The Effect of Financial Systems on Earnings Management Among Firms Reporting Under IFRS

This study examines the relation between financing system and earnings management and changes in the patterns of earnings management activities over time. Prior research suggests that managers are more likely to manage earnings in a credit financing system because the purpose of the financial reporting in this credit environment is to protect creditors by prudently calculating distributable profit. In addition, multinational enterprises financial reporting tends to be anchored in their home countrys practices and responsive to their national requirements. Using 121 firm-year observations of non-U.S. firms reporting under IFRS, we find some evidence that firms from credit financing systems manage earnings more than firms from equity financing systems. We find that firms in a credit financing environment report 1.6% higher in absolute discretionary accruals than equity firms. However, we did not find evidence that overall earnings management activities have decreased as the IASBs Comparability/Improvements Project went into effect after 1995. This finding suggests that the IASB has not been effective in narrowing down the international differences in accounting practices and providing comparable financial statements to the public

The effect of firm characteristics and good corporate governance characteristics to earning management behaviors

Purpose: This research is carried out to investigate the influence of firm characteristics and good governance characteristics to earnings management behavior. Furthermore, the research is expanded to determine the predictive discretionary accruals models in Indonesia. The author utilizing firm listed in Indonesia Stock Exchange during 2014 – 2018 as research object. Design/methodology/approach: The research samples is selected by utilizing the purposive sampling method. In addition, the data analyze is conducted through E-Views version 10. Three discretionary accruals models is used to define earnings management behavior. The research assumed firm characteristics factors such as financial performance, firm size, leverage, and share issuance activity and good governance characteristics such as board of directors’ size and auditor’s size. Findings: The research discovers that firm characteristics can accentuate the earnings management behavior significantly. In other hand, in good corporate governance characteristics only big four auditor is significant. The research also find that discretionary accruals model of Jones, Dechow, and Kothari are predictive in Indonesia. Practical implications: The discoveries of this research provide understanding for investors that enforcement on both governance and monitoring mechanism are essential approach to reduce earnings management behavior. Originality/value: The research investigated three models of discretionary accruals’ capability in predicting earnings management behavior, and found out all discretionary accruals model are still relevant to be use in predictive to define earnings management behavior in Indonesia.peer-reviewe

JONES, DECHOW AND KASZNIK MODELS SIGNIFICANCE IN THE ROMANIAN ECONOMIC ENVIRONMENT

This study intends to be a first step into an attempt of measuring the earningsmanagement using an econometric model valid for the Romanian specificities by trying to establishthe level of significance of three acknowledged econometric models: Jones (1991), Dechow et al.(1995) and Kasznik (1999) on Romanian economic environment.Given the above mentioned premises, the study was conducted using the Romanian listedcompanies (active on the Bucharest Stock Exchange) selected by a main criteria: discrepancybetween reported cash flow and reported net income. Our analyses lead us to the conclusionrelated to the above mentioned issues that Jones model was found to be significant for Romanianeconomic environment in terms of applicability unlike Dechow and Kasznik models, thus it may befurther developed and applied to an extended database.earnings management, manipulation, cash flow

Efficient contracting, earnings smoothing and managerial accounting discretion

Purpose – The purpose of this paper is to examine whether the contracting incentives (i.e. bonus plans, debt covenants, political costs hypotheses), and income smoothing can explain accounting choices in an emerging country, Egypt. Design/methodology/approach – The paper uses the ordinary least square regression model to examine the relationship between earnings management and reporting objectives. A sample of 438 non-financial firms listed on the Egyptian Exchange over the period 2005-2007 is used. Findings – The paper finds that the contracting objectives explain little of the variations in accounting choices (i.e. discretionary accruals) in the Egyptian context. However, the paper finds that mangers are likely to smooth the reported earnings by managing the accrual component in an attempt to reduce the fluctuation in reported earnings by increasing (decreasing) earnings when earnings are low (high) in attempt to reduce the variability of the reported earnings. Research limitations/implications – The empirical results rely on the ability of earnings management proxies to adequately capture earnings manipulation activities. Practical implications – The findings of the study should be of substantial interest to regulators and policy makers. The results implicitly contribute to the ongoing argument in relation to the optimal flexibility permitted by standard setting and the argument that tightening the accounting standards and mandating International Financial Reporting Standards are likely to improve reporting quality and reduce opportunistic earnings management. The results reveal that many of the weaknesses related to corporate reporting in emerging countries may result from the inadequate enforcement of the law and the weak legal protection of minority shareholders. The results also highlight the crucial role of understanding the reporting incentives, which is mainly shaped by institutional and market forces and the legal environment, in explaining accounting choices. Originality/value – Unlike previous studies that tested an individual objective, this study examines the trade-offs among various reporting objectives in an emerging economy

A framework for the classification of accounts manipulations

Accounts manipulations have been a matter of research, discussion and, even, controversy in several countries such as the United States, Canada, the United Kingdom, Australia and France. The objective of this paper is to elaborate a general framework for classifying accounts manipulations through a thorough review of the literature. This framework is based on the desire to influence the market participants' perception of the risk associated to the firm. The risk is materialized through the earnings per share and the debt/equity ratio. The literature on this topic is already very rich, although we have identified series of areas in need for further research.accounts manipulations; earnings management; income smoothing; big bath accounting; creative accounting

Regulatory incentives and financial reporting quality in public healthcare organisations

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)

Audit quality, public ownership and firms' discretionary accruals management.

Francis et al. (1999) and Becker et al. (1998) report evidence that audit quality acts as a constraint on both income-increasing and income-decreasing earnings management in public firms. These results raise several interesting questions. First, are incentives for and constraints on earnings management independent of whether earnings are above or below target? Second, does audit quality also restrain earnings management in private firms as it does in public firms? Third, does public ownership itself act as a constraint on earnings management? One could argue that, relative to private ownership, public ownership increases the scrutiny of a firm's financial statements which may in turn restrain a firm's earnings-management behavior.Accordingly, we study publicly available financial statements of a matched sample of public and private Belgian firms. Following Francis et al. 1999, DeFond and Subramanyam 1998, Becker et al. 1998, we use discretionary accruals as a measure of earnings management. One finding is that audit quality and public ownership act as constraints on income-decreasing earnings management. We also find that, to a large extent, public ownership and auditor type are substitutes: for example, a firm that is both public and big-6-audited typically does not show more restraint in earnings management than a firm that has only one of these characteristics. Lastly, we do not have any evidence that audit quality and public ownership constrain income-increasing earnings management. Thus, our study contributes to the literatures on audit quality differentiation and especially earnings management. First, we provide supportive evidence of audit quality differentiation between Big 6 and non-Big 6 auditors in the private clients segment of the audit market. Second, we provide evidence on differences in the level of discretionary accruals between public and private firms.Management; Companies;

Accruals, Cash-Flows and Tobin’s q : An Investment Perspective on Firm Accruals

Following Zhang (Accounting Review, 2007) we cast firm accruals in terms of short-term investment. Since many studies consider accruals as a smoothed measure of cash flows, we first adopt Zhang specification and augment the standard Jones model with a cash-flow variable. Second, if accruals are indeed a form of short-term investment they should also be influenced by firm’s performance as measured by Tobin’s q. Consequently we propose a new version of the accrual model including a proxy for Tobin’s q. Given that accounting data and Tobin’s q are generally measured with errors, we also introduce a new estimation method based on a modified version of the Hausman artificial regression, featuring an optimal weighting matrix composed of higher moments instrumental variable estimators. Our results suggest that all the key parameters of the accrual models are indeed systematically biased with measurement errors. More importantly, our findings largely qualify Zhang’s conjecture on accruals, as both cash-flows and Tobin’s q are found strongly significant regressors of firm accruals. Relatedly we find that the Tobin’s q augmented model better isolate discretionary accruals so that the residuals of the equation are particularly well-suited to forecast stock returns.Discretionary accruals; Earnings management; Investment; Measurement errors; Higher moments; Instrumental variable estimators.

Earnings quality in privately held firms : the roles of external audits, stakeholders, and governance mechanisms.

While the extant empirical literature on earnings management focuses on incentives, constraints and consequences in US listed companies, we present results on nonlisted companies that operate in a continental European environment (Belgium); and we consider not just the effects of internal mechanisms and external auditing but also of stakeholder relations. Methodologically, special care is taken of an errors-in-variables problem induced by a two-step procedure. We find clear evidence that earnings are managed (downward) for tax purposes, but also that relationships with banks and suppliers act as a restraining factor in this field. Another factor of moderation of downward manipulation appears to be a large board. Employee power does not seem to affect accruals management. Lastly, in our sample, audit quality does not exhibit any statistically clear relation with the auditor's visibility (for instance, big-N or not).Audit quality; Auditing; Companies; Earnings management; Effects; Governance;

The Interrelation between Audit Quality and Managerial Reporting Choices and Its Effects on Financial Reporting Quality

Two distinct lines of research have been dedicated to empirically testing how financial reporting quality (measured as the earnings response coefficient or ERC) is associated with management's choice of reporting bias and with audit quality. However, researchers have yet to consider how ERCs are affected by either the auditor's reaction to changes in the manager's reporting bias or the manager's reaction to changes in audit quality. Our study provides theoretical guidance on these interrelations and how changes in the manager's or the auditor's incentives affect both reporting bias and audit quality. Specifically, when the manager's cost (benefit) of reporting bias increases (decreases), we find that expected bias decreases, inducing the auditor to react by reducing audit quality. Because we also find that the association between expected audit quality and ERCs is always positive, changes in managerial incentives for biased reporting lead to a positive association between ERCs and expected reporting bias. When the cost of auditing decreases or the cost of auditor liability increases, we find that expected audit quality increases, inducing the manager to react by decreasing reporting bias. In this case, changes in the costs of audit quality lead to a negative association between ERCs and expected reporting bias. Finally, we demonstrate the impact of our theoretical findings by focusing on the empirical observations documented in the extant literature on managerial ownership and accounting expertise on the audit committee. In light of our framework, we provide new interpretations of these empirical observations and new predictions for future research