The impact of principles-based vs rules-based accounting standards on reporting quality and earnings management

2019 ◽  
Vol 20 (1) ◽  
pp. 78-93 ◽  
Author(s):  
Dennis Sundvik
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Accounting Standards ◽  
Reporting Quality ◽  
Absolute Magnitude ◽  
Cash Flows ◽  
Real Earnings Management ◽  
Content Type ◽  
Analytical Work ◽  
The Impact

Purpose The purpose of this paper is to explore whether principles-based vs rules-based accounting standards have an effect on measures of financial reporting quality and earnings management strategies. Design/methodology/approach This study uses a firm-year-specific variable that captures the extent to which firms’ accounting and operating behavior is affected by the characteristics of a specific standard in the USA. Measures of absolute accruals, financial misconducts, signed abnormal accruals and abnormal cash flows are used to assess the effects. Findings The results show that absolute magnitude of accruals and probability of financial misconduct is lower, and accrual earnings management is higher when firms’ standards are more based on principles. The study also suggests that potentially costlier real earnings management is a consequence of rules-based standards. Research limitations/implications This study relies heavily on measures from the prior accounting literature, hence, care has been exercised in generalizing the findings. Practical implications This study has direct implications for a number of stakeholders, including standard setters, policymakers, securities regulators, researchers, investors, financial statement preparers and auditors. For example, the future development of accounting standards can be supported by the empirical conclusions in this study together with previous standard-setting ambitions, commentaries, experiments and analytical work. Originality/value This study extends prior single-country studies on reporting quality and cross-country studies on transition effects of firms switching from local to International Accounting Standards by observing the impact of accounting standard characteristics on additional measures of reporting quality and accrual as well as real earnings management when holding institutional factors constant. The study also offers archival evidence complementing prior commentaries, experiments and analytical work.

Stock pledging and earnings management: an empirical analysis

2019 ◽  
Vol 27 (3) ◽  
pp. 350-372
Author(s):  
Sandhya Bhatia ◽  
Sangita Choudhary ◽  
Amish Dugar ◽  
Smita Mazumdar
Keyword(s):  
Earnings Management ◽  
Management Practices ◽  
Reporting Quality ◽  
Cash Flows ◽  
Decision Makers ◽  
Real Earnings Management ◽  
Managerial Behavior ◽  
Content Type ◽  
Agency Risk ◽  
The Impact

Purpose The purpose of this paper is to investigate the impact of agency risk implied in case of personal debt obtained by promoters through pledging of their stock on accrual and real earnings management practices. Design/methodology/approach In this paper abnormal accruals, as suggested in Dechow et al. (1995), and the real earnings management proxies as indicated in Dechow et al. (1998) and Roychowdhury (2006) are used. OLS regression is run over 29,054 firm-years of Indian companies starting from the year 2008 to 2016. Then the occurrence of earnings management is tested in firms in year t where promoters pledge/release their holdings from the pledge in year t+1. Findings The findings suggest that earnings management increases in the prior year with an increase in the proportion of promoters’ stock pledge in the subsequent year. The authors find evidence for increased earnings management through accruals and also for real earnings management using abnormal cash flows and abnormal discretionary expenses. However, the authors do not find real earnings management using abnormal production cost as a measure. Practical implications The paper has considerable implications on managerial behavior toward earnings management because of the flexibility managers have in applying accounting policies and authority in operating decisions under domestic GAAP, and IFRS and earnings are prone to management tactics, fostering agency risk when they relate to the welfare of decision makers. Originality/value This paper addresses the consequences of individual borrowing of promoters collateralized by their stake in the firm, which is a global phenomenon, on reporting quality.

scholarly journals The Impact of Financial Statement Comparability on Earnings Management: Evidence from Frontier Markets

2020 ◽  
Vol 8 (4) ◽  
pp. 73
Author(s):  
Wil Martens ◽  
Prem W. S. Yapa ◽  
Maryam Safari
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Common Law ◽  
Accounting Standards ◽  
Real Earnings Management ◽  
Financial Statement ◽  
Financial Reporting Standards ◽  
Developed Markets ◽  
Accounting Comparability ◽  
The Impact

This paper examined whether financial statement comparability constrains opportunistic earnings management in frontier market countries. Using a large sample of 19 frontier market countries, and an accounting comparability method that maps comparability across several accounting standards, the results show that enhanced financial comparability constrains accruals earnings management (AEM). Contrary to developed markets and novel to this study, a significant relationship between financial comparability and real earnings management (REM) was not found. For greater robustness, AEM and REM were also tested on both International Financial Reporting Standards (IFRS) adopting and non-adopting countries. The results suggest IFRS adoption constrains AEM, yet exhibited no impact on constraining REM. Additionally, the use of BigN auditors failed to conclusively show an ability to moderate EM. When combined, the results suggest that frontier markets engage in less REM than expected. It is also noted that the legal roots (civil vs. common law) play a significant role in constraining earnings management. Common law countries exhibited lower AEM when comparability increased; this significance was not found in countries that were rooted in civil law. Contributions from this study show that findings from developed markets cannot be generalised to frontier markets.

scholarly journals The impact of ownership structure on financial reporting quality in the east

2017 ◽  
Vol 25 (2) ◽  
pp. 178-197 ◽  
Author(s):  
Qaiser Rafique Yasser ◽  
Abdullah Al Mamun ◽  
Margurite Hook
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Ownership Structure ◽  
Developing Economies ◽  
Reporting Quality ◽  
State Ownership ◽  
Financial Reporting Quality ◽  
Content Type ◽  
Negatively Associated ◽  
The Impact

Purpose This paper aims to focus mainly on the relationship between ownership structure and earnings management of a developed and two developing economies, and is distinct from prior research. Design/methodology/approach Using a sample of firms from three countries (Australia, Malaysia and Pakistan), the detailed ownership evolutions for the period 2011-2013 were observed. Findings Overall, the authors find that in the East, ownership concentration is negatively associated with financial reporting quality. Individual ownership and group ownership were negatively associated with earnings management in Pakistan, however, not in Malaysia where the same were positively associated. Further, the result of this study indicated that state ownership is negatively associated with firm performance. Among the control variables, it was found that larger firms were negatively correlated with financial reporting, while firms with a larger board size and mature in the maneuver were coupled positively with earnings management. Originality/value The results highlight the highly individualized effects of blockholders and the need for research to further understand the mechanisms through which shareholders impact financial reporting quality.

Discussion of Foreign Ownership and Real Earnings Management: Evidence from Japan

2015 ◽  
Vol 14 (2) ◽  
pp. 215-219
Author(s):  
Yongtae Kim
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Reporting Quality ◽  
Foreign Ownership ◽  
Cash Flows ◽  
Production Costs ◽  
Real Earnings Management ◽  
Future Research ◽  
Foreign Investors ◽  
Japanese Firms

ABSTRACT Guo, Huang, Zhang, and Zhou (2015) examine whether foreign investors encourage or limit real earnings management in Japanese firms. They find that firms with higher foreign ownership engage less in real earnings management than other firms as evidenced by higher abnormal cash flows from operations, lower abnormal production costs, and higher abnormal discretionary expenses. While the results suggest that foreign ownership and real earnings management in Japanese firms are negatively correlated, it remains unclear whether foreign investors improve the corporate governance of firms and thus limit real earnings management or that they are attracted to firms that have better governance and more transparent earnings. One fruitful avenue for future research is to examine whether the negative relation between foreign ownership and financial reporting quality reflects monitoring by foreign investors or selection.

Audit committee and financial reporting quality: the moderating effect of audit quality

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Sana Mardessi
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Audit Committee ◽  
Audit Quality ◽  
Reporting Quality ◽  
Moderating Effect ◽  
Real Earnings Management ◽  
Financial Reporting Quality ◽  
Content Type ◽  
The Relationship

Purpose The purpose of this study is to address the impact of audit quality on financial reporting quality proxied by real earnings management. To further clarify the mentioned links, this study empirically assesses the moderating effect of audit quality. Design/methodology/approach The study is based on a sample consisting of 90 non-financial companies that are listed in the Amsterdam stock exchange in AEX all share index over the 2010–2017 period. This study applies a quantitative approach and secondary data as the main source of information for analysis. This paper performs an ordinary least squares regression to examine the moderating effect of audit quality on the relationship between financial reporting quality. Findings Empirical findings demonstrate that corporate governance mechanism, mainly independence members, financial expert and audit committee size has a statistically significant relationship with real earnings management. However, the effect of audit committee meetings on real earnings management is not significant. There is also evidence that audit quality moderates the audit committee – real earnings management links. Originality/value This study extends the existing literature by examining the moderating effect of audit quality on the relationship between financial reporting quality proxied by real earnings management in the Dutch context.

Exploring the potentials of clawbacks to check earnings management practices and enhance financial reporting quality: perceptions from the UAE

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Kahkashan Mahmood ◽  
Yasser Barghathi ◽  
Alhashmi Aboubaker Lasyoud
Keyword(s):  
Earnings Management ◽  
United Arab Emirates ◽  
Financial Reporting ◽  
Management Practices ◽  
Reporting Quality ◽  
Financial Reporting Quality ◽  
Firm Level ◽  
Content Type ◽  
Set Up ◽  
The Impact

Purpose For investors to wholeheartedly entrust their finances to the supposed executives, there is the need to set up policies to checkmate the excesses of such executives, hence clawback policy. This study aims to explore the perceptions of professionals regarding the impact of clawback provisions on earnings management (EM) and financial reporting quality in the context of the United Arab Emirates (UAE). Design/methodology/approach The application of a qualitative approach in an EM is of great significance in this study. For convenience, perceptions of the professionals were collected through semi-structured face-to-face interviews, internet forums and telephone conversations from which the data were initially transcribed and analyzed using thematic analysis. Findings The findings of the study indicate that clawbacks will have a significant impact on EM and financial reporting quality, and apart from this, other firm-level factors have also been supporting clawbacks. Practical implications EM has been a widespread practice; this research may potentially assist directors and regulatory bodies to comprehend factors that should be considered to reduce it. It may also provide practical insights from professionals regarding clawbacks and their bearing on EM and the quality of financial information from an emerging economy perspective. Originality/value A significant gap in the contemporary literature regarding the impact of clawback provisions on EM and financial reporting quality has been filed by this work, in the context of the UAE economy. Consequently, it provides a great insight into the effect of clawback in a business setting and how it can help checkmate the excesses of company executives.

scholarly journals The Role Of Board Characteristics In Mitigating Management Opportunism: The Case Of Real Earnings Management

2015 ◽  
Vol 31 (2) ◽  
pp. 661 ◽  
Author(s):  
Dorra Talbi ◽  
Mohamed Ali Omri ◽  
Khaled Guesmi ◽  
Zied Ftiti
Keyword(s):  
Earnings Management ◽  
Empirical Evidence ◽  
Financial Reporting ◽  
Boards Of Directors ◽  
Empirical Studies ◽  
Reporting Quality ◽  
Real Earnings Management ◽  
Board Characteristics ◽  
The Impact

<p>This study seeks to provide empirical evidence of the efficacy of board characteristics in constraining management opportunism, measured by real earnings management. The paper uses regression analysis to document empirical evidence regarding the impact of the independence of boards of directors and the independence of committees on real earnings management in 7,481 US firms over the period 2000 to 2009. This study contributes to empirical studies on the role of corporate governance in financial reporting quality by demonstrating the role of the independence of boards of directors and the independence of committees in constraining real earnings management. These results should contribute to providing an orientation for future regulators regarding possible amendments, especially in the wake of the current financial crisis.</p>

Does IPSAS adoption reduce corruption’s level? New evidence from ODA beneficiary countries

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Mounira Hamed-Sidhom ◽  
Yosra Hkiri ◽  
Ahmed Boussaidi
Keyword(s):  
Financial Reporting ◽  
Accounting Standards ◽  
Reporting Quality ◽  
Financial Reporting Quality ◽  
Content Type ◽  
Underdeveloped Countries ◽  
Useful Signal ◽  
The Impact ◽  
New Evidence ◽  
Important Evidence

Purpose The accounting literature suggests that the use of accounting standards with greater quality promotes the financial reporting quality and enhances accountability. This study aims to investigate the effect of the International Public Sector Accounting Standards (IPSAS) adoption, by official development assistance (ODA) beneficiary countries, on the reported level of their perceived corruption. Design/methodology/approach We investigate a sample of ODA beneficiary countries (168 country-year observations) facing rising levels of corruption. We apply a panel regression analysis for these countries during the period from 2015 to 2018. Findings The findings suggest that the IPSAS’ adoption can significantly influence the level of perceived corruption and implement important evidence about promoting transparency factor for underdeveloped countries. Originality/value This study contributes to the accounting literature by examining the theoretical and empirical insights about the impact of the of IPSAS’ adoption on the level of corruption, which can be considered as a new area of accounting literature and a useful signal for stakeholders in countries seeking adequate solutions to combat and fight corruption activities.

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.

scholarly journals The impact of corporate governance mechanisms on real and accrual earnings management practices: evidence from Jordan

2019 ◽  
Vol 19 (6) ◽  
pp. 1167-1186 ◽  
Author(s):  
Lara Al-Haddad ◽  
Mark Whittington
Keyword(s):  
Corporate Governance ◽  
Earnings Management ◽  
Financial Reporting ◽  
Management Practices ◽  
Reporting Quality ◽  
Content Type ◽  
Public Firms ◽  
Corporate Governance Mechanisms ◽  
The Impact

Purpose This paper aims to investigate the impact of corporate governance (CG) mechanisms on real (REM), accrual-based earnings management (AEM) and REM/AEM interaction in Jordan following the 2009 Jordanian CG Code (JCGC). Design/methodology/approach The study used a sample of 108 Jordanian public firms covering 2010-2014. Hypotheses are tested using pooled OLS-regression models. Findings The authors find that both institutional and managerial ownership constrain the use of REM and AEM. In contrast, both independent directors and large shareholders are found to exaggerate such practices, and CEO-duality is found to exaggerate REM only. However, foreign ownership does not appear to have a significant impact. They further find that managers use REM and AEM jointly to obtain the greatest earnings impact. Practical implications The findings have important implications for policymakers, regulators, audit professionals and investors in their attempts to constrain earnings management (EM) practices and improve financial reporting quality in Jordan. Originality/value The authors believe this to be the first Jordanian study examining the relationship between CG mechanisms and both REM and AEM following the introduction of the 2009 JCGC, as well as the first in Jordan and the Middle East to examine board characteristics and REM. Moreover, it is the first to test for the potential substitution of REM and AEM since the 2009 JCGC enactment. As such, the findings draw attention to EM practices and the role of monitoring mechanisms in Jordan.

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