Does national ethical judgement matter for earnings management?

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Dante Baiardo Cavalcante Viana Jr ◽  
Isabel Lourenço ◽  
Ervin Lynn Black
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Ethical Issues ◽  
Accounting Standards ◽  
Ethical Judgement ◽  
Firm Level ◽  
Content Type ◽  
Management Actions ◽  
Country Level

Purpose This study aims to analyse the association between country-level ethical judgement and earnings management and the role that firm-level enforcement and the quality of accounting standards play in this association. Design/methodology/approach The analyses are based on a sample of 45,889 firm-year observations from 34 countries between 1998 and 2018. Based on the World Values Survey questionnaire, this study constructs a comprehensive index of the ethical judgement of each country. Findings The empirical findings suggest that firms from countries where ethically suspect behaviours are less acceptable are associated with lower levels of accruals-based earnings management and that firm-level enforcement and the quality of accounting standards dampen such association. Practical implications The results contribute to the debate about ethical issues in the accounting profession in an international context, adding to the sustainable development debate given that the creation of long-term value for firms is intrinsically related to business ethics and good quality financial reporting. Social implications When it is known that countries’ ethically-related judgements reduce the level of earnings management, actions can be taken by regulators and other stakeholders to build fairer societies with a more sustainable view, given that the quality of the financial reporting is inextricably linked to how income and wealth are distributed. Originality/value While previous literature documents that ethical judgement at both the individual and organizational levels matter as key determinants of the way managers are involved with unethical accounting practices, this study investigates the role of ethical judgement at the country level in explaining earnings management.

Corporate social responsibility and earnings management in the EU: a panel data analysis approach

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Panagiotis E. Dimitropoulos
Keyword(s):  
Corporate Social Responsibility ◽  
Panel Data ◽  
Social Responsibility ◽  
Earnings Management ◽  
Financial Reporting ◽  
Negative Association ◽  
Content Type ◽  
Corporate Social ◽  
The Eu

Purpose Over the past decades, corporate social responsibility (CSR) has been considered as a significant corporate strategy and also has been documented as a main information dissemination mechanism of corporations to shareholders, creditors and other external stakeholders. This fact makes the CSR activities and CSR performance interconnected with the quality of firms’ financial reporting. The purpose of this paper is to study the impact of CSR performance on the earnings management (EM) behaviour using a sample from 24 European Union (EU) countries summing up to 121,154 firm-year observations over the period 2003–2018. Design/methodology/approach The study uses a multi-country data set with various dimensions of CSR performance including indexes regarding workforce, community relations, product responsibility and human rights protection. The empirical analysis is conducted with panel data regressions. Findings Evidence supports the negative association between CSR and EM indicating that high CSR performing firms are associated with less income smoothing and discretionary accruals, thus with higher financial reporting quality. Practical implications Regulatory agencies in the EU could use the findings of the study for the improvement of the accounting framework via enhancing the use and publications of social and environmental responsibility information and reports. Social implications Also, the current paper could be of interest not only to academic researchers but also to potential and existing investors in European corporations. The negative association between CSR performance and EM could be used by investors in assessing the risk of firms and the quality and reliability of their financial information. Originality/value This is the first study within the EU, which considers the multi-facet characteristics of CSR on the quality of accounting earnings and offers useful policy implications for regulators and investors.

scholarly journals Political and financial background in board interlocking and earnings management in Brazil

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Cristian Baú Dal Magro ◽  
Roberto Carlos Klann
Keyword(s):  
Corporate Governance ◽  
Earnings Management ◽  
Financial Reporting ◽  
Management Practices ◽  
Accounting Information ◽  
Real Earnings Management ◽  
The Political ◽  
Content Type ◽  
Quality Of Accounting Information

Purpose Although board interlocking underlying forces are largely hidden, the purpose of this paper is to provide managers, auditors, analysts, regulators and other stakeholders with sociological board interlocking information considering the different backgrounds of their members. Design/methodology/approach The research sample gathered 1,606 observations from 2010 to 2017. For data analysis, the direct and indirect board interlocking linkages, considering the different backgrounds of board members, established the centrality indicators. Subsequently, the authors used these indicators according to each measured background in the regression models. Findings The results indicate that the political background of board interlocking members is positively related to real earnings management practices, while the financial background has a mitigating effect on such practices. Research limitations/implications The findings suggest that individual skills and interests conveyed across the corporate social network have shaped corporate governance, with distinct impacts on the quality of accounting information. Practical implications The authors conclude that both backgrounds could have implications on agency conflicts, increasing (policy) or reducing (financial) information asymmetry between the company and its various stakeholders, which indicates that the authors must consider sociological and not just economic aspects within corporate governance. Social implications The sociological background of individuals is necessary for the congruence of monitoring mechanisms, and consequently, the quality of accounting information. Originality/value This study examines the influence of the political and financial background of board interlocking members on real earnings management practices in Brazilian publicly traded companies in the International Financial Reporting Standards post-adoption period.

Impairment reversals: unbiased reporting or earnings management

2018 ◽  
Vol 26 (2) ◽  
pp. 245-271 ◽  
Author(s):  
Tongyu Cao ◽  
Hasnah Shaari ◽  
Ray Donnelly
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Accounting Standards ◽  
Financial Accounting ◽  
Financial Accounting Standards Board ◽  
Reporting Standard ◽  
Accounting Standard ◽  
Content Type ◽  
Study Support ◽  
A Company

Purpose This paper aims to provide evidence that will inform the convergence debate regarding accounting standards. The authors assess the ability of impairment reversals allowed under International Accounting Standard 36 but disallowed by the Financial Accounting Standards Board to provide useful information about a company. Design/methodology/approach The authors use a sample of 182 Malaysian firms that reversed impairment charges and a matched sample of firms which chose not to reverse their impairments. Further analysis examines if reversing an impairment charge is associated with motivations for and evidence of earnings management. Findings The authors find no evidence that the reversal of an impairment charge marks a company out as managing contemporaneous earnings. However, they document evidence that firms with high levels of abnormal accruals and weak corporate governance avoid earnings decline by reversing previously recognized impairments. In addition, companies that have engaged in big baths as evidenced by high accumulated impairment balances and prior changes in top management, use impairment reversals to avoid earnings declines. Research limitations/implications The results of this study support both the informative and opportunistic hypotheses of impairment reversal reporting using Financial Reporting Standard 136. Practical implications The results also demonstrate how companies that use impairment reversals opportunistically can be identified. Originality/value The results support IASB’s approach to the reversal of impairments. They also provide novel evidence as to how companies exploit a cookie-jar reserve created by a prior big bath opportunistically.

The impact of the global economic crisis of 2008 on earnings quality in Mexico

2019 ◽  
Vol 9 (3) ◽  
pp. 407-421
Author(s):  
Jose Miranda-Lopez ◽  
Ivan Valdovinos-Hernandez
Keyword(s):  
Earnings Management ◽  
Economic Crisis ◽  
Earnings Quality ◽  
Accounting Standards ◽  
Previous Literature ◽  
Income Smoothing ◽  
Accounting Quality ◽  
Content Type ◽  
Global Economic Crisis

Purpose The purpose of this paper is to examine the earnings quality of companies listed on Mexico’s primary stock market, the Bolsa Mexicana de Valores (Bolsa) before and during the global economic crisis of 2008. Previous research has shown that these economic events can have potentially conflicting effects on the quality of earnings of listed companies in capital markets around the world. Design/methodology/approach This paper operationalizes earnings quality based on earnings management. Therefore, four constructs to proxy for earnings quality are developed from previous literature, and multiple regression analysis along with tests of differences across two time periods, 2005–2007 and 2008–2010, are used to determine if there is a significant change in the accounting quality of companies listed on the Bolsa before and after the start of the global economic crisis. Findings Results indicate a statistically significant decrease of earnings quality on three out of the four constructs used to proxy for earnings management. There is only one construct in this category that shows a significant increase of earnings quality. Research limitations/implications There are different number of constructs and methodologies used to test for earnings quality. This study draws on four different constructs on two dimensions of earnings quality from previous literature, but other methodologies and constructs can potentially be used as well, such as discretionary accruals. Furthermore, there is a chance that there can be confounding factors affecting the results of this study besides the effects of the global economic crisis. Finally, the sample used in this study comprises non-financial public companies listed on the Bolsa, which can affect the generalization of the results to countries other than Mexico. Practical implications The results of this study can be of interest to Mexican and foreign investors, standard setters and regulators of the Bolsa, as the results show a strong incentive to manage companies’ earnings using income smoothing in an emerging economy during an economic crisis even after converging to a higher-quality set of accounting standards. Results can also be of interests to investors and regulators in other Latin-American countries with economies similar to that of Mexico. Originality/value This is the first study to test the quality of earnings of Mexican companies before and during the global economic crisis of 2008. Thus, this study contributes to the accounting quality literature by offering evidence showing a significant increase of income smoothing during the global economic crisis for companies listed in a developing economy with a relevant history of economic crises, even when these companies were using recently converged, higher-quality accounting standards.

International accounting standards and accounting quality in code-law countries

2016 ◽  
Vol 24 (1) ◽  
pp. 41-59 ◽  
Author(s):  
Ibrahim El-Sayed Ebaid
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Management Practice ◽  
Accounting Standards ◽  
Accounting System ◽  
Accounting Quality ◽  
Regulatory Requirement ◽  
Content Type ◽  
Set Up ◽  
Egyptian Government

Purpose – This study aims to examine whether the adoption of International Financial Reporting Standards (IFRS) leads to accounting quality improvements in Egypt as a code-law country. In particular, the study examines earnings management, the construct often used to assess accounting quality. Design/methodology/approach – The study compares earnings management practice for Egyptian listed companies before (2000-2006) and after (2007-2009) the adoption of IFRS. Findings – The findings of the study reveal that accounting quality, as measured by earnings management, has decreased in post-adoption period compared to pre-adoption period. IFRS are set up to provide high-quality financial reporting. However, this cannot be achieved solely by a regulatory requirement to follow. The accounting system is a complementary component of the country’s overall institutional system. Institutional improvements did not simultaneously take place by the Egyptian government around the adoption of IFRS. The Egyptian government did not introduce a more effective enforcement system, mandatory corporate governance regulations, investor protection mechanisms and sufficient institutional knowledge of IFRS during that period. Thus, even if IFRS are higher quality standards, the institutional features of Egyptian market could eliminate any improvement in accounting quality arising from adopting IFRS. Research/limitations/implications – The results of the study are consistent with prior research suggesting that the adoption of IFRS, which are generally perceived to be of higher quality than domestic standards, does not necessarily lead to higher accounting quality in code-law countries like Egypt. The overall results indicate that incentives dominate accounting standards in determining accounting quality in Egypt. Originality/value – The main reason why countries adopt IFRS invariably is to improve accounting quality. It is, therefore, of interest to ascertain if this goal has been met, especially, in code-law countries such as Egypt.

Effect of eliminating mandatory reconciliation requirements for foreign issuers in the U.S.

2019 ◽  
Vol 17 (2) ◽  
pp. 271-291
Author(s):  
Gaurav Kumar ◽  
Jagjit S. Saini
Keyword(s):  
Financial Reporting ◽  
Value Relevance ◽  
Accounting Standards ◽  
Discretionary Accruals ◽  
Accrual Quality ◽  
Content Type ◽  
The Usa ◽  
Reported Earnings ◽  
Book Values

Purpose The purpose of this paper is to examine the effect of choice of accounting standards on the value relevance and accrual quality of reported earnings and book values under International Financial Reporting Standards (IFRS) versus US Generally Accepted Accounting Principles (GAAP). Design/methodology/approach The authors examine the effect of choice of accounting standards on the value relevance and accrual quality of reported earnings and book values under IFRS versus US GAAP using 404 firms from 37 countries listed in the USA. They use the modified Jones (1991) model to measure accruals. Findings The authors find that value relevance of the book value of equity is increasing (significantly) when the sample firms use IFRS to prepare their financial statements. They also find some evidence in support of the mediating effect of the choice of accounting standards on the accrual quality of the sample firms. The results of this paper indicate that sample firms with lower accrual quality (larger discretionary accruals) experience higher returns during the fiscal year. However, the authors also find that the positive association between size of discretionary accruals and returns is decreasing in the use of IFRS by the sample firms. Originality/value This paper adds to prior literature on the harmonization of accounting standards and emphasizes the role of accounting standards in the quality of financial reporting. By using the financial data of all foreign registrants listed in the USA, the authors are able to provide deeper and more representative evidence.

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.

The effect of gender composition in joint audits on earnings management

2019 ◽  
Vol 34 (5) ◽  
pp. 549-574 ◽  
Author(s):  
Fan-Hua Kung ◽  
Yu-Shan Chang ◽  
Minting Zhou
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Financial Information ◽  
Real Earnings Management ◽  
Gender Composition ◽  
Institutional Setting ◽  
Content Type ◽  
Empirical Results ◽  
Industry Expertise

Purpose This paper aims to examine the association between gender composition of joint auditor pairs and the quality of reported financial information. More specifically, the authors attempt to assess whether and how these gender compositions affect the client firms’ earnings management behavior. Design/methodology/approach The authors utilized the unique institutional setting of Taiwan, where joint auditors are required by law. They studied the effect of gender in joint auditor pairs on accrual earnings management and real earnings management to achieve financial reporting objectives. Findings Empirical results indicate that engaging a woman as the lead auditor can constrain accrual earnings management, regardless of whether the joint auditor is male or female. The authors also found that all-male signing auditor pairs with industry expertise can significantly reduce accrual earnings management. The authors also documented that all-female signing auditor pairs and auditor industry expertise could drive clients to engage in real earnings management activities as an alternative to accrual earnings management. Originality/value The empirical results demonstrate that gender indeed plays a role in the quality of client’s reported financial information. Female auditors in a lead position and male auditors with industry expertise tend to be more successful in delivering better-quality audits.

Measuring goodwill and noncontrolling interest under the new consolidation accounting standards

2017 ◽  
Vol 15 (2) ◽  
pp. 198-207
Author(s):  
James G.S. Yang ◽  
Frank J. Aquilino
Keyword(s):  
Financial Reporting ◽  
Design Methodology ◽  
Accounting Standards ◽  
Financial Statements ◽  
Consolidated Financial Statements ◽  
Accounting Standard ◽  
Content Type ◽  
Net Assets ◽  
Practical Implications

Purpose The accounting standards for consolidated financial statements have been updated recently. The change involves the measurement of goodwill and noncontrolling interest. Under the new accounting standards, goodwill consists of not only the parent company’s portion but also the noncontrolling interest’s share. The noncontrolling interest comprises both the subsidiary’s identifiable net assets and goodwill. In addition, it further changes the treatment of noncontrolling interest from liability to equity. The change indeed has far-reaching consequences on financial statements. This paper formulates an equation to measure goodwill and noncontrolling interest. It also provides some examples for illustrative purposes. The purpose of this paper is to update the financial reporting to the current standards. Design/methodology/approach New accounting standards under FASB #141R and 160. Findings New accounting standards in measuring goodwill and noncontrolling interest in financial reporting. Research limitations/implications The knowledge is useful for accountants and financial analysts. Practical implications Improve the quality of financial statements. Social implications Investors will be better informed. Originality/value This new accounting standard was not explored before.

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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