scholarly journals Auditor report and earnings management: Evidence from FTSE 350 companies in the UK

2016 ◽  
Vol 6 (4) ◽  
pp. 334-344 ◽  
Author(s):  
Mohammad Alhadab
Keyword(s):  
Earnings Management ◽  
Discretionary Accruals ◽  
Real Earnings Management ◽  
Audit Report ◽  
Audit Firms ◽  
The Uk ◽  
Different Characteristics ◽  
The Relationship

This paper examines the relationship between audit report and real-based and accrual-based earnings management based on a UK sample. Prior research has mostly focused on US data and examined the relationship between auditor report (qualified vs. non-qualified) and earnings management (proxied by discretionary accruals), and found evidence that qualified audit report is positively associated with the level of discretionary accruals. Despite the importance of the role of audit firms to constrain the use of earnings management, there is no research to date has examined the relationship between auditor reports and real earnings management activities based on UK sample. This paper therefore fills this gap in the literature by providing the first evidence for UK FTSE 350 companies that auditor report is positively associated with real and accrual earnings management. The paper also provide evidence that firms received qualified audit report share different characteristics as compared to firms received un-qualified audit report.

Whose cash compensation has more influence on real earnings management, CEOs or CFOs?

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Radwan Alkebsee ◽  
Adeeb A. Alhebry ◽  
Gaoliang Tian
Keyword(s):  
Earnings Management ◽  
Least Squares ◽  
Real Earnings Management ◽  
Least Squares Regression ◽  
Content Type ◽  
Equity Compensation ◽  
Cash Compensation ◽  
Management Literature ◽  
The Relationship

PurposeScholars have investigated the association between executives' incentives and earnings management. Most of the extant literature focuses on equity executives' incentives, while most of the earnings management literature focuses on accrual earnings management (AEM), not real earnings management (REM). This paper investigates the association between chief executive officers’ (CEOs) and chief financial officer (CFOs) cash compensation and REM and explores who has more influence on REM, the CEO or the CFO.Design/methodology/approachThe authors use the data of all listed companies on the Shanghai and Shenzhen Stock Exchanges for the period from 2009 to 2017 and ordinary least squares regression as a baseline model and the Chow test to capture whether the CEO's or the CFO's cash compensation has more influence on REM. To address potential endogeneity issues, the authors use a firm-fixed effect technique and two-stage least squares regression.FindingsThe authors find that CEOs' and CFOs' cash compensation is significantly associated with REM, suggesting that paying non-equity compensation to the CEO and CFO is negatively associated with REM. The authors also find that the CFO's cash compensation has a more significant influence on REM than the CEO's cash compensation, suggesting that the CFO's accounting and financial knowledge strengthens his or her power on the quality of financial reporting.Practical implicationsThe study contributes to the literature of agency and contract theories by using cash-based compensation to provide strong evidence that CEO's and CFO's compensation is associated with REM. It also contributes to the earnings management literature by examining the effect of CEOs' and CFOs' cash compensation on earnings management using proxies for REM-related activities. The study also contributes to the institutional theory by providing empirical evidence on the governance role of executives' cash compensation in deterring REM. Finally, it is the first to examine the relationship between CEO's and CFO's cash compensation and REM, and the first to explore who is more influential regarding REM in emerging markets, the CEO or the CFO.Originality/valueAs a response to the call for investigations of the role of non-equity-based compensation in earnings management and the call to consider non-developed institutional contexts in governance research, this study extends prior studies by providing novel evidence on the relationship between CEOs' and CFOs' non-equity compensation and REM in China's emerging market. The study documents that the CFO has a greater influence on REM than the CEO does.

scholarly journals The Relationship Between Accrual-Based Earnings Management and Real Earnings Management: Reference to the Polish Capital Market

2020 ◽  
Vol 20 (2) ◽  
pp. 66-81
Author(s):  
Michał Comporek
Keyword(s):  
Earnings Management ◽  
Empirical Research ◽  
Capital Market ◽  
Stock Exchange ◽  
Negative Relationship ◽  
Discretionary Accruals ◽  
Research Area ◽  
Real Earnings Management ◽  
Cross Sectional ◽  
The Relationship

Abstract Research background: The literature on the subject matter emphasizes the lack of empirical research on the relationships between accrual-based earnings management (AEM) and real earnings management (REM), while studies conducted so far are characterized by highly ambiguous results. Purpose: The main aim of the paper is to present the results of empirical research on the relationships between the AEM and REM practices used to create financial results in industrial public companies listed on the WSE. Research methodology: The research sample concerns 72 listed companies whose shares were traded on the Warsaw Stock Exchange (WSE) for a minimum 13 years in the adopted reference period of 2003–2017. The estimation of AEM and REM practices was made by using: the Jones model, the Kang-Sivaramakrishnan model and the Roychowdhury methodology. Results: The empirical results allowed showing the existence of a statistically significant, negative relationship between discretionary accruals and the abnormal level of an operational cash flow indicator, as well as between discretionary accruals and the total REM indicator. An in-depth cross-sectional analysis showed the existence of significantly differentiated relationships between the studied variables in individual branches of industry. Novelty: Research on the relationship between AEM and REM practices in the context of the Polish capital market has not been carried out so far, hence it can be considered a new research area in which there is a justified need to deepen theoretical and empirical research on the EM phenomenon.

scholarly journals The role of institutional shareholders in the relationship between unconditional conservatism and earnings management

2021 ◽  
Vol 19 (1) ◽  
pp. 94-104
Author(s):  
Raffaela Casciello ◽  
Marco Maffei ◽  
Fiorenza Meucci
Keyword(s):  
Earnings Management ◽  
Institutional Ownership ◽  
Previous Literature ◽  
Accounting Conservatism ◽  
Real Earnings Management ◽  
Conditional Conservatism ◽  
Institutional Shareholders ◽  
The Impact ◽  
The Relationship

This study investigates whether and how institutional shareholders affect the relation between unconditional conservatism and earnings management. We analyze the relation between unconditional conservatism and accrual-based earnings management and the relation between unconditional conservatism and real earnings management, focusing on the role of the institutional shareholders variable in these two relations. First, we find evidence of positive (negative) relations between unconditional conservatism and accrual-based (real) earnings management. Second, we demonstrate that the presence of institutional shareholders has a mitigating (amplifying) impact on the relation between unconditional conservatism and accrual-based (real) earnings management. This study contributes to enrich the previous literature in two ways. First, it extends the strand of research on the relation between accounting conservatism and earnings management (Garcìa Lara, García Osma, & Penalva, 2020; Chen, Hemmer, & Zhang, 2007; Gao, 2013), focusing on unconditional conservatism since it is less prevalent than conditional conservatism in previous literature (Ruch & Taylor, 2015). Second, it extends the strand of research on the impact of institutional ownership on accounting practices (Farooq & El Jai, 2012; Sakaki, Jackson, & Jory, 2017), highlighting the role of the institutional shareholders in the relation between unconditional conservatism and earnings management

scholarly journals The role of earnings management in the relationship between accruals and market value

2018 ◽  
Vol 15 (1) ◽  
pp. 236-244
Author(s):  
Nasim Aryannejad ◽  
Mohammadhossein Ghaemi ◽  
Keyhan Maham
Keyword(s):  
Earnings Management ◽  
Stock Exchange ◽  
Statistical Tests ◽  
Market Value ◽  
Discretionary Accruals ◽  
Expected Return ◽  
Cross Sectional ◽  
Selective Approach ◽  
The Relationship

The paper aims to clarify the role of earnings management in the relationship between accruals and the market value of companies. Previous studies suggest that some managers, for providing a desirable image of their performance, manage their profits through distorting cash or accruals. Consequently, investors rely on this information and estimate inaccurate stability of accruals which lead to mispricing phenomenon. Finally, the returns earned by the investors will not be equal to the expected return and thus the accrual anomaly will be created.To this aim, two hypotheses were developed and three regression models were applied to analyze the data. To analyze and estimate the models employed, the financial information of 110 companies listed on the stock exchange between years 2008 to 2014 is used. A selective approach to test the hypotheses is studying cross-sectional data.After conducting statistical tests, the results showed that discretionary accruals through which earnings management is done are improperly valued by the market, but the issue is not applicable regarding the non-discretionary accruals. Based on the close relationship between earnings management and discretionary accruals it can be found that earnings management can have an effect on the relationship between accruals and market value.

scholarly journals Earnings Management Behavior in Malaysia: The Role of Ownership Structure and External Auditing

2020 ◽  
Vol 19 (3) ◽  
pp. 185-221
Author(s):  
Nor Irdawati Mahyuddin ◽  
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Audit Quality ◽  
Reporting Quality ◽  
Discretionary Accruals ◽  
Real Earnings Management ◽  
Financial Reporting Quality ◽  
External Control ◽  
Listed Firms

"This paper aims to empirically investigate firms’ earnings management (EM) behaviour, representing an issue in the realm of corporate financial reporting. Specifically, it explores the strategic roles of two common governance elements of ownership (managerial, institutional and family) and external audit in shaping the firms’ EM behaviour based on the two common EM attributes of Discretionary Accruals (DA) and Real Activities EM (REM). The analyses based on 227 survived Malaysian listed firms throughout the sixteen-year period from 2001 to 2016 (3,632 firm-year observations) indicate a dynamic EM behaviour depending on the presence of different ownership structures. Whilst a high percentage of family and institutional ownership mitigates DA, it however does not hold true for REM. Further, this paper also shows that the external control mechanism of audit quality is not significant in mitigating both EM attributes. The empirical results suggest that firms facing different challenges would affect the firms’ financial reporting behaviours in their choice of EM. The paper adds to the growing body of empirical knowledge dealing with the determinants of DA and REM from the lens of an emerging economy like Malaysia. KEYWORDS: Earnings management, discretionary accruals, real earnings management, accrual earnings management, financial reporting quality."

scholarly journals FINANCIAL DISTRESS AND EARNINGS MANAGEMENT IN INDONESIA: THE ROLE OF INDEPENDENT COMMISSIONERS

2021 ◽  
Vol 07 (01) ◽  
Author(s):  
Vania Agatha Rusci ◽  
◽  
Setyarini Santosa ◽  
Vita Elisa Fitriana ◽  
◽  
...  
Keyword(s):  
Earnings Management ◽  
Financial Distress ◽  
Stock Exchange ◽  
Secondary Data ◽  
Real Earnings Management ◽  
Earning Management ◽  
Panel Regression ◽  
Relationship Of ◽  
The Relationship

Abstract: This research aims to find out whether the presence of independent commissioner can restrict the manipulation of earnings by management in financially distressed companies. Earning management used in this research is accrual as well as real earning management. This research employs quantitative method with data panel regression model. The sample used in this study is secondary data obtained from consumer goods industry listed on Indonesia Stock Exchange during the period of 2015 until 2019. The result of this study revealed that both accrual earnings management and real earnings management are significantly influenced by financial distress. However, independent commissioner fails to moderate the relationship of financial distress with both accrual earnings management and real earnings management. This research gives an insight and input to the management as the evaluation material, so that the earnings manipulation could be reduced or even not carried out. Abstrak: Penelitian ini bertujuan untuk mengetahui apakah keberadaan komisaris independen dapat membatasi manipulasi laba oleh manajemen pada perusahaan yang mengalami financial distress. Manajemen laba yang digunakan dalam penelitian ini adalah manajemen laba akrual dan manajemen laba riil. Penelitian ini menggunakan metode kuantitatif dengan model regresi data panel. Sampel yang digunakan dalam penelitian ini adalah data sekunder yang diperoleh dari industri barang konsumsi yang terdaftar di Bursa Efek Indonesia selama periode 2015 hingga 2019. Hasil penelitian ini mengungkapkan bahwa baik manajemen laba akrual maupun manajemen laba riil dipengaruhi secara signifikan oleh financial distress. Namun, komisaris independen gagal memoderasi hubungan financial distress dengan manajemen laba akrual dan manajemen laba riil. Penelitian ini memberikan wawasan dan masukan kepada pihak manajemen sebagai bahan evaluasi, sehingga manipulasi laba dapat dikurangi atau bahkan tidak dilakukan.

scholarly journals The impact of industry specialist audit firms on pricing of discretionary accruals and earnings management: Australian evidence

2012 ◽  
Vol 9 (2) ◽  
pp. 158-177
Author(s):  
Harjinder Singh ◽  
May Sze Khoo
Keyword(s):  
Earnings Management ◽  
Audit Quality ◽  
Negative Relationship ◽  
Discretionary Accruals ◽  
Audit Committees ◽  
Firm Level ◽  
Audit Firms ◽  
The Impact ◽  
Industry Specialist

This paper examines the relationship between the capital market pricing of Australian publicly listed firms and earnings management (proxied by discretionary accruals) during a three-year pooled time-frame of 2008 to 2010. More importantly, the role of industry specialist audit firms on market returns and earnings management relationship is investigated. Main results indicate a significant negative relationship between firm returns and earnings management. However, there is no significance in the role of industry specialist audit firms on the firm returns and earnings management linkage. On the other hand, sensitivity tests indicate that industry specialist audit firms play in significant monitoring role for audit committees with less than fifty percent of their members classified as independent. One major contribution is for regulators (aiming to improve audit quality) to strengthen key firm-level corporate governance mechanisms. Specifically, by placing the consequences from this paper into perspective, there may be a greater likelihood of increased audit quality by altering audit committee’s structure, composition and authority levels.

Abnormal audit fees and accrual and real earnings management: evidence from UK

2018 ◽  
Vol 16 (3) ◽  
pp. 395-416 ◽  
Author(s):  
Mohammad Alhadab
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Audit Quality ◽  
Audit Fees ◽  
Real Earnings Management ◽  
Direct Impact ◽  
Content Type ◽  
Negatively Associated ◽  
Audit Firms ◽  
The Uk

Purpose This paper aims to examine the relationship between abnormal audit fees and accrual-based and real-based earnings management by using a sample of 1,055 UK firm-year observations from 2006 to 2015. Design/methodology/approach Linear regression was used to test the hypothetical relation between abnormal audit fees and accrual and real earnings management. Following prior research, several proxies have been used to measure abnormal audit fees, accrual earnings management and real earnings management. Findings Abnormal audit fees were negatively associated with real earnings management. A higher level of abnormal audit fees was the major driver of enhanced audit quality, in turn reducing managers’ flexibility to use real earnings management and to manipulate reported earnings. Abnormal audit fees were found to be negatively associated with abnormal discretionary expenses, abnormal production costs and the aggregated measure of real earnings management. Practical implications This paper outlines the importance of considering any abnormal audit fees paid to audit firms. It is expected that the abnormal audit fees might compromise auditor independence and lead to a higher level of earnings management. However, the findings of this paper provide a new insight to many interested parties, e.g. regulators, audit firms, investors and creditors, that abnormal audit fees are associated with higher audit quality and higher financial reporting quality in the UK. Regulators in the meanwhile should reform the audit market by, e.g. revising the types of non-audit services that are provided for the same client, setting a cap on the maximum fees that can charged by auditors and monitoring earnings management practices. Audit firms should take into consideration that any charged abnormal level of audit fees may have a direct impact on audit quality. Originality/value This is the first study to examine the impact of abnormal audit fees on accruals and real earnings management after major regulatory changes that took place in the UK. These major changes are the adoption of the International Financial Reporting Standards in 2005 and the new legislation concerning the ethical standards issued by the UK Audit Practice Board in 2004. These two major changes are expected to have a direct impact on both earnings management and audit fees, notably for the largest public listed firms. This study also focuses on one of the very developed and attractive stock markets in the world, the UK FTSE 350 stock index, that incorporates that largest 350 public firms.

scholarly journals Conceptual Framework for IFRS Adoption, Audit Quality and Earnings Management: The Case of Bangladesh

2019 ◽  
Vol 3 (1) ◽  
pp. 58
Author(s):  
Mohammad Tariq Hasan ◽  
Azhar Abdul Rahman
Keyword(s):  
Earnings Management ◽  
Conceptual Framework ◽  
Developing Country ◽  
Audit Quality ◽  
Discretionary Accruals ◽  
Developing Economy ◽  
Ifrs Adoption ◽  
The Relationship ◽  
Moderating Role

This study propose to explore the moderating role of audit quality on the relationship between IFRS adoption and earnings management as well as the effect of IFRS adoption on earnings management in the context of Bangladesh, as developing economy. Earlier literature document that the relationship among IFRS adoption, audit quality and earnings management are not conclusive. In case of IFRS adoption, it is incoherent which may be the result of difference in culture, practices and legal strength of the country. This study considers discretionary accruals as proxy of earnings management which is measured by the extended modified Jones model. Moreover, the influence of audit quality on the association between IFRS adoption and earnings management is also proposed to investigate. This study expects to explore the effect of IFRS adoption on earnings management in the context of developing country, like Bangladesh. It may be informative for the reader to understand the outcome of IFRS adoption, audit quality on earnings management in developing economy.

scholarly journals The role of intellectual capital as a mediation of relationship between audit committee and real earnings management

Accounting ◽  
2021 ◽  
Vol 7 (7) ◽  
pp. 1799-1804 ◽  
Author(s):  
Sri Layla Wahyu Istanti ◽  
Anis Chariri ◽  
Agung Juliarto
Keyword(s):  
Human Capital ◽  
Earnings Management ◽  
Intellectual Capital ◽  
Audit Committee ◽  
Mediating Effect ◽  
Real Earnings Management ◽  
Manufacturing Companies ◽  
Management Actions ◽  
The Relationship

This study aims to examine the role of human capital, which is part of intellectual capital, as a mediator in the relationship between audit committee expertise and the number of audit committee meetings with real earnings management. This research is a quantitative study. The data source used is data from manufacturing companies in Indonesia. The sample selection technique used purposive sampling. The analysis technique uses path analysis. The results showed that the expertise of the audit committee had a significant effect on human capital, while the number of audit meetings had no effect on human capital. The results of this study also state that audit committee expertise, number of audit committee meetings and human capital performance have no effect on real earnings management actions. Furthermore, there is empirical evidence that shows that human capital has a mediating effect on the relationship between audit committee expertise and the number of audit committee meetings with real earnings management. The role of human capital in the relationship between the expertise of the audit committee and the number of audit committee meetings becomes originality, so it is the main contribution of research. The limitation of this research is that it only uses human capital as a mediating variable.

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