals published in 2016-2021 state that the factors for fraudulent financial statements in Indonesia are weak auditors, ineffective audit committee supervision, weak internal controls, weak governance and client engagement with borrowers. While the factors of financial statement fraud in Malaysia are audit committee involvement, weak governance and low earnings management. The researcher concludes that financial statement fraud that occurs in Indonesia and Malaysia can occur due to pressure and opportunities that occur due to weak internal and external controls.
 
 Keywords: Systematic Literature Review (SLR), fraudulent financial statements, Indonesia, Malaysia

Former auditors on the audit committee and earnings management: Evidence from African banks

AbstractThis paper investigates whether former auditors on the audit committee constrain earnings management through loan loss provisions. Based on an analysis of the annual reports of 82 African listed banks over the period 2011–2016, findings show that the presence of former auditors on an audit committee is associated with lower earnings management. This result suggests that audit committee members with auditing expertise and background contribute to effective monitoring of management’s accounting practices. Furthermore, results reveal that the reducing effect on earnings management of former auditors is strongest for directors who are unaffiliated with the bank’s current external auditor.

Audit committee composition and earnings management in a specific institutional environment: the case of Russia

PurposeThe purpose of this paper is to investigate the specifics of the relationship between audit committee characteristics and earnings management in Russian listed companies. This research is driven by the possibility of placing this relationship within the context of a specific institutional environment for company performance.Design/methodology/approachThe authors apply a panel study of 184 Russian listed companies for the period 2014–2018. In addition to the standard fixed effects model, the authors test the results for potential endogeneity with two-stage least squares (2SLS) analysis.FindingsThe results show that audit committee representation on the board of directors results in some mitigation of earnings management. Results reveal that a higher level of audit committee independence and the presence of financial expertise on the committee are associated with lower earnings management. However, companies with relatively busy directors on audit committees are more inclined to practice earnings management. The study’s findings hold after testing for endogeneity of audit committee independence. The authors also reveal that some audit committee characteristics (for example, audit committee independence; its level of expertise) alleviate earnings management in listed state-owned companies (SOEs) more strongly than in listed non-SOEs.Originality/valueThe results add to the ongoing debate on the role of corporate governance mechanisms in mitigating earnings management in emerging markets by taking into account the type of ownership (state-owned vs private) as a moderating variable. This study reveals, in particular, that the effect of certain audit committee characteristics on earnings management is more prominent in listed SOEs than in listed non-SOEs.

The context of earnings management and its ability to predict future stock returns

This paper constructs a signal-based composite index, namely ESCORE, which captures the context of earnings management. Specifically, ESCORE aggregates 15 individual signals related to both accrual and real earnings management based on prior relevant literature. After establishing that ESCORE is capable of capturing the context in which earnings management is more likely to occur, the study finds that low ESCORE firms outperform those with high ESCORE by an average of 1.37% per month after controlling for risk loadings on the market, size, book-to-market and momentum factors up to one year after portfolio formation in the UK. This finding implies that investors tend to ignore the observable context of earnings management. In addition, with ESCORE model, investors do not need to estimate the magnitude of earnings management, rather it is sufficient to look at the surrounding context to differentiate between low and high earnings management firms. Finally, when tested using the US data, most of the main results of the study appear to hold.

Earnings management and investor reaction

The purpose of the article is to investigate the contraction between the behavior of managers and investors toward Iran's capital market and the focus on agency theory which ends up with the conflict between the utilities of manages and investors because a conflict of interest implies an attempt to spread opportunistic behavior. In the current study, the benefit of reducing capital cost (manager's utility) and return on assets (investor's utility) are considered variables of interest of either party, in that Osborne's game theory was used in a two-step manner. The study population consisted of the companies listed on the Tehran Stock Exchange and Iran Over-the-Counter Market, classified in the game table according to managers' behavior toward high or low earnings management and investor's behavior toward acceptance non-acceptance of stock. The experimental results presented in this paper uphold the agency theory, indicating a conflict between managers and investors in Iran's capital market, particularly in the Tehran Stock Exchange. According to game theory, Nash's dominant equilibrium comes to the fore when dealing with the manager's low earnings management and investor's choice of strategy to accept a share in Iran's capital market and Tehran Stock Exchange. Alternatively, the presentation of transparent financial statements and the acceptance of such a company stock can maximize parties' utilities.

PERAN PEMODERASI KUALITAS AUDIT ATAS PENGARUH PERENCANAAN PAJAK DAN PAJAK TANGGUHAN TERHADAP MANAJEMEN LABA

The purpose of this study is to examine the impact of tax planning and deferred tax assets on earnings management in manufacturing companies listed on the Indonesia Stock Exchange from 2016 to 2018. An explanatory strategy with a quantitative approach is used in this study design. Secondary data sources used in this study include the company's financial statements on the balance sheet, profit and loss, and cash flow. This study used a sample of 73 manufacturing companies that were listed on the Indonesia Stock Exchange between 2014 and 2016. Univariate and moderated regression analysis models were used to analyze the data. The findings of this study show that tax planning has a favorable impact on earnings management and audit quality, with KAP Big 4 enterprises performing lower earnings management than KAP non-Big 4 firms. . Furthermore, deferred tax does not increase the favorable impact on earnings management, and firms audited by KAP Big 4 in deferred tax have lower earnings management than firms audited by KAP non-Big 4.

Influence or Preference? A New Look at Institutional Ownership and Earnings Management

Prior literature finds that earnings management is negatively correlated with institutional ownership. The question is whether institutional investors drive down earnings management of the firms they invest in, or they choose firms with lower earnings management. In this paper, we use the instrument variable design of the Russell 1000 and 2000 indices reconstruction to obtain an exogenous variation in institutional ownership. We find that institutional investors do not drive down earnings management. Instead, institutions choose firms with lower earnings management when they make investment decisions. To further support the preference hypothesis, we add measures of institution preference in the panel regression and find that the negative relation between institutional ownership and earnings management disappears.

The impact of IFRS on earnings management: evidence from Mexico

PurposePrior literature investigating the adoption of International Financial Reporting Standards (IFRS) finds that managerial incentives, capital market institutions and accounting standards interact to endogenously determine accounting outcomes. In this paper, we investigate the impact of changing from local GAAP to IFRS in 2012 on earnings management by public firms in Mexico. Given the institutional environment and managerial incentives in Mexico, there is not a clear theoretical prediction for the impact of Mexico's adoption of IFRS on earnings management. Thus, it is an empirical question whether a change in accounting standards had any effect on earnings management.Design/methodology/approachWe use three measures of earnings smoothing and one measure of upwards earnings management. Logistic regression analysis along with t-tests across two time periods, pre-IFRS (2009–2011) and post-IFRS (2013–2015) are used to determine if there is a significant change in the earnings management of Mexican firms, and if this change is different for companies cross-listed in the US and companies listed only in the Bolsa.FindingsWe hypothesize and find that adopting IFRS is associated with lower earnings management via earnings smoothing in Mexico, and the reduction is greater for firms cross-listed in the United States. Our results support the contention that strong institutions and enforcement aid in the implementation of new accounting standards.Originality/valueFirst, we contribute to the literature on the adoption of IFRS around the world. The consensus in the literature is that the impact of IFRS on financial reporting is country-specific. To our knowledge, we are the first to conduct such research on Mexico. Second, our findings indicate that IFRS adoption is associated with a reduction in earnings management through income smoothing by firms in Mexico. This contributes to a small but growing body of literature documenting consequences of improvements in Mexican capital markets. Results of research in this area provide important insights to capital market participants and regulators in Mexico.

Outsourced internal audit function and real earnings management: The role of industry and firm expertise of external providers

As the outsourced internal audit function (IAF) and real earnings management are attracting widespread attention among firms, it is vital for stakeholders to understand how these two practices affect the quality of financial reporting. This study examines how the expertise of an external IAF provider reduces real earnings management. Using a pooled panel data regression of 928 firm‐observations, we find that the external IAF provider's firm‐specific expertise is significantly associated with lower real earnings management. Conversely, we report no such association for external IAF providers with industry expertise. These findings are robust under a battery of sensitive analyses. The results of additional analyses show that the industry and firm‐specific expertise of external IAF provider interact with each other, resulting in a significant reduction in real earnings management. We also find significant differences in the IAF quality between big4 and second‐tier audit firms in which the latter are associated with lower real earnings management and the former with higher real earnings management. Finally, we observe low real earnings management for important clients and/or those with influential CEOs if the external IAF provider has firm‐specific expertise.

Let us work together: The impact of customer strategic alliances on IPO underpricing and post-IPO performance

Leveraging the availability of three years of pre-IPO data and related vs unrelated-party customer information for Chinese firms, we examine the impact of customer strategic alliances (CSA) on IPO underpricing from 2007 to 2015. Our core findings suggest that IPO firms with CSAs have less IPO underpricing than those without such a relationship. The decrease in underpricing is more salient for IPO firms that have non-related-party customers. Additional analysis suggests that the core findings are primarily driven by firms with good information environment pre-IPO, including high audit quality, high analyst following, and low earnings management. We interpret the results as indicating that a good pre-IPO information environment enhances the credibility of CSA relationships and signals high IPO quality. Furthermore, we document that a CSA relationship has a positive impact on an IPO firm's post-IPO performance, especially when the firm has non-related-party customers. Overall, CSAs reduce IPO underpricing and enhance IPO returns post-IPO.

CORPORATE SOCIAL RESPONSIBILITY DAN EARNINGS MANAGEMENTS: SUDUT PANDANG STAKEHOLDER THEORY

This study aims to examine the effect of corporate social responsibility on earnings management. Earnings management, as the dependent variable, is proxied by discretionary accruals (DACC). While corporate social responsibility, as an independent variable, is measured by adjusted GRI standards. This study uses sample manufacturing companies listed on the Indonesia Stock Exchange during the period 2012-2016. The number of samples used in this study amounted to 423. The findings, based on the linear regression method, indicate that corporate social responsibility has a significant negative effect on earnings management. To conform to the result, a robustness test was performed and found a significant negative relationship between dummy corporate social responsibility and earnings management. Dummy 1 for the company which disclose CSR above average, 0 for the company disclose CSR below average. So it can be concluded that the company that focuses on corporate social responsibility has lower earnings management. For leverage, size, and ROA, as control variables, showed no significant effect on earnings management.

Information Risk and Debtholders’ Mispricing by Considering Audit Quality*

AbstractWe examine how audit quality perceptions impact debt mispricing in the presence of earnings management. The Big Four auditors (BFAs) and auditor tenure are used as proxies for perceptions of higher quality audits. Debt mispricing means that debtholders charge a lower (higher) cost of debt to a firm with low (high) accrual earnings management (AEM) and high (low) real earnings management (REM). We find that debt mispricing is accentuated (attenuated) by considering the BFA and auditor tenure because debtholders fixate on quality audits curving AEM. For low AEM and REM firms, debt investors place a premium on low AEM with the BFAs/long‐tenured auditors, worsening the mispricing. For high AEM and low REM firms, debt investors impose a “smaller discount” on high AEM with the BFAs/long‐tenured auditors. This study demonstrates that the accentuation (attenuation) of debt mispricing when considering the BFA and auditor tenure occurs mainly if the firm raised only private debt rather than both private and public debt.

Regulation of capital flows: Effects on liquidity and the role of financial reporting quality

Capital controls as restrictions on capital flows are a tool proposed as a cure to the destabilizing market movements of the 1970s (i.e., Tobin, 1978) despite the criticism that they have received (Edwards, 1999). Capital controls resurfaced during the European Financial Crisis and the restrictions imposed on capital flows in Cyprus and Greece. These were the first instances of capital control implementation in the European Union's history and had various effects on firms’ financial positions. By using a sample of EU countries and distinguishing between austerity and capital controls periods, we assess the effects of capital controls on the stock liquidity of firms. All of the sample countries have a common financial reporting framework (International Financial Reporting Standards -IFRS), and some of them implemented a range of different measures from less intensive, such as increases in tax rates, to more intensive, such as the enforcement of capital controls, in their effort to stabilize their economies. For the task at hand, we specifically engage two accounting determinants of information asymmetry, namely, conditional conservatism and the level of earnings management. Our results show that financial reporting quality as measured by higher conditional conservatism and lower earnings management is beneficial for liquidity. However, during the capital controls period, the relation between conditional conservatism and liquidity becomes negative, and this negative relation relates to less risky firms. Thus, the negative relation between conditional conservatism and liquidity is likely due to investors keeping more conservative firms in their portfolios as a measure against the crisis.

Testing the role of independent supervisory board characteristics on the relationship between earnings management and quality of corporate social reporting disclosure

This research aims to examine whether a company with high earnings management discloses high quality Corporate Social Reporting (CSR) information to obscure the stakeholders’ view related to earnings management practice within the company. The characteristics of independent supervisory board as formal supervisor is predicted to weaken the relation between earnings management and quality of CSR disclosure. Using Thompson Reuters and Osiris databases, 242 samples consist of 36 companies from 5 countries, namely Indonesia, Malaysia, Singapore, Thailand and Philippines were obtained. The results show that the proportion of independent supervisory board has negative role in moderating the relationship between earnings management and quality of CSR disclosure. The larger the proportion of independent supervisory board, the more effective the supervisory board in conducting supervision so the earnings management decreases. Companies with low earnings management do not have tendency in disclosing the CSR information with better quality as an effort to obscure the earnings management, so CSR information is revealed truthfully or even lower than expected.