scholarly journals Efficient contracting, earnings smoothing and managerial accounting discretion

2014 ◽  
Vol 15 (1) ◽  
pp. 100-123 ◽  
Author(s):  
Mohamed Khalil ◽  
Jon Simon
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Legal Protection ◽  
Income Smoothing ◽  
Least Square ◽  
Managerial Accounting ◽  
Content Type ◽  
Accounting Choices ◽  
Trade Offs ◽  
Reported Earnings

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.

Bank earnings management using commission and fee income

2019 ◽  
Vol 20 (2) ◽  
pp. 172-189 ◽  
Author(s):  
Peterson K. Ozili ◽  
Erick Outa
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Investor Protection ◽  
Income Smoothing ◽  
Real Earnings Management ◽  
Accounting Standard ◽  
Content Type ◽  
Financial Firms ◽  
Reported Earnings ◽  
Accounting Standard Setting

Purpose The purpose of this paper is to investigate whether banks use commission and fee (CF) income to manage reported earnings as an income-increasing or income smoothing strategy. Design/methodology/approach The authors employ the regression methodology to detect real earnings management. Findings The authors find that banks use CF income for income smoothing purposes and this behaviour persists during recessionary periods and in environments with stronger investor protection. The implication of the findings is that bank non-interest income which achieves diversification gains to banks is also used to manipulate reported earnings. Research limitations/implications The findings show that real earnings management is prevalent among banks in Africa. Further research into earnings management should examine real earnings management among non-financial firms in developing regions. Practical implications From an accounting standard setting perspective, the evidence suggests the need for national/international standard setters to adopt strict revenue recognition rules that ensure that banks or firms report the actual fees they make, and to discourage banks from delaying (or deferring) the collection of fee income to manage or smooth reported earnings opportunistically. Originality/value This study contributes to the positive accounting theory (PAT) literature which examines the accounting and non-accounting decisions that influence managers’ choice of accounting methods in financial reporting. Extending the PAT, the authors show that certain conditions can incentivize managers to engage in earning management such as during recessions and weak institutional quality or weak investor protection.

Dividend policy, earnings management and the moderating effect of corporate governance in the French context

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Olfa Ben Salah ◽  
Anis Jarboui
Keyword(s):  
Corporate Governance ◽  
Earnings Management ◽  
Financial Reporting ◽  
Dividend Policy ◽  
Legal Protection ◽  
Moderating Effect ◽  
Least Square ◽  
Governance Mechanisms ◽  
Content Type ◽  
The Impact

Purpose The purpose of this paper is to examine the moderating effect of corporate governance on the impact of earnings management on dividend policy. Design/methodology/approach In this paper, the authors selected French non-financial companies listed on the CAC All Tradable index during the 2008–2015 period. Feasible generalized least square regression method is used to estimate the econometric models. Findings The empirical results allowed the authors to confirm and/or reject certain hypotheses. First, the ownership concentration seems to positively moderate the impact of earnings management on dividend policy. Another conclusion that the authors have been able to draw is that the effect of earnings management on dividend policy is more favorable in the case of firms with a small director’s board. Practical implications Our results have shown that French firms run earnings to inform the market that they can distribute dividends. Therefore, we recommend that the various partners of the firm pay more attention to the governance mechanisms of these types of companies and, in particular, in countries where foreign investors suffer from weak legal protection (Easterbrook, 1984; Gomes, 2000; La Porta et al., 2000 and Athari et al., 2016). In fact, standardization bodies, the Ministry of Finance, external auditors and stock exchange organizer must focus on sophisticated governance mechanisms to ensure better quality of financial reporting. Originality/value To our knowledge, no other research has examined whether the impact of earnings management on dividend policy varies significantly with the moderating effect of certain governance mechanisms in France.

The effect of the need for subsequent seasoned equity offerings on earnings management motivation

2019 ◽  
Vol 18 (1) ◽  
pp. 25-52
Author(s):  
Guannan Wang ◽  
Moshe Hagigi
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Seasoned Equity Offerings ◽  
Common Stock ◽  
Equity Offerings ◽  
Content Type ◽  
Equity Issues ◽  
Total Magnitude ◽  
Prior Literature ◽  
Reported Earnings

PurposeMost prior literature focuses on how managers’ immediate needs affect their current earnings management. The purpose of this paper is to expand this body of literature by investigating the managerial motivation in a multi-period setting. The authors believe that managers’ incentive to engage in earning management around current equity issues is not only determined by the companies’ immediate need, but that it is also determined by their longer-term financing need.Design/methodology/approachThe authors examine all issuances of common stock, whether they are issued as seasoned equity offerings or whether as a reissuance of previously repurchased stock. They believe that the motivations for earnings management are similar for all these various stock-issuance events, which result in an increase in the number of outstanding common stock items.FindingsThe results of this paper reveal that those firms with less of a need for subsequent equity issuances are more likely to engage in “income- increasing” earnings management before their equity issuances. Conversely, equity issuers with more of a need for subsequent equity issuances would be more concerned about the potential impact of current earnings management on their future reported earnings and, therefore, would be less likely to manage earnings.Originality/valueThis paper contributes to the literature by extending the findings of the prior literature, showing that managerial discretion does not only affect the total magnitude of earnings management, but that it also impacts the timing of the earnings management activities. Insights gained from our research may contribute to the literature and enable a better understanding of firms’ financial reporting strategy from a longer-run view.

Audit quality and earnings management: evidence from Jordan

2016 ◽  
Vol 17 (2) ◽  
pp. 170-189 ◽  
Author(s):  
Ebraheem Saleem Salem Alzoubi
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Audit Quality ◽  
Reporting Quality ◽  
Least Square ◽  
Cross Sectional ◽  
Content Type ◽  
Audit Firm ◽  
Big 4 ◽  
Jones Model

Purpose – The purpose of this paper is to test the association between audit quality and earnings management (EM). Audit quality studies documented that accruals would reduce when the auditor is independent or the audit firm is large. Design/methodology/approach – This paper uses generalised least square regression to investigate the influence of audit quality on EM. The sample contained 86 companies listed on the Amman Stock Exchange from 2007 to 2010. The cross-sectional modified Jones model was employed to measure discretionary accruals as a proxy for EM. Findings – This paper revealed that there is a significantly negative association between audit quality and EM. The result inferred that EM level is significantly lower among companies using the services of independent auditors. Moreover, this study exposed that the level of EM is significantly less among companies hiring a Big 4 audit firm, as compared to companies utilising the service of a non-Big 4 audit firm. Research limitations/implications – The measurement error, which is a rigorous concern for studies on EM, is one of the limitations in this study. Hence, the current study wholly inherited the limits of the modified Jones model. Practical implications – The findings based on the current study would provide beneficial information for regulators in Jordan and other countries with an institutional environment similar to that of Jordan. Moreover, the results provided valuable information to investors in assessing the influence of audit quality on financial reporting quality (FRQ). Originality/value – The current study contributed to auditing and corporate governance literature and its influence on EM among Jordanian companies. This research will be of value to companies seeking to reduce EM and enhance FRQ.

Bank earnings management and income smoothing using commission and fee income

2017 ◽  
Vol 13 (4) ◽  
pp. 419-439 ◽  
Author(s):  
Peterson K. Ozili
Keyword(s):  
Earnings Management ◽  
Management Strategy ◽  
Income Smoothing ◽  
Policy Implications ◽  
Too Big To Fail ◽  
Content Type ◽  
Interest Income ◽  
Ex Post ◽  
European Banks ◽  
Reported Earnings

Purpose The purpose of this paper is to investigate whether European banks use commission and fee income (CF) to smooth reported earnings or to persistently increase reported earnings as an income-increasing earnings management strategy. Design/methodology/approach The author tests the income-smoothing hypothesis following the approach of Stubben (2010) and Ahmed et al. (1999). Findings The author finds that European banks use CF to smooth reported earnings and this behaviour is pronounced among non-too-big-to-fail (NTBTF) European banks compared to too-big-to-fail (TBTF) European banks. The author also finds a positive and significant correlation between interest income and non-interest income (CF) indicating increased systematic risk due to reduced diversification benefits. The author also finds that the CF of NTBTF banks is procyclical with fluctuating economic conditions but not for TBTF banks. Also, the author finds evidence for income-increasing earnings management in the post-crisis period, for larger European banks and when banks have higher ex post interest income, implying that the propensity to engage in income-increasing earnings management significantly depends on bank size and ex post interest margin considerations. The findings have policy implications. Originality/value The author examines alternative financial numbers that banks use to manage earnings. The author focusses on income smoothing via CF among European banks, a context that has not been explored in the literature.

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.

scholarly journals Bank earnings management using loan loss provisions: comparing the UK, France, South Africa and Egypt

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Peterson K. Ozili
Keyword(s):  
South Africa ◽  
Financial Crisis ◽  
Earnings Management ◽  
Financial Reporting ◽  
Global Financial Crisis ◽  
Income Smoothing ◽  
Loan Loss ◽  
Content Type ◽  
Loan Loss Provision ◽  
The Uk

PurposeThis paper aims to investigate bank earnings management using loan loss provision. The paper examines income smoothing, which is a type of earnings management. It compares the income smoothing behaviour of banks in the UK, France, South Africa and Egypt.Design/methodology/approachThe study uses the panel fixed effect regression methodology to analyse bank income smoothing.FindingsThe findings show that bank income smoothing is present in the UK and Egypt and absent in France and South Africa. Banks in Egypt used LLPs to smooth income before the global financial crisis. Meanwhile, bank income smoothing is pronounced in France during and after the financial crisis but was absent in the pre-crisis period. Also, bank income smoothing is reduced in countries that (1) have strict banking supervision, (2) adopt common law particularly the United Kingdom, and by countries that adopt civil law, particularly France and Egypt. Bank earnings management is greater in countries that (3) adopt a mixed legal system, particularly South Africa, and in countries that adopt International Financial Reporting Standards accounting standards.Research limitations/implicationsThe implication of the findings is that country differences may affect banks' incentive to smooth income using loan loss provision.Originality/valueThe novelty of this paper is that it explicitly analyses specific countries that have different supervisory regimes, different structure and accounting rules.

The effects of a public indicator of accounting aggressiveness on managers’ financial reporting decisions

2019 ◽  
Vol 34 (8) ◽  
pp. 986-1007 ◽  
Author(s):  
Erin L. Hamilton ◽  
Rina M. Hirsch ◽  
Jason T. Rasso ◽  
Uday S. Murthy
Keyword(s):  
High Risk ◽  
Earnings Management ◽  
Financial Reporting ◽  
Risk Scores ◽  
Content Type ◽  
Accounting Choices ◽  
Best Estimate ◽  
Reporting Decisions ◽  
Public Risk ◽  
Risk Metric

Purpose The purpose of this paper is to examine how publicly available accounting risk metrics influence the aggressiveness of managers’ discretionary accounting decisions by making those decisions more transparent to the public. Design/methodology/approach The experiment used a 2 × 3 between-participants design, randomly assigning 122 financial reporting managers among conditions in which we manipulated whether the company was currently beating or missing analysts’ consensus earnings forecast and whether an accounting risk metric was indicative of low risk, high risk or a control. Participants chose whether to manage company earnings by deciding whether to report an amount of discretionary accruals that was consistent with the “best estimate” (i.e. no earnings management) or an amount above or below the best estimate. Findings Aggressive (income-increasing) earnings management is deterred when managers believe such behavior will cause their firm to be flagged as aggressive (i.e. high risk) by an accounting risk metric. Some managers attempt to “manage” the risk metric into an acceptable range through conservative (income-decreasing) earnings management. These results suggest that by making the aggressiveness of accounting choices more transparent, public risk metrics may reduce one type of earnings management (income-increasing), while simultaneously increasing another (income-decreasing). Research limitations/implications The operationalization of the manipulated variables of interest may limit the study’s generalizability. Practical implications Users of accounting risk metrics (e.g. investors, auditors, regulators) should be cautious when relying on such risk metrics that may be of limited reliability and usefulness due to managers’ incentives to manipulate their companies’ risk scores by being overly conservative in an effort to prevent being labeled “aggressive”. Originality/value By increasing the transparency of the aggressiveness of accounting choices, public risk metrics may reduce one type of earnings management (income-increasing), while simultaneously increasing another (income-decreasing).

scholarly journals Busy boards and corporate earnings management: an international analysis

2019 ◽  
Vol 18 (4) ◽  
pp. 533-556 ◽  
Author(s):  
Stephen P. Ferris ◽  
Min-Yu (Stella) Liao
Keyword(s):  
Corporate Governance ◽  
Earnings Management ◽  
Financial Reporting ◽  
Audit Committee ◽  
Reporting Quality ◽  
Financial Reporting Quality ◽  
Content Type ◽  
Corporate Earnings ◽  
The Usa ◽  
Reported Earnings

Purpose Because of our limited understanding of the incidence and effect of board busyness globally, the mixed evidence of the effect of board busyness obtained in the USA and the divergence of international patterns of director busyness from that observed in the USA, the author contends that there is a strong need to examine board busyness from a global perspective. The literature, however, does not examine the effect of board busyness on reported earnings quality and certainly does not analyze it internationally. Consequently, the purpose of this study is to examine the effect of multiple board appointments on the quality of a firm’s reported earnings. Design/methodology/approach The research design for this study is empirical. It uses both univariate and multivariate statistical analysis to examine historical corporate accounting, finance and governance data. Findings Consistent with the busyness hypothesis of corporate governance, the author finds that firms with a higher proportion of busy independent directors or busy CEOs manage their earnings more extensively. Further, the findings of this study present that firms with a higher proportion of busy independent audit committee members have poorer financial reporting quality. Using a sample of American Depository Receipts (ADRs), this study determines that the ineffectiveness of busy boards regarding earnings management is mitigated by the listing regulations imposed by US exchanges. Research limitations/implications The author believes that this study offers new and important evidence regarding the debate whether busy directors provide knowledge, skill and corporate connections, or whether they are overextended and, thus, unable to fully perform their monitoring duties. This study shows that firms with busy directors are associated with poorer financial reporting quality and, consistent with the busyness hypothesis, are less effective as managerial monitors. Practical implications This study provides useful guidance regarding board design and the kinds of policies that firms should adopt regarding multiple boarding. Social implications The social implications focus on the public policy implications regarding the importance of effective corporate governance in the reporting of financial wealth, wealth creation and wealth management. Originality/value This is the first study that examines the relation between board/committee busyness and corporate earnings management using a comprehensive set of international firms. Second, the author expands the analysis of audit committee into a new dimension: committee quality as captured by the busyness of its independent members. This study also contributes to the ongoing debate in the corporate finance literature regarding the reputation and busyness hypotheses of multiple directorships.

scholarly journals Bank earnings smoothing during mandatory IFRS adoption in Nigeria

2019 ◽  
Vol 10 (1) ◽  
pp. 32-47 ◽  
Author(s):  
Peterson K. Ozili ◽  
Erick R. Outa
Keyword(s):  
Financial Reporting ◽  
Income Smoothing ◽  
Accounting Quality ◽  
Loan Loss ◽  
Content Type ◽  
Financial Reporting Standards ◽  
Ifrs Adoption ◽  
Loan Loss Provisions ◽  
Earnings Smoothing ◽  
Reported Earnings

PurposeThe purpose of this paper is to examine the extent of bank earnings smoothing during mandatory International Financial Reporting Standards (IFRS) adoption in Nigeria, to determine whether mandatory IFRS adoption increased or decreased income smoothing among Nigerian banks.Design/methodology/approachThe authors employ panel regression methodology to estimate the association between loan loss provisions (LLPs) and bank earnings.FindingsThe authorse find that the mandatory adoption of IFRS is associated with lower earnings smoothing among Nigerian banks, which implies that Nigerian banks do not use LLPs to smooth reported earnings during the mandatory IFRS adoption period. The authors find evidence for earnings smoothing via LLP during voluntary IFRS adoption. Earnings smoothing is not significantly associated with listed and non-listed Nigerian banks during voluntary and mandatory IFRS adoption. Overall, the findings indicate that mandatory IFRS adoption improves the informativeness and reliability of LLPs estimate by discouraging Nigerian banks from influencing LLPs for earnings smoothing purposes during the mandatory IFRS adoption. The findings of this paper are relevant to the debate on whether IFRS reporting improves the quality of financial reporting among firms in Nigeria.Practical implicationsOverall, the findings indicate that mandatory IFRS adoption improves the informativeness and reliability of LLPs estimate by discouraging Nigerian banks from influencing LLPs estimates to smooth earnings during the period of mandatory IFRS adoption.Social implicationsThe implication of the study is that IFRS has higher accounting quality than local GAAP in Nigeria as it improves the quality and informativeness of accounting numbers (LLPs and earnings) reported by Nigerian banks during the period examined.Originality/valueThis study is the first attempt to focus on income smoothing during mandatory IFRS adoption in Nigeria.

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