Proxy For Earnings Management Research Articles

The Impact of Covid-19 on Earnings Management: Empirical Evidence from Vietnam

Earnings management (EM) is the practice of adjusting profits or earnings on financial statements at the discretion of the management. This study undertook a regression analysis of the earnings management model, with data from 300 non-financial listed companies on the Vietnamese stock exchange during the period 2016 to 2021 to determine whether the COVID-19 pandemic has had an impact on earnings management. To estimate earnings management, compared with the original model, we add the leverage variable (LV) was used as earnings management proxy in this research. The results show that the COVID-19 pandemic positively and significantly impact the earnings management of non-financial listed companies. Moreover, it was found that managers are more involved in real earnings management than accrual earnings management, implying that financially distressed firms need to reassure investors to raise more capital during the pandemic. However, there is no evidence of a trade-off between these two techniques during the pandemic compared to before the pandemic. Additionally, this study provides evidence that the model by Roychowdhury, following Cohen et al., and the performance-matched model by Jones, following Kothari et al. are more suitable for detecting EM behavior when factoring in the financial leverage (LV) variable for firms with a high debt ratio in developing countries. JEL Classification: H8, M42

Sustainability Commitment Versus Earnings Management Practices: Saudi Insights

This paper aims to examine the impact of corporate sustainable management (CSM) on earnings management (EM) activities using annual data from 2018 to 2022 for 37 non-financial Saudi indexed firms. A multi-measure approach was utilized to proxy for EM (AEM and REM) and CSM (CSR sustainability reporting, CSR sustainability committee, CSR sustainability external audit, GRI report guidelines, ESG performance index). The empirical analysis employed pooled ordinary least squares (POLS) regression. The results suggest that CSM plays a significant role in reducing both AEM and REM practices, indicating that sustainability-oriented organizations mitigate EM activities. Furthermore, the study reveals a negative correlation between CSM and sales manipulation, overproduction, and cutting discretionary expenditures. This research supports the notion that companies prioritize sustainable management due to a focus on long-term strategies and transparency. This is the first work in the Middle East and Arab region, particularly in Saudi Arabia, investigating this association.

Earnings management, investor sentiment and short-termism

PurposeThis study examines the investment horizon influence, mediated by market optimism, on earnings management based on accruals and real activities. Based on short-termism, the authors argue that earnings management increases in optimistic periods to boost corporate profits.Design/methodology/approachThe authors analyzed non-financial Brazilian publicly traded firms from 2010 to 2020 by estimating industry-fixed effects of groups of short- and long-horizon firms to compare their behavior on earnings management practices during bullish moments. For robustness, the authors used alternate measures and trade-off analyses between earning management practices.FindingsThe findings indicate that, during bullish moments, companies prioritize managing their earnings through real activities management (RAM) rather than accruals earnings management (AEM), depending on their time horizon. The results demonstrate the trade-off between earnings management practices.Research limitations/implicationsThis study presents limitations when using proxies for earnings management and investor sentiment.Practical implicationsInvestors and regulators should closely monitor companies' operations, especially during bullish market conditions to prevent fraud.Originality/valueThe study addresses investor sentiment mediation in the earnings management discussion, introducing the short-termism approach.

Financial sustainability and earnings manipulation: Evidence from Spanish provincial councils

While earnings manipulation has a broad literature in the private sector, there is a lack of research on this topic in the public sector. This paper aims to explore the level of earnings management in Spanish provincial councils. The use of accrual accounting may be viewed negatively by stakeholders such as the central government, opposition parties, and citizens. The public choice theory highlights the conflicting interests of politicians seeking re-election and citizens aiming to maximize their welfare, leading to potential manipulation of earnings. Discretionary accruals are used as a proxy for earnings management in this study. Additionally, the impact of financial sustainability measures on earnings management is examined. The analysis covers the period from 2017 to 2020 and reveals how certain financial sustainability ratios and pre-election years can influence the extent of earnings manipulation. This paper contributes to the existing literature on earnings management in local governments by examining the connection between financial sustainability indicators and this behavior. Specifically, it focuses on the relationship between budget vulnerability and sustainability, and their influence on the magnitude of discretionary accruals.

The governance involvement in the relationship between earnings management and surplus free cash flow

The purpose of this study is to examine empirically the association between surplus free cash flow (SFCF) and earnings management (EM), and the moderating effect of governance on this relationship. The study used a sample of non-financial companies listed on the Amman Stock Exchange (ASE) over the ten-year period (2011–2020) with all the information necessary to estimate the study variables. The modified Jones (1991) model is used to estimate discretionary accruals, a widely used proxy for earnings management. Based on the regression analysis of the related panel data collected, the study’s findings indicate that SFCF is positively associated with EM activities. This result is consistent with most prior related study’s findings (Nouri & Gilaninia, 2017; Rahmawati, 2020) and suggests that when growth opportunities are limited, the free cash flow induces management to involve in upward management practices. Additionally, results indicate a significant negative impact of the interaction variable SFCF*AQ (audit quality) on EM, suggesting that, in an SFCF situation, AQ reduces manager’s tendency to involve in upward EM practices. The study’s results are likely to be useful for accounting researchers, local governmental bodies, and policymakers who are concern with the impact of EM practices on the quality of earnings.

Earnings management and corporate governance during COVID-19: Evidence from the European capital market

The objective of this paper is to analyse the impact of COVID-19 on the earnings manipulation of firms and whether corporate governance has a mitigating effect. The methodological approach consists of two steps: in the first stage, a pooled ordinary least squares (OLS) regression model has been implemented to compute the earnings management proxies, whereas in the second stage panel data regression analysis has been adopted to test the effects of corporate governance variables on the earnings management proxies themselves. Using data from STOXX Europe 600 as a proxy for the European capital market, it is found that the level of companies’ earnings manipulation increased during the pandemic. In particular, companies have engaged in more accounting and real earnings management (REM) practices. The findings show that a larger board helps to mitigate the positive relationship between COVID-19 and earnings manipulation, whereas no mitigating effect for board independence, board diversity and chief executive officer (CEO) duality has been found. In addition, an industry analysis has been developed both for robustness purposes and in order to check which sectors have been most and least affected by the pandemic. In particular, the findings show how the most affected industries reported a higher level of earnings management, resulting in a worse reporting quality. This paper provides additional evidence on the impact of COVID-19 on earnings management using a strong multi-country level governance setting. The results of this study provide useful suggestions for business practice, investors and policymakers.

Corporate biodiversity reporting and earnings management: Does a critical mass of female directors have an impact?

This study addresses the relationship between corporate biodiversity reporting (CBR) and earnings management as well as the moderating impact of board gender diversity (BGD). Due to increased regulatory pressure, we relied on a sample of STOXX Europe 600 firms (1,537 firm-year observations) for the business years 2017–2021. In line with the moral licensing hypothesis, we assume that CBR and our two main proxies of earnings management (accruals-based and real earnings management) are positively related, and a critical mass of female directors may weaken this link. Our regression results align with these assumptions and prior research on similar relationships. Moreover, we conduct several endogeneity checks, which support our main results. This study mainly contributes to prior research as it is the first one on the link between CBR and earnings management. We stress major implications for researchers, standard setters, and business practitioners. Biodiversity represents a key sub-pillar of sustainability reporting with an impact on financial reporting, indicating the need for integrated thinking, which should be promoted in future empirical research.

Earnings management and ESG performance: Empirical evidence from Italian context

The purpose of this paper is to investigate the relationship between environmental, social and governance (ESG) performance, both in its totality and its three pillars (environmental, social and governance), and earnings management. The sample includes companies listed on the Italian Stock Exchange market (FTSE Italia All-Share index) during business years 2014–2019. After excluding those firms belonging to the financial sector, along with those with missing values, the final sample consists of 103 firms for a total of 618 firm-year observations. Data have been collected from two databases, that are Refinitiv Eikon (for ESG and governance variables) and AIDA Bureau van Dijk (for economic and financial variables). Panel data regression analysis has been implemented to analyse the impact of ESG performance on accrual-based (AEM) and real based (REM) earnings management. It is found that ESG performance has a negative effect on AEM but not on REM, and the governance pillar has the strongest impact compared to those of environmental and social ones. In addition, this research suggests a bidirectional link between ESG performance and earnings management. This analysis contributes to prior research since it is the first study that has used accrual and real-based earnings management proxies with this topic in relation with ESG performance and its three components in the Italian traditional corporate governance system. Corporate practice, regulators and researchers should recognize that ESG performance and earnings management should be discussed together.

The role of real earnings management in the value relevance of accounting information in Indonesia

Purpose- One feature that should be integrated in financial statements to be relevant to decision-makers is the relevance of the information to the users. When the value and usefulness of accounting information used to gauge business financial performance are undermined by earnings management methods, problems arise. As a result, the information presented may deceive financial statement users about the corporation's financial performance. Because IFRS demands managerial judgment in the accounting process by definition, its adoption may even increase the chance for real earnings management (REM). This study aims to examine the impact of REM to the value relevance of accounting information before and after IFRS adoption. Methodology- The population was manufacturing companies listed on the IDX, with samples 230 firm year observations consists of one hundred fifteen firms year before adoption of IFRS and one hundred fifteen firms year after IFRS adoption. this study used firms’ abnormal levels of cash flows, production costs, and discretionary expenditures as proxies for real earnings management. Using a price model and panel data, the main result confirms that real-based earnings management has an impact on the value relevance of earnings and book value of equity before IFRS adoption, but has no effect after IFRS adoption. Findings- The findings revealed that prior to the adoption of IFRS, real earnings management was employed by companies that had higher earnings value relevance and lower equity book value relevance than companies that did not apply earnings management. After the adoption of IFRS, there is no significant effect of real earnings management on the value relevance of earnings and equity book value. Conclusion- The results show that investors believe that earnings are a signal from managers with the implementation of real earnings management prior to the adoption of IFRS, but after the adoption IFRS, they may not be able to do so. Keywords: Real earnings management, value relevance, accounting information, earnings, equity book value, JEL Codes: M40, M41, M49

Do the educational profile, gender, and professional experience of audit committee financial experts improve financial reporting quality?

Going beyond the mere presence of the audit committee financial experts (ACFEs) within the audit committee, we examine whether the educational profile, gender, and professional experience of ACFEs reduces the extent of earnings management. Using a sample of Chinese listed companies, we find evidence suggesting that ACFEs with postgraduate qualifications and other professional certifications mitigate earnings management. Female ACFEs with postgraduate qualifications are more effective in mitigating earnings management than their male counterparts. Also, the professional experience of ACFEs helps them reduce the extent of earnings management. Results are more pronounced in the case of female ACFEs with more professional experience. In addition, we found that ACFEs working in privately-owned Chinese firms better mitigate earnings management compared to those in state-owned Chinese firms. Overall, our results remain robust after controlling for potential endogeneity problems and using alternative earnings management proxies. Our study provides implications for regulators about necessary policy reforms regarding audit committee composition and recommends that companies appoint female ACFEs in China.

Stock market liberalization and financial reporting quality

This study employs the Mainland-Hong Kong Stock Connect pilot program in China to investigate the influence of stock market liberalization on firm-level financial reporting quality (FRQ). First, through a staggered difference-in-difference specification strategy, we find that eligible firms experience a significant improvement in FRQ, as measured by a composite proxy of accrual earnings management, real activities manipulation, and financial report restatement. Second, cross-sectional analyses suggest that the effect is stronger when firms are headquartered in regions with weaker institutional environments, characterized by lower judicial efficiency and less developed financial markets. We also show that the impact is more pronounced when firms face less external pressure and possess more effective corporate governance before stock market liberalization. Third, further evidence highlights that augmented FRQ is associated with a reduction in regulatory compliance costs, an improvement in stock price efficiency, and a mitigation of financing constraints. Collectively, we shed new light on the role of stock market liberalization in shaping firms’ financial reporting behavior.

Influence of Firm size on Audit Quality and Earnings Management Relationship: Evidence from Listed Manufacturing Firms in Nigeria

The study investigated the influence of Firm size on the relationship between Audit quality and Earnings Management of listed Consumer Goods Manufacturing firms in Nigeria. This study tested a number of audit quality indicators (auditor’s tenure, Audit firm size and joint audit) and earnings management proxies that is (earnings restatement and discretionary accruals), using 26 listed consumer-goods manufacturing firms as the study population. Secondary data were extracted from the annual report of 13 listed consumer-goods manufacturing firms while judgmental sample from the population, covering the study period from 2012 to 2018 using historical data were adopted. The data were tested through the use of Univariate, Bivariate and Multivariate analysis. Univariate/descriptive, Bivariate, Pearson Product Moment Correlation (PPMC) techniques by use of E-view 10 Econometric software and Multivariate – regression model. The findings of the study showed that firm size variability does not influence every aspect of the Firm's attributes. Some aspects of Firms' characteristics are influenced by the size of the Firm whereas some other aspects do not respond to size variability. As was indicated by the Firm size analyses, earnings restatement of consumer-goods manufacturing firms does not respond to Firm size attribute while their discretionary accrual practices significantly depend on their size attributes. The study concludes that firm size is a significant moderator between the use of audit quality and earnings management, however it depends of the variable of earnings management used. In the light of these, it is the recommendation of this study that to ensure positive significant relationship with earnings management, the firms should voluntary engage two audit firms in all to other to allow for effective comparison, so that hidden information in financial statement could be dictated or revealed; the total assets as a dimension of firm size should be r

How do auditor attributes affect bank earnings management? Evidence from Africa

PurposeThis paper aims to examine the impact of the auditor's characteristics on bank's earnings management (EM) through loan loss provisions (LLP) for African banks.Design/methodology/approachThis study is based on 360 bank-year observations from 14 African countries for the period 2011–2016, discretionary LLP is used as proxy for EM. Panel regressions have been conducted.FindingsThe authors' findings reveal that auditor's industry specialization and tenure exert a negative and significant influence on the extent of LLP-based EM. The results also show that total fees paid to the banks' auditors are positively related to the extent of EM. In a further analysis, the authors find that industry specialist auditors are more effective in reducing the incoming-increasing. Similarly, the positive relationship previously found between EM and total fees still holds only for income-increasing. Moreover, auditor tenure negatively impacts both income-increasing and income-decreasing EM. As for auditor change, results reveal differential effect on EM.Originality/valueThe current research extends prior literature and provides an understanding of an important external monitoring mechanism, the external audit, within African banks. To the best of the authors' knowledge, there is a paucity of cross-country studies that has addressed the influence of auditors' attributes on banks' EM in Africa.

PENGARUH KINERJA KEUANGAN DAN FAKTOR LAINNYA TERHADAP MANAJEMEN LABA PADA PERUSAHAAN

This research is a development of previous research, namely Asim and Ismail (2019) with the dependent variable earnings management and the independent variable leverage. This study aims to examine actual data on how financial performance and other variables affect earnings management in manufacturing organizations. Leverage, profitability, firm size, company growth, audit committee, fixed asset turnover, and audit quality are the factors used in this study. The population of this study is manufacturing companies listed on the Indonesia Stock Exchange during the period 2019 to 2021. Purposive sampling is used to choose the samples for this study, and 216 data are collected. Data were examined using several regression techniques. Proxy that used in this research was Modified Jones Model as proxy of dependent variable earnings management to calculate data. The findings of this study demonstrated that the company growth have an impact on earnings management. This showed that changes of total asset of in a company from year to year can affected the manager to do earnings management. While others, such as leverage, profitability, firm size, audit committee, fixed asset turnover, and audit quality, do not influence on earnings management.

Earnings management in European real estate firms during crisis periods

PurposeIn periods of economic distress, expectations for businesses change and there is a heightened need for reporting quality. This study investigates the impact of crises on earnings management in the real estate sector.Design/methodology/approachThe data consisted of financial statements from 2005 to 2021 from real estate firms listed on 10 European stock exchanges. Estimated discretionary accruals from four standard accruals models were used as a proxy for earnings management, using cross-sectional industry and firm fixed effects models. The authors examined earnings management during three crises: the financial crisis (2008–2009), the debt crisis (2011–2012) and the COVID-19 pandemic (2020–2021).FindingsThe results showed less earnings management during the COVID-19 crisis and more earnings management during the financial crisis, though with slightly weaker evidence. The authors did not find significant evidence of earnings management related to the debt crisis. These results suggest that stakeholders in the real estate sector should be extra vigilant in crisis periods.Originality/valueThis study is the first to investigate earnings management in European real estate firms, focusing on the impact of crises.

Whether corporate social responsibility is used to suppress earnings management practices and could corporate governance mechanisms prevent them? An empirical study

PurposeThis study examines whether managers adopt corporate social responsibility (CSR) disclosures to suppress earnings management practices and whether corporate governance mechanisms could limit such practices.Design/methodology/approachA quantitative approach was followed, in which secondary data from listed firms from 2014 to 2019 were gathered. Descriptive statistics and inferential techniques were performed, which included correlation, ordered logistic regression and 2SLS panel regression analyses.FindingsThe findings indicate that firms use CSR disclosure to conceal managers' opportunistic behaviour via earnings management as an entrenchment strategy and that corporate governance mechanisms could significantly constrain such behaviour.Research limitations/implicationsThis study goes beyond the conventional agency theory by incorporating additional theoretical perspectives from stakeholder and legitimacy theories, resulting in a multi-theoretical perspective in conceptualizing the study.Practical implicationsThe findings are expected to have significant policy implications, especially in limiting the opportunistic use of CSR disclosures and reducing earnings management practices to safeguard stakeholders' interests and ensure the sustainability of business entities.Originality/valueThe levels of CSR and board governance practices are captured using comprehensive indices. Moreover, earnings management was operationalized using both accrual-based and real earnings management proxies. Furthermore, while addressing an empirical dearth noted, the findings provide significant policy implications for limiting managers' opportunistic and unethical use of CSR disclosures with corporate governance mechanisms.

Management’s Discretionary Assessments of Goodwill Impairments—Evidence from STOXX Europe 600

The main issues of accounting reporting regarding goodwill are whether a firm’s management reliably conveys their private information about future earnings, and whether they disclose value-relevant and useful information to accounting users. In the current International Financial Reporting Standards (IFRS) regulations, the goodwill impairment test is based on management’s discretionary assessments. This study examines how goodwill impairment is reported under IFRS considering company- and industry-specific economic factors, proxies for earnings management, and macroeconomic crisis years. We extend previous research using tobit and logit regressions by employing a fixed-effects model. This approach is possible because of a panel dataset comprising 449 of 600 active companies sampled from the STOXX Europe 600 index from 2005 to 2018. We find that goodwill impairments are largely concentrated in certain companies, industries, and years. The regression models show a significant negative correlation between companies’ return on total assets and goodwill impairments. Moreover, we discover that goodwill impairments have a significant positive correlation with goodwill intensity, debt ratio, and the proxy for reporting a one-off big bath charge. In addition, we find that the global financial crisis in 2008–2009 and the European debt crisis in 2011 differ significantly from other fiscal years.

Accrual-based, real activities earnings management and corporate social responsibility: A virtuous circle? emerging market evidence

The relationship between Earnings Management (EM) and Corporate Social Responsibilities (CSR) has raised a considerable number of attentions, especially, in financial and accounting field since they determine firms’ performance as well as market positioning. On the contrary, in an emerging country as Vietnam, the number of relevant studies are rare together with several limitations. Thus, this paper is the pioneer investigating the cause and effect among Accruals Earnings Management (AEM), Real Earnings Management (REM) as two proxies for EM, and CSR. Next, Granger’s causality replacing for traditional method is employed in order to interpret this nexus. The analysis relies on the sample size of 225 companies during the period 2014–2018 from Hanoi Stock Exchange (HNX) and Ho Chi Minh Stock Exchange (HOSE). We figured out executives prefer REM to AEM when implementing earnings manipulations. Consistent with the expectations and prior scholars, we found there is a negative correlation in the association of AEM and CSR while it is positive in the case of REM and CSR. Besides the consistent results with multivariate regression analysis (MRA) in terms of CSR-EM association, the fsQCA findings also explore more combinations regarding the relationship between CSR-EM. Additionally, all empirical results also provide evidence that there is cause-and-effect relationship in terms of AEM, REM and CSR which has never been researched and discussed over the past several years.

The Impact of the COVID-19 Pandemic on Quality of Financial Reports

Abstract The Corona Virus Disease pandemic has significant adverse effects on the economy, health, and society that have hampered global economic growth. Taiwan is one of the countries impacted by this pandemic. The pandemic had an enormous influence on the world economy, making the role of financial report quality an even more critical issue. This study aims to examine and evaluate the impact of the COVID-19 pandemic on the quality of financial reports. Additionally, it intends to examine and evaluate the differences between the impact of audit opinion and audit quality on the quality of financial reports before and after the COVID-19 pandemic. This study adopts secondary data, i.e., annual financial reports and audit quality data of public listing firms on the Taiwan Stock Exchange (TSE). Furthermore, this study selected data from 2016 to 2021. This study proves that the COVID-19 pandemic affects the quality of financial reports. Furthermore, this study suggests that the COVID-19 pandemic strengthens the negative impacts of audit opinion on the quality of financial reports using accrual earnings management proxies. However, it also shows that the audit quality did not impact the quality of financial reports proxied by accrual and real earnings management at the beginning of the COVID-19 outbreak. JEL classification numbers: G32, M41, O06, Q56. Keywords: The Quality of Financial Reports, COVID-19 Pandemic, Audit Opinion, Audit Quality.

Critical audit matters: litigation, quality and conservatism

PurposeThis study aims to address the following four research questions: first, whether auditors report critical audit matters (CAMs) to shield themselves against possible litigation; second, whether reporting quality affects auditors’ propensity to report CAMs; third, whether auditors’ tenure length – reflecting familiarity with clients’ financial reporting – affects their likelihood to report CAMs; and fourth, whether auditors’ conservatism increases the likelihood of CAMs reporting.Design/methodology/approachData are manually collected from audit reports including CAMs in 10-K, then financial data are collected from the Capital IQ database, and market data are collected from the CRSP database. Using propensity score matching, the initial sample of companies with CAMs is matched with companies without reported CAMs. Performance adjusted discretionary accruals, real earnings management proxy, Khan and Watts’ (2009) C-score, propensity to issue a going concern opinion, Dechow et al.’s (2011) F-Score, Rogers and Stocken’s (2005) model and Houston et al.’s (2010) model are used to measure reporting quality, auditor conservatism, misstatement risk and litigation risk, respectively.FindingsThe results do not show that auditors report CAMs opportunistically to shield themselves from litigation risk. However, the results do suggest that auditors have a greater tendency to report CAMs when reporting quality is low and when they are more conservative. On the other hand, they have less tendency to report CAMs in their first year of engagement.Research limitations/implicationsThe findings of this study have important implications for the auditor behavior literature as it shows that, when it comes to reporting CAMs, auditors actually behave objectively and do not report in a trite way. This study also provides early archival evidence on a standard that relates to the first major change to the auditor’s report in decades. To the best of the author’s knowledge, it is the first to provide evidence on the association between auditor conservatism and auditors tendency to report CAMs and the first to triangulate prior research on auditor litigation risk by providing the first archival evidence on the auditors “litigation-shielding” concern.Practical implicationsThis study examines whether auditors attempt to meet the stated objective of reporting CAMs by signaling information about reporting quality. This study demonstrates that reporting CAMs is not a “boilerplate” communication. This study has implications for standards setters, as it shows that CAMs are reported in a way consistent with the objectives of the new standard, namely, via signaling information in the audit report on the quality of the financial statements.Originality/valueIn terms of originality, this paper uses a manually collected sample and, to the best of the author’s knowledge, is the first to focus on auditor’s behavior rather than on investors or clients reactions to CAMs. Also, this paper addresses a recently issued standard using US data and archival approach, rather than experimental. This paper also provides relevant evidence related to concerns raised earlier but were not empirically examined, such as reporting CAMS as “boilerplate” expectations. This paper provides new evidence on the auditors’ behavior with regard to litigation risk.