Discussion of “Regulatory Capital, Tax, and Earnings Management Effects on Loan Loss Accruals in the Canadian Banking Industry”

Purpose This study aims to examine the effect of equity incentives on earnings management that occurs via the use of loan loss provisions by using a sample of 204 bank-year observations over the period 2006-2011. Design/methodology/approach The authors use the data of 39 European banks to test the main hypothesis. Several valuation models and regressions are used to measure the main proxies for executives’ compensation and the determinant factors of loan loss provisions. Findings The empirical results reveal that earnings management that occurs via discretionary loan loss provisions is associated with equity incentives in the banking industry. In particular, European banks’ executives with high equity incentives are found to manage reported earnings upwards by reducing loan loss provisions. The results therefore show that income-increasing earnings management via discretionary loan loss provisions is widely practised by the executives of European banks and that this is partly motivated by executives’ compensation. Practical implications The findings of this paper present important implications for regulators in the European Union, who should take further steps to reform the regulatory environment to monitor and mitigate the earnings management practices that occur via the manipulation of loan loss provisions. Earnings management practices do not just negatively affect subsequent performance but are also found to lead to firms’ failure. Thus, regulators should take the necessary reforms to protect the wealth of stakeholders (investors, creditors, etc.). Originality/value This study provides the first evidence on the relationship between equity incentives and earnings management in the European banking industry. The study sheds more light on an issue of great interest to a broad audience that does not receive much attention in the prior research, thus opening new avenues for future research.

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Fair Value Accounting and Earnings Management Using LLP and Realized Gains and Losses: Study in Banking Industry Listed on Indonesia Stock Exchange

Jurnal Economia ◽

10.21831/economia.v14i2.19560 ◽

2018 ◽

Vol 14 (2) ◽

pp. 126-137

Author(s):

Ice Maria Ulfa ◽

Bambang Subroto ◽

Zaki Baridwan

Keyword(s):

Earnings Management ◽

Empirical Evidence ◽

Banking Industry ◽

Stock Exchange ◽

Fair Value ◽

Fair Value Accounting ◽

Loan Loss ◽

Trade Off ◽

Gains And Losses ◽

The Impact

Abstract: Fair Value Accounting and Earnings Management Using LLP and Realized Gains and Losses: Study in Banking Industry Listed on Indonesia Stock Exchange. This study examines whether earnings management can be limited by the implementation of fair value accounting in banking industry. The main contribution of this study is providing provide empirical evidence about the impact of fair value accounting on earnings management in Indonesia. Earnings management is proxied by loan loss provision (LLP), the realized of gains and losses, and the trade-off between realized gains and losses and LLP following Bratten et al (2013). The study provides empirical evidence that earnings management is still performed by banks, by using LLP, realized gains and losses and also occurs trade-off between LLP and realized gains and losses as means to perform earnings management in accordance with the needs of management. If banks are exposed to fair value accounting, managers will have more flexibility in reporting banks’ financial performance to present a desired earning, by providing them with additional earning managements tools. These findings can be informative for policymakers, banking practitioners, and academics. Keywords: earnings management, fair value accounting, LLP, realized gains and losses, trade-off LLP and realized gains and losses.Abstrak: Akuntansi Nilai Wajar dan Manajemen Laba menggunakan CKPN dan Realized Gains and Losses: Studi pada Industri Perbankan yang terdaftar di Bursa Efek Indonesia. Studi ini bertujuan untuk meneliti apakah manajemen laba dapat dibatasi oleh penerapan akuntansi nilai wajar dalam industri perbankan. Kontribusi dari penelitian ini adalah untuk memberikan bukti empiris tentang dampak penerapan akuntansi nilai wajar pada manajemen laba di Indonesia. Manajemen laba diproksikan oleh cadangan kerugian penurunan nilai (CKPN), realized of gains and losses, dan trade-off antara realized of gains and losses dan CKPN mengikuti model penelitian Bratten et al (2013). Studi ini memberikan bukti empiris bahwa manajemen laba masih dilakukan oleh bank menggunakan CKPN, realized of gains and losses dan juga terjadi trade-off antara CKPN dan realized of gains and losses sebagai sarana manajemen laba sesuai dengan kebutuhan manajemen. Konsekuensi dari paparan bank terhadap akuntansi nilai wajar dapat meningkatkan fleksibilitas manajer dalam melaporkan penghasilan yang diinginkan dengan memberikan mereka alat manajemen laba. Temuan-temuan tersebut dapat bersifat informatif bagi pembuat kebijakan, anggota industri perbankan, dan akademisi. Kata kunci: manajemen laba, akuntansi nilai wajar, CKPN, realized gains and losses, trade-off CKPN dan realized gains and losses.

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Fair Value Exposure, Auditor Specialization, and Banks’ Discretionary Use of the Loan Loss Provision

Journal of Accounting Auditing & Finance ◽

10.1177/0148558x17742567 ◽

2017 ◽

Vol 35 (2) ◽

pp. 318-348 ◽

Cited By ~ 11

Author(s):

Brian Bratten ◽

Monika Causholli ◽

Linda A. Myers

Keyword(s):

Earnings Management ◽

Banking Industry ◽

Fair Value ◽

Loan Loss ◽

Management Behavior ◽

Management Tools ◽

Loan Loss Provision ◽

Value Reporting ◽

Auditor Specialization ◽

Industry Specialist

In this study, we examine whether banks’ use of the loan loss provision (LLP) to manage earnings is associated with (a) the extent to which banks hold assets subject to fair value reporting and (b) the use of an industry specialist auditor. We find that banks with a greater proportion of assets subject to fair value reporting (i.e., higher fair value exposure) use less LLP-based earnings management but more transaction-based earnings management (i.e., earnings management achieved by timing the realization of gains/losses). We also find that banks engaging industry specialist auditors use less LLP-based earnings management. Our findings suggest that banks’ use of the LLP to manage earnings is more limited when they have access to alternative earnings management tools and when they engage an auditor with more industry knowledge. Our results should be informative to regulators, members of the banking industry, and academics interested in the earnings management behavior of banks.

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Loan Loss Provisions and Earnings Management in Malaysian Banking Industry

GATR Global Journal of Business Social Sciences Review - GATR Global Journal of Business and Social Science Review (GJBSSR) Vol.7(1) Jan-Mar 2019 ◽

10.35609/gjbssr.2013.1.1(10) ◽

2013 ◽

Vol 1 (1) ◽

pp. 93-104

Author(s):

Hasni Abdullah ◽

Imbarine Bujang ◽

Ismail Ahmad

Keyword(s):

Earnings Management ◽

Commercial Banks ◽

Global Financial Crisis ◽

Banking Industry ◽

Least Square ◽

Capital Management ◽

Loan Loss ◽

Macroeconomic Factors ◽

Ordinary Least Square ◽

Loan Loss Provisions

Objective The main purpose of the study is to investigate the presence of earnings management incentive in affecting the LLP decision of commercial banks in Malaysia, focusing on the relation between loan loss provisions and earnings before tax and provisions. Methodology/Technique This study applies the pooled Ordinary Least Square model in assessing the determinants of the LLP. Findings The empirical findings clearly indicate that the LLP in Malaysian commercial banks is affected by earnings management for that particular period Type of Paper: Empirical paper Novelty : The expansion of the existing research in Malaysia in order to examine the extent to which the Malaysian banks engage in earnings and capital management, extends the period of investigation by considering the recent global financial crisis 2007-2009. Keywords: Loan Loss Provisions; Earnings Management; Capital Management; Macroeconomic Factors; Commercial Banks.

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Does banking oversight make financial statements more reliable? An analysis through countries which are part of the Single Supervisory Mechanism (SSM)

Corporate Ownership and Control ◽

10.22495/cocv16i3art4 ◽

2019 ◽

Vol 16 (3) ◽

pp. 36-51

Author(s):

Giacomo Ceccobelli ◽

Alessandro Giosi

Keyword(s):

Earnings Management ◽

Banking Industry ◽

Financial Statements ◽

Income Smoothing ◽

Capital Management ◽

Loan Loss ◽

Single Supervisory Mechanism ◽

Loan Loss Provisions ◽

Regulation And Supervision ◽

Bank Regulation And Supervision

The purpose of this research is to investigate earnings management purposes in the banking industry via loan loss provisions using a sample of 156 banks from 19 European countries under the Single Supervisory Mechanism (SSM) over the period 2006-2016. Using regression analysis, banks are tested for income smoothing, capital management, and signaling purposes. This study contributes to the literature exploring the relationship between accounting quality and earnings management objectives by analyzing which one of the latter is the more important determinant. The hypotheses of income smoothing and signaling are strongly approved since loan loss provisions consist as a tool for smoothing the amount of net profit and to convey private information to the market; on the contrary, the capital management purpose is not supported. Additionally, the analysis finds that non-discretionary components of loan loss provisions (essentially non-performing loans) have played an important role, especially during the financial crisis. Furthermore, the research is aimed at investigating the peculiar regulatory and supervisory environment in the banking industry on the basis of a set of indexes included in the “Bank Regulation and Supervision Survey”, carried out by the World Bank. Unlike previous literature, this study takes into account the latest release of the survey, emphasizes the role of an on-site inspection as the main supervisory tool and extends the analysis of the interaction between bank regulation and supervision and earnings management. The results demonstrate that such controls can influence the behaviour of bank managers in terms of income smoothing and signaling practices. Therefore they can be considered as effective instruments for reducing banks’ management accounting discretion, making financial statements more reliable.

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Earnings Management by Japanese Bank Managers Using Discretionary Loan Loss Provisions

Review of Pacific Basin Financial Markets and Policies ◽

10.1142/s0219091509001526 ◽

2009 ◽

Vol 12 (01) ◽

pp. 1-26 ◽

Cited By ~ 15

Author(s):

Wikil Kwak ◽

Ho-Young Lee ◽

Susan W. Eldridge

Keyword(s):

Earnings Management ◽

External Financing ◽

Regulatory Capital ◽

Loan Loss ◽

Loan Loss Provisions ◽

Bank Managers

This paper investigates Japanese bank managers' use of the discretionary component of loan loss provisions to manage earnings during the recession of the late 1990s. Although studies of US banks document that bank managers use loan loss provisions to smooth earnings, manage regulatory capital, and signal undervaluation, factors that may affect discretionary loan loss provisions in Japanese banks have not been empirically examined. We find that discretionary loan loss provisions for our sample of Japanese banks are positively related to the demand for external financing, realized securities gains, and prior year taxes and are negatively related to capital and pre-managed earnings.

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Discretionary Loan Loss Provisions, Earnings Management and Capital Management in Banks

Asian Social Science ◽

10.5539/ass.v15n7p144 ◽

2019 ◽

Vol 15 (7) ◽

pp. 144

Author(s):

Amina Zgarni ◽

Hassouna Fedhila

Keyword(s):

Earnings Management ◽

Financial Reporting ◽

Management Practices ◽

Reporting Quality ◽

International Standards ◽

Financial Reporting Quality ◽

Regulatory Capital ◽

Loan Loss ◽

Loan Loss Provisions ◽

Financial Scandals

The two past decades have been marked by a multitude of financial scandals (the Enron failure, WorldCom. etc.) mainly caused by the practices of earning management that have challenged the financial reporting quality disclosed. The purpose of this research is to study the determinants of discretionary loan loss provisions in banks. To achieve this objective, we selected a sample of the main Tunisian banks over the period from 2001 to 2014. The estimation results shows that the banks are opting for earnings management practices through the discretionary loan loss provisions in order to align with international standards, in particular with respect to regulatory capital. In opposition, we found a non-significant relationship between earnings before taxes and provisions and discretionary provisions.

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Bank loan-loss accounts, income smoothing, capital management, signaling and procyclicality

Journal of Financial Reporting and Accounting ◽

10.1108/jfra-06-2016-0041 ◽

2018 ◽

Vol 16 (4) ◽

pp. 677-693

Author(s):

Jamal Abu-Serdaneh

Keyword(s):

Earnings Management ◽

Banking Sector ◽

Global Financial Crisis ◽

Banking Industry ◽

Emerging Market ◽

Conclusive Evidence ◽

Income Smoothing ◽

Bank Loan ◽

Loan Loss ◽

Content Type

Purpose The purpose of this paper is to investigate if Jordanian banks using provision accounts as a technique to smooth income, manage capital ratio, signal future earning and test other determinants affecting provision accounts. Design/methodology/approach The study was conducted on all Jordanian listed banks, and it covers the period 2005-2014. Different models are applied to test the dependent variables (loan loss provision [LLP] accounts) and its effects on different explanatory variables by using several statistical techniques (e.g. multiple regression). Findings The results show that there is no conclusive evidence supports that Jordanian banks used provision to smooth income, manage capital ratio or engage in pro-cyclical behavior. However, a positive and significant effect between one year ahead change in earnings and loan loss allowance, indicating that banks may use provisions to signal future positive changes in earnings. In addition, the results show that loan-to-asset ratio and beginning loan loss allowance have positive effect on provision accounts. Practical implications The results of this study are useful in assisting the regulators (e.g. US Securities and Exchange Commission, central bank) in efforts toward improving the quality of the reported financial reporting in the banking industry and focus on LLP management motivations. This study gives shareholders further insight which enables them to better understand the actions of managers and thus increase their control over their investments. Additionally, auditors should be aware of different incentives for using LLP as a tool of earnings management to be able to detect eventual manipulation of accounting earnings. Originality/value Banking in is one of the most stringently regulated of sectors and, furthermore, has a major impact on other sectors and on economic growth in general. In view of such importance, this study focuses on the banking industry and contributes to the literature in several ways. First, it represents the first known study, to the best of author knowledge, which examines if Jordanian banks use LLP accounts as a tool to smooth income and/or to manage capital. Second, unlike most existing research, which usually studies one aspect of LLP, this study focuses on four main motivations influencing provision accounts in the banks of Jordan. Third, additional tests were carried out to check the robustness of results, for example, sensitivity analysis is used to examine the change of findings by repeating of tests after using different proxies. Fourth, as a difference from other studies, this study investigates the effects of global financial crisis of 2008 on income smoothing behavior of Jordanian banking sector. Fifth, this paper provides a timely contribution to the continuous debate of the effect of LLP on earnings management in a poorly exploited setting, emerging market context.

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PRUDENTIAL REGULATORY REGIMES, ACCOUNTING STANDARDS, AND EARNINGS MANAGEMENT IN THE BANKING INDUSTRY

Buletin Ekonomi Moneter dan Perbankan ◽

10.21098/bemp.v21i3.975 ◽

2019 ◽

Vol 21 (3) ◽

pp. 367-394 ◽

Cited By ~ 1

Author(s):

Ali Ashraf ◽

M. Kabir Hassan ◽

Kyle J. Putnam ◽

Arja Turunen-Red

Keyword(s):

Earnings Management ◽

Banking Industry ◽

Accounting Standards ◽

Income Smoothing ◽

Loan Loss ◽

Accounting Standard ◽

Loan Loss Provision ◽

Dynamic Provisioning ◽

Regulatory Regimes

We analyze if a change in accounting standard or a change in prudential regulationimpacts banks’ loan loss provision. We find that, in general, the banks using aprinciples-based accounting standard exhibit a lower level of earnings managementcompared to banks using a rules-based accounting standard. When a country movesfrom pro-cyclical macro-prudential regulations to a dynamic provisioning regime,banks are more likely to set aside a larger amount of loan loss provision for the purposeof income smoothing.

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