The impact of auditor conservatism on accruals and going concern opinion: Iranian angle

2018 ◽  
Vol 11 (4) ◽  
pp. 650-666 ◽  
Author(s):  
Mahdi Salehi ◽  
Hossein Tarighi ◽  
Haydar Sahebkar
Keyword(s):  
Earnings Management ◽  
Emerging Market ◽  
Economic Sanctions ◽  
Discretionary Accruals ◽  
High Quality ◽  
Content Type ◽  
Going Concern ◽  
Abnormal Accruals ◽  
The Impact ◽  
Auditor Conservatism

Purpose The purpose of this study is to examine high-quality auditors’ conservatism in Iran market based on the classification of Tehran Stock Exchange (TSE) in terms of their reaction to client’s earnings management behavior and their limitations to issue the going concern opinions (GCOs) over an eight-year period from 2009 to 2016. Design/methodology/approach The study population consists of 1,376 observations and 172 companies listed on the TSE during the years 2009-2016. Following the prior studies, the authors used the modified Jones model to measure discretionary accruals as a proxy for earnings management. Findings The results witnessed a negative relationship between the size of the audit firm and discretionary accruals; besides, the relationship between abnormal accruals and GCO on companies audited by high-quality audit firms is higher than other companies. In other words, firms with GCO, which were audited by the Iranian large auditors, report negative abnormal accruals less than those audited by non-large auditors. In short, in spite of the special features of Iran market because of economic sanctions, this paper extends prior literature clarifying that auditors’ conservatism induces accrual reversals when auditors issue GCOs. One interpretation of this result is that the existence of such association is because of not only auditor conservatism but also financially distressed firms. Practical implications The outcomes of this paper will help to fill the knowledge gap related to this issue between developing and developed countries because this investigation exposed more than ever the vital role of the auditor as an observer on the financial statements. Without any exaggeration, this research will make investors and stakeholders aware of this fact that auditor conservatism will be effective in reducing the manipulation of financial reporting and agency problems in emerging markets, particularly those markets facing with economic sanctions like Iran. Originality/value Because of Iran’s dire economic situation during the period under consideration, this is one of the most comprehensive research among the countries of the Middle East that surveys the impact of auditor conservatism on accruals and GCO in an emerging market, namely, Iran.

Earnings management and audit quality at Damascus securities exchange: Does managerial ownership matter?

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Zukaa Mardnly ◽  
Zinab Badran ◽  
Sulaiman Mouselli
Keyword(s):  
Earnings Management ◽  
Ownership Structure ◽  
Management Practices ◽  
Audit Quality ◽  
Emerging Market ◽  
Ordinary Least Squares ◽  
Managerial Ownership ◽  
External Audit ◽  
Content Type ◽  
The Impact

Purpose The purpose of this study is to examine the individual and combined effect of managerial ownership and external audit quality, as two control mechanisms, on earnings management. Design/methodology/approach This study applies ordinary least squares estimates on fixed-time effects panel regression model to test the impact of the investigated variables on earnings management for the whole population of banks and insurance companies listed at Damascus Securities Exchange (DSE) during the period from 2011 to 2018. Findings The empirical evidence suggests a negative non-linear relationship between managerial ownership (as proxied by board of directors’ ownership) on earnings management. However, neither audit quality nor the simultaneous effect of the managerial ownership and audit quality (Big 4) affects earnings management. Research limitations/implications DSE is dominated by the financial sector and the number of observations is constrained by the recent establishment of DSE and the small number of firms listed at DSE. In addition, the non-availability of data on executive directors’ and foreign ownerships restrict our ability to uncover the impact of different dimensions of ownership structure on earnings management. Practical implications First, it stimulates investors to purchase stocks in financial firms that enjoy both high managerial ownership, as they seem enjoying higher earnings quality. Second, the findings encourage external auditors to consider the ownership structure when choosing their clients as the financial statements’ quality is affected by this structure. Third, researchers may need to consider the role of managerial ownership when analyzing the determinants of earnings management. Originality/value It fills the gap in the literature, as it investigates the impact of both managerial ownership and audit quality on earnings management in a special conflict context and in an unexplored emerging market of DSE. It suggests that managerial ownership exerts a significant role in controlling earnings management practices when loose regulatory environment combines conflict conditions. However, external audit quality fails to counter earnings management practices when conditions are fierce.

Do discretionary accruals affect firms’ corporate dividend policy? Evidence from France

2018 ◽  
Vol 16 (2) ◽  
pp. 333-347 ◽  
Author(s):  
Anis Ben Amar ◽  
Olfa Ben Salah ◽  
Anis Jarboui
Keyword(s):  
Earnings Management ◽  
Dividend Policy ◽  
Positive Impact ◽  
Panel Data Analysis ◽  
Negative Relationship ◽  
Discretionary Accruals ◽  
Additional Measure ◽  
Ample Evidence ◽  
Content Type ◽  
The Impact

Purpose In financial literature, dividend payout decisions are determined by factors such as debt, liquidity, profitability, size and risk. The purpose of this paper is to identify the effect of earnings management measured by discretionary accruals based on Dechow et al.’s (1995) model on dividend policy. Design/methodology/approach This research will use panel data analysis to test the effect of earnings management on dividend policy. The authors selected 280, French non-financial companies, listed on the CAC All Tradable index for the 2008-2015 period. Findings Using a sample of 2108 firm-year observations, the authors find a positive impact of earnings management on dividend policies of firms. Besides, there is a positive/negative relationship between the size of the firm and the dividend policy. Moreover, this paper has dealt with some factors such as debt, the risk of the firm and liquidity which may affect the corporate dividend policy. The results are robust as the authors adopted an additional measure of dividend policy. Practical implications The findings may have important implications for analysts, investors, regulators and academics. First, the study shows that earnings management is a common practice in the French context and constitutes a major objective of dividend policy. Better still, identifying the other variables that influence the dividend policy provides a clearer understanding of dividend policy for investors, analysts and academics alike. Second, the study provides ample evidence of agency problems between various partners in French capital markets, highlighting the necessity to establish new corporate governance mechanisms. This is highly relevant for policymakers in their quest for a better financial market. Originality/value This study extends the literature on the impact of dividend thresholds on earnings management by showing that firms run earnings to inform the market that the company can distribute dividends.

The role of audit committees in mitigating earnings management: evidence from Jordan

2022 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Taha Almarayeh ◽  
Modar Abdullatif ◽  
Beatriz Aibar-Guzmán
Keyword(s):  
Developing Countries ◽  
Earnings Management ◽  
Audit Committee ◽  
Discretionary Accruals ◽  
Least Square ◽  
Audit Committees ◽  
Institutional Setting ◽  
Content Type ◽  
The Impact

PurposeThis study examines the relationship between audit committees (ACs) and earnings management (EM) in the developing country context of Jordan. In particular, it investigates whether audit committee attributes, including their size, independence, expertise and meetings, are able to restrict discretionary accruals as a proxy for EM.Design/methodology/approachThe generalized least square (GLS) regression was used to study the association between audit committee attributes and discretionary accruals, as a proxy of EM, for a sample of industrial firms listed on the Amman Stock Exchange (ASE) during the period 2012–2020. Data were obtained from the firms' annual reports.FindingsThe regression results indicate that audit committee independence is the only audit committee attribute that seems to improve the effectiveness of ACs, in that it is significantly associated with less EM, while other audit committee attributes that were tested do not show statistically significant associations.Research limitations/implicationsIn emerging markets, like Jordan, ACs may not be an efficient monitoring mechanism; therefore, it can be argued that the prediction made by the agency theory about the role of ACs in mitigating opportunistic EM activities does not necessarily apply to all contexts.Practical implicationsA better understanding of audit committee effectiveness in developing countries could help regulators in these countries assess the impact of planned corporate governance (CG) reforms and to better monitor and enhance the performance of ACs.Social implicationsIn a setting characterized by closely held companies, high power distance and low demand for high-quality CG mechanisms, this study contributes to understanding how this business system operates, and how improving CG mechanisms could be successful in such cultures.Originality/valueThis study investigates the under-researched relationship between audit committee characteristics and EM in developing countries. In so doing, it aims to provide new insights into this relationship within the developing context case of Jordan, including if and how the institutional setting influences this relationship.

scholarly journals The impact of CEOs’ accounting backgrounds on earnings management and conservatism

2017 ◽  
Vol 10 (1) ◽  
pp. 4-24
Author(s):  
Nan Hu ◽  
Rong Huang ◽  
Xu Li ◽  
Ling Liu
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Discretionary Accruals ◽  
Accounting Conservatism ◽  
Policy Implications ◽  
Good News ◽  
Content Type ◽  
Accounting Research ◽  
Significant Difference ◽  
The Impact

Purpose Existing literature in experimental accounting research suggests that accounting professionals and people with accounting backgrounds tend to have a lower level of moral reasoning and ethical development. Motivated by these findings, this paper aims to examine whether chief executive officers (CEOs) with accounting backgrounds have an impact on firms’ earnings management behavior and the level of accounting conservatism. Design/methodology/approach The authors classify CEOs into those with and without accounting backgrounds using BoardEx data. Using discretionary accruals from several different models, they do not find that CEOs with accounting backgrounds are more likely to engage in income-increasing accruals. However, the authors find that CEOs with accounting backgrounds exhibit lower levels of conservatism, proxied by C-scores and T-scores (Basu, 1997). This finding suggests that CEOs with accounting backgrounds recognize bad news more quickly than good news, consistent with the accounting principle of “anticipating all losses but anticipating no gains”. Findings The authors show that firms whose CEOs have accounting backgrounds exhibit lower levels of accounting conservatism. However, these firms do not exhibit higher levels of income-increasing discretionary accruals. This study documents the impact of CEOs’ educational backgrounds on firms’ accounting choices and confirms prior findings in experimental accounting research using large sample archival data. Originality/value This paper is the first study that investigates the impact of CEOs’ accounting backgrounds on firms’ financial reporting policy. The findings may have some policy implications. If accounting backgrounds of CEOs can make a significant difference on firms’ behavior, it is reasonable to make CEOs accountable for the quality of financial reporting. This paper is one of the first to empirically test inferences drawn by experimental accounting research. There has been a gap between archival and experimental accounting studies. The authors propose that interesting research questions can be addressed by filling in such a gap.

Do high-quality standards ensure higher accounting quality? A study in India

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Manish Bansal ◽  
Ashish Garg
Keyword(s):  
Value Relevance ◽  
Accounting Standards ◽  
Quality Standards ◽  
Discretionary Accruals ◽  
Accounting Quality ◽  
High Quality ◽  
Content Type ◽  
Earnings Smoothing ◽  
The Impact

Purpose The study aims to investigate the impact of International Financial Reporting Standards (IFRS)-converged standards (Indian Accounting Standards (INAS)) on the accounting quality of Indian firms. The phased manner approach of implementing INAS provides us a unique setting to investigate the issue in India. Design/methodology/approach The study used difference-in-difference (DiD) methodology, where the accounting quality is compared between test firms and benchmark firms during the pre-and post-INAS adoption period. Accounting quality is operationalized through four different constructs, namely, earnings smoothing, discretionary accruals, earnings timeliness and value relevance of earnings. Findings The findings deduced from the empirical results demonstrate that accounting quality has been significantly reduced after the adoption of INAS. In particular, results show that the degree of earnings smoothing, and the magnitude of discretionary accruals have been increased among test firms in the post-adoption year. Besides, findings provide evidence that timely recognition of losses and value relevance of earnings has been reduced for test firms relative to benchmark firms after the adoption of INAS. Practical implications The results suggest that the mere adoption of high-quality standards does not ensure higher accounting quality in countries with a weaker enforcement mechanism. Hence, stringent enforcement mechanisms are needed to ensure full compliance with accounting standards. This study serves as a case study for other emerging countries that are in the process of IFRS convergence and make them aware of the unintended consequences of IFRS adoption. Originality/value Indian authorities implemented INAS in a phased manner that provides a unique setting to use DiD methodology. DiD helps to control the impact of concurrent economic shocks, while examining the impact of the particular regulatory shock. Besides, this is the first attempt to investigate the impact of INAS on the accounting quality of Indian firms.

CEO characteristics and earnings management: empirical evidence from France

2020 ◽  
Vol 18 (1) ◽  
pp. 77-110 ◽  
Author(s):  
Dhouha Bouaziz ◽  
Bassem Salhi ◽  
Anis Jarboui
Keyword(s):  
Earnings Management ◽  
Significant Relationship ◽  
Management Practices ◽  
Discretionary Accruals ◽  
Content Type ◽  
Financial Communication ◽  
The Impact ◽  
The Relationship ◽  
Ceo Characteristics

Purpose The purpose of this paper is to investigate the impact of chief executive officer (CEO) characteristics on the earnings management examined by the discretionary accruals. Design/methodology/approach The sample includes 151 French firms listed on the CAC ALL shares index from 2006 to 2015. The paper uses the feasible generalized least square regression technique to test the relationship between CEO characteristics and earnings management. Findings Using discretionary accruals as a proxy for earnings management, the results obtained from the three models (Jones modified 1995; Kothari et al., 2005; Raman and Shahrur, 2008) indicated that there is a positive and significant relationship between CEO duality, CEO nationality and the quality of financial communication. However, no significant relationship was found between CEO board member, CEO turnover and earnings management. Originality/value A literature review finds that fewer studies have investigated the relationship between earnings management practices and personal CEO characteristics in the French context. Furthermore, no study yet has examined the influence of CEO nationality and CEO age on earnings management practices. This study provides empirical data about the impact of CEO’s characteristics on earnings management and how these different characteristics can facilitate the transition to manipulate and influence the quality of financial communication.

Impact of IPO grading on earnings management

2015 ◽  
Vol 13 (2) ◽  
pp. 142-158 ◽  
Author(s):  
Yogesh Maheshwari ◽  
Khushbu Agrawal
Keyword(s):  
Earnings Management ◽  
Initial Public Offering ◽  
Design Methodology ◽  
Discretionary Accruals ◽  
Alternative Measure ◽  
Cross Sectional ◽  
Content Type ◽  
Public Offering ◽  
The Impact ◽  
First Time

Purpose – This paper aims to examine the impact of initial public offering (IPO) grading on earnings management by Indian companies in their IPOs. Specifically, it investigates whether earnings management significantly differs in the pre-IPO grading regime and post-IPO grading regime. Further, it examines whether earnings management significantly differs between high-graded and low-graded IPOs. Design/methodology/approach – The cross-sectional modified Jones model is used to obtain the discretionary accruals, a proxy for earnings management. The impact of IPO grading on earnings management is assessed using multiple regression analysis. Findings – Earnings management is significantly lower in graded IPOs as compared to the ones that are not graded. Further, among the graded IPOs, the high-graded IPOs exhibit lower earnings management as compared to the low-graded IPOs. The findings are robust to the use of an alternative measure for discretionary accruals. Originality/value – IPO grading in India is a unique certification mechanism, introduced for the first time in any market. This paper establishes the efficacy of this mandatory certification mechanism in reducing earnings management. The findings could be valuable to issuer companies, investors and market regulators.

Opportunistic earnings management during initial public offerings: evidence from India

2016 ◽  
Vol 15 (3) ◽  
pp. 352-371 ◽  
Author(s):  
Rachappa Shette ◽  
Sudershan Kuntluru ◽  
Sunder Ram Korivi
Keyword(s):  
Earnings Management ◽  
Initial Public Offerings ◽  
Market Performance ◽  
Discretionary Accruals ◽  
Content Type ◽  
Public Offerings ◽  
Earnings Performance ◽  
The Impact

Purpose This paper aims to examine the impact of initial public offerings (IPO)-year opportunistic earnings management on long-term market and earnings performance. Design/methodology/approach A sample of 150 book-built IPOs over 2001-2006 are analysed based on industry adjusted return on sales and industry adjusted return on assets for six post-IPO years. The quality of earnings is measured in two ways using discretionary accruals and Beneish manipulation score. Modified Jones model is used to estimate the expected accruals and to compute the discretionary accruals for each IPO firm year. Regression model is used to examine the impact of IPO-year quality of earnings on future earnings performance. Findings The paper finds that earnings and market performance of IPO companies are abnormally higher in the IPO-year, as compared to the post-IPO years. Similarly, the quality of earnings during the IPO-year is lower than those in the post-IPO years. The results also show that the opportunistic earnings management in IPO-year has significant negative impact on the long-term adjusted earnings and market performance. Research limitations/implications The present study is confined to the period from 2001 to 2006 for the purpose of post-IPO analysis for a period of six post-IPO years. Thus, the conclusions of this study are to be viewed with this limitation. Originality/value This paper is the first study based on the Indian context to examine the relationship between the quality of earnings of the IPO firm and long-term earnings and market performance.

Audit committee, internal audit function and earnings management: evidence from Jordan

2019 ◽  
Vol 27 (1) ◽  
pp. 72-90 ◽  
Author(s):  
Ebraheem Saleem Salem Alzoubi
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Audit Committee ◽  
Internal Audit ◽  
Reporting Quality ◽  
Discretionary Accruals ◽  
Least Squares Regression ◽  
Content Type ◽  
Internal Audit Function ◽  
The Impact

PurposeThis study aims to examine the influence of audit committee existence and internal audit function on the earnings management of companies.Design/methodology/approachThis paper uses generalised least squares regression to investigate the influence of audit committee existence, internal audit function and the interaction of these two mechanisms on earnings management for a sample of 86 industrial companies listed on the Amman Stock Exchange over a four-year period from 2007 to 2010. The paper uses the extent of discretionary accruals as the proxy for earnings management.FindingsThis paper finds that audit committee existence and the internal audit function reduce the level of earnings management. The number of meetings between the audit committee and internal audit function also reduces discretionary accruals. Overall, this study finds that audit committee existence and internal audit function decrease earnings management and improve the financial reporting quality.Originality/valueThe main contribution of this study is that it investigates the combined effects of audit committee existence and internal auditors on earnings management. Furthermore, this study is the initial paper to examine the impact of audit committee and internal audit on earnings management in Jordan.

IFRS and accounting quality: legal origin, regional, and disclosure impacts

2016 ◽  
Vol 24 (3) ◽  
pp. 296-316 ◽  
Author(s):  
Ajit Dayanandan ◽  
Han Donker ◽  
Mike Ivanof ◽  
Gökhan Karahan
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Common Law ◽  
Civil Law ◽  
Discretionary Accruals ◽  
Income Smoothing ◽  
Content Type ◽  
The World ◽  
The Impact

Purpose The purpose of this study is to examine whether the quality of financial reporting has improved after the adoption of International Financial Reporting Standards (IFRS) in Europe and across the world. The study investigates the impact of IFRS on income smoothing and earnings management in different geographic regions under different legal origins and disclosure environments. Design/methodology/approach To measure income smoothing in the pre- and post-IFRS periods, the authors use the coefficient of variation and the panel unit root model proposed by Im et al. (2003) for testing whether net income is stationary throughout the sample period. The study uses a dynamic panel estimation framework, as it captures the dynamics of IFRS on discretionary accruals efficiently. Discretionary accruals are used to measure earnings management. Findings The results suggest that the adoption of high quality standards, such as IFRS, reduces income smoothing and earnings management. In addition, the study finds that earnings management has decreased in the post-IFRS period, in particular, for French and Scandinavian civil law countries, but not for German civil law countries and common law countries. The latter can be explained by the fact that common law countries have strong investor protection laws, strict law enforcement and high disclosure levels of financial information. The study also finds empirical evidence that the adoption of IFRS reduces earnings management in countries with high levels of financial disclosure. Overall, the study shows that the adoption of IFRS improved the quality of financial reporting. Originality/value This study is useful for accounting standard setters across the world, including those countries that have not yet decided to adopt IFRS. The study contributes to the literature by examining the adoption of IFRS in income smoothing and earnings management under different legal regimes and disclosure environments by using advanced empirical methodologies.

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