Accuracy and Pervasiveness of Earnings Management Practices in Islamic Banking Institutions

This paper investigates issues related to the Burgstahler and Dichev methodology (1997) applied to test earnings management (EM) in Islamic banking institutions (IBIs) using earnings measured over alternative periods. These alternative periods are periods ending at the first three quarters of the fiscal year. We compare the statistical properties of  fiscal year earnings to annual earnings starting with the fiscal year quarters two, three and four. In general, our results for the higher moments of  the earnings distribution are more consistent with the EM hypothesis than with the settling up hypothesis. When the predictions of the two hypotheses differ, our results are generally more consistent with predictions resulting from the EM hypothesis. We  find evidence of higher degree of EM pervasiveness to avoid losses, consistent with a higher motivation to manipulate earnings. Such a motivation is affected by the way banks approach the zero earnings target. IBIs approaching the target from below show higher pervasiveness than IBIs approaching the target from above. Keywords: Earnings Management, Quarterly Earnings, Settling Up, Earnings Management Pervasiveness , Islamic Banking Institution

Corporate Governance Practices and Earnings Management in Islamic Banking Institutions

This paper examines corporate governance (CG) characteristics and relates them to earnings management (EM) behaviours in the context of a large emerging sector, Islamic banking industry. Empirical Investigation used multivariate probit analysis and relied on a sample of 90 Islamic Banks over the period of the years 2000-2009. Findings revealed that CG issues in Islamic banking differ significantly from those of the conventional system. Main differences are found with regard to philosophical aspects, including objectives of the bank, natures of contract involved, key players in the CG practice as well as the relationships between the players. We verified that these aspects provide strong justification for an additional layer in the CG of an Islamic bank being the Shari'ah Supervisory Board (SSB). The mechanism and tools for the effective implementation of CG are relatively the same as the conventional system. Results suggest also that audit committee plays a more significant role in moderating EM than the other aspects of CG.  Moreover, the estimated coefficients of SSB embeddedness suggest that an in-house SSB is effective in mitigating EM. The results, however, do not provide evidence that SSB characteristics, such as SSB size, SSB members objectivity and SSB members competence are significant in mitigating EM. By the same, results revealed no difference between Islamic banks with and without governance  committee in terms of EM intensity. Keywords: Earnings Management, Corporate Governance, Islamic Banking Institutions

Earnings Management to Avoid Earnings Decreases and Losses: Empirical Evidence from Islamic Banking Industry

We use earnings distribution approach (EDA) to investigate whether and why Islamic banks manage reported earnings. First findings confirm the assumption that Islamic banks manage earnings to avoid reporting losses (with statistical tests) and earnings decreases (with visual evidence but without statistical tests). However, earning management phenomenon is not as obvious in Islamic banking institutions as in other non-Islamic institutions. That is, Islamic banking institutions practice earnings manipulations but not as well as non-Islamic institutions. Additionally findings show that prospect theory can explain the trade-off between risk and return, i.e., Islamic banks above the earnings threshold are found to be risk averters while banks below the earnings threshold are found to be risk seekers. Therefore, we have accepted the hypothesis that prospect theory explains Islamic banks’ motivation in managing earnings to exceed thresholds. Keywords: Earnings Management, Earnings Distribution Approach (EDA), Prospect Theory, Islamic Banking Institutions

Culture, Economics and Disclosure of (IAS/IFRS) Information: Empirical Evidence in the Tunisian, French and Canadian Contexts

According to the theory of environmental determinism, the accounting system of a country is made by the environment. From our study on three samples of the three countries in different cultural and economic environments (50 Tunisian firms listed on Tunindex, 35 French companies listed on the CAC40 and 36 Canadian companies listed on TSE60), we have demonstrated that despite the adoption by these three countries in a single repository (IAS / IFRS), the degree of implementation of these standards (for each standard) differs from one country to another. We have also found that the level of IAS/IFRS disclosure in Canada is higher than in France which is in far higher than in Tunisia turn. The high level of disclosure of TSE60 companies of Canada compared to the CAC 40 companies of France is explained by existing differences between the cultural dimensions of the two countries. Indeed, Canada is characterized by professionalism and transparency in contrast to France which is characterized by the statutory control and discretion. In addition, for Tunisia, extensive reading annual reports showed a low level of disclosure and demonstrated the presence of a large number of items unenforceable. Inapplicable items reflect the absence of the scope of the standards adopted by Tunisia. Thus, standards adopted and those not yet adopted by Tunisia face rather the level of economic development as the national culture. The results of this study demonstrate the validity of the theory of environmental determinism. Keywords: Theory of environmental determinism, Disclosure, IAS/IFRS

Impact de l’efficacité des comités d’audit sur la qualité des bénéfices comptables divulgués

Cet article vise à examiner l’importance du rôle de contrôle exercé par le comité d’audit sur la fiabilité des états financiers dans les sociétés américaines. Plus précisément, nous cherchons à déterminer l’influence de certaines caractéristiques du comité d’audit sur la qualité des bénéfices comptables. Pour atteindre cet objectif, nous avons étudié, de 2000 à 2004, un échantillon de 100 entreprises américaines qui exercent dans divers secteurs d’activités. Nous avons choisi la pertinence et le niveau de conservatisme comptable comme mesures de la qualité des bénéfices. Ainsi, nous avons remarqué une relation positive entre la qualité des bénéfices et l’efficacité des comités d’audit grâce à l’indépendance, à l’orientation, à l’expertise et à la diligence de ces membres.The aim of this study is to examine the importance of the role of control exerted by the audit committee on the reliability of the financial statements within the framework of American companies. More precisely, we seek to determine the influence of certain characteristics of the audit committee on the quality of the accounting earnings. To achieve this goal, we based ourselves on a sample of 100 American companies, operating in various sectors over the period going from 2000 to 2004. We chose the relevance and the level of countable conservatism like measurements of the quality of the benefit. Thus, we found a positive relationship between the earning quality and the effectiveness of the audit committee appreciated through independence, instruction, expertise and the diligence of these members

Conservatisme comptable et coût de la dette : étude sur un échantillon d’entreprises canadiennes

L’objectif de cette recherche est d’étudier l’impact du conservatisme comptable sur le coût de la dette de la firme. Nous avons utilisé deux modèles pour mesurer le conservatisme comptable à savoir le modèle de Basu (1997), et le modèle de Beaver et Ryan (2000). Sur la base d’un échantillon composé de 85 entreprises canadiennes, nous avons soulevé l’influence du conservatisme comptable sur le coût de la dette. Nos résultats empiriques confirment le fait que, le conservatisme comptable joue un rôle important dans l’atténuation des conflits d’intérêts entre actionnaires et créanciers. En effet, cette évidence nous a guidé pour tester l’influence du conservatisme comptable sur le coût de la dette de la firme. Nous avons trouvé que le conservatisme comptable affecte négativement le coût de la dette.The objective of this research is to study the impact of accounting conservatism on the cost of the debt of the firm. We used two models to measure the accounting conservatism : Basu (1997), and Beaver and Ryan (2000). Basing on a sample of 85 Canadian firms, we found that accounting conservatism influenced the cost of debt. Our empirical results confirm the fact that, accounting conservatism plays an important role in mitigating interest conflicts between shareholders and stockholders. Indeed, this guided us to test the influence of accounting conservatism on the cost of the debt of the firm. We found that accounting conservatism affects the cost of the debt negatively

Auditor-auditee negotiation: effects of auditor independence and expertise in Tunisian context

The purpose of this paper is to study the impact of auditor independence (auditor tenure) and expertise (auditor industry specialist, auditor experience and the audit firm size) on auditor-auditee negotiation outcomes. For the entire sample of 53 Tunisians firms for the period 2001-2007, our results indicate non-significant relationship between auditor tenure and auditor-auditee negotiation outcomes, a positive and significant relationship between auditor experience and the extent to which the auditee agreed with the auditor over the financial reporting issues. On the other hand, the results indicate a positive but non-significant relationship between the auditor industry specialist and the negotiation outcome. For the audit firm size, we find a negative and significant effect on negotiation outcome. Indeed, we find no significant relationship between auditee importance and size and auditor-auditee negotiation outcome.auditor-auditee negotiation; auditor independence; auditor tenure; auditor expertise; industry specialists; auditor experience; audit firm size; Tunisia; auditee importance.