Risk Assessment and Earning Management in Banking of Indonesia: Corporate Governance Mechanisms

2016 ◽  
Vol 4 (1) ◽  
pp. 01-07
Author(s):  
Trinandari Prasetya Nugrahanti
Keyword(s):  
Risk Assessment ◽  
Corporate Governance ◽  
Earnings Management ◽  
Management Practices ◽  
Banking Sector ◽  
Loan Loss ◽  
Loan Loss Provisions ◽  
Corporate Governance Mechanisms ◽  
The Impact

Objective - The aim of this study to investigate the impact of risk assessment using the risk inherent and quality implementation of quality risk management in the operational activities of banking operations to earnings management practices through loss loan provisions and examine whether the mechanism of corporate government bank covering structure of corporate governance and quality of corporate governance can reduce the impact increase in earnings management in Banking sector of Indonesian. Methodology/Technique - We used data pooled from 2012 through 2014. By exploring the purposive sampling method, the 36 banking listed on the Stock Exchange Indonesian were selected as a sample of this study. A panel data multivariate regression methodology is used. Findings - The result of this study that (1) risk assessment strengthens the decrease in the earning management implementation after the adoption of IFRS in IAS 39; (2) corporate governance mechanisms can weaken the decrease in the earnings management practices through loan loss provisions. The final conclusions are IFRS in IAS No. 39 and Basel II Accord generally evidence to improve in bank's financial report quality. Novelty - This study could not find an empirical evidence on the impact of corporate government mechanisms covering structure of corporate governance and quality of corporate governance can reduce the increase in earnings management in banking sector of Indonesian Type of Paper - Empirical Keywords: Risk Assessment, Corporate Governance, Earnings Management, Loan Loss Provisions.

Did corporate governance mechanisms affect earnings management? Further evidence from GCC Islamic banks

2017 ◽  
Vol 10 (1) ◽  
pp. 2-23 ◽  
Author(s):  
Mohamed Chakib Kolsi ◽  
Rihab Grassa
Keyword(s):  
Corporate Governance ◽  
Earnings Management ◽  
Negative Relationship ◽  
Governance Mechanisms ◽  
Loan Loss ◽  
Content Type ◽  
Loan Loss Provision ◽  
Corporate Governance Mechanisms ◽  
The Impact

Purpose The aim of this paper is to examine the impact of corporate governance mechanisms on earnings management practice for a sample of Gulf Cooperation Council (GCC) Islamic banks (IBs) using a new model of earnings management. Design/methodology/approach First, the authors estimate discretionary accruals based on loan loss provisions discretionary loan loss provision (DLLP) using the procedure derived from Jones’ (1991) original model. Second, the authors run a multivariate regression model to check the linkage between corporate governance characteristics and discretionary loan loss provision. Finally, the authors use an additional sensitivity check analysis to assess whether the results are robust to the estimation procedure and to other exogenous factors. Findings Using as sample of 26 IBs pertaining to the GCC region with a total of 223 firm-year observations and a nine-year period (2004-2012), the results are conclusive and show that first, IBs with large Shariah Board size manage less DLLP. Secondly, Accounting and Auditing Organization for Islamic Financial Institutions membership positively impacts earnings management through DLLP in IBs. Third, there is a negative relationship between boards of director’s independence the extent to which IBs manage DLLP. Fourth, the existence of block holders positively affects earnings management by IBs. Fifth, there is a negative relationship between audit committee meetings and DLLP. Finally, institutional ownership and bank size have no effect on earnings management through DLLPs. Research limitations/implications In this research, the authors do not take into account all governance factors that are supposed to impact earnings management in IBs. Future research should explore the impact of additional IBs governance structures including chief executive officer bonus, experience, gender and the extent to which IBs use real earnings management with Murabaha, Mudaraba and Musharaka transactions. Practical implications The paper is a very useful source of information that may provide relevant guidelines in helping the future development of corporate governance of IBs. In addition, the findings could prove to be useful for regulators because they are responsible for the acceptable level of corporate governance standards. Thus, they must consider strengthening governance mechanisms either through new legislation or stronger enforcement where earnings management is of such magnitude to that serious impedes information transparency and financial reporting quality of IBs. Originality/value This study associates the corporate governance characteristics with earnings management by IBs. The study contributes to the growing body of literature on earnings management and corporate governance in IBs. It should be useful to researchers, regulators, investors, analysts and creditors as well as other players in the capital markets, as it presents a new and important aspect that needs to be accounted for when assessing the quality of IBs’ accounting information in GCC countries.

scholarly journals Discretionary loan loss provision in the Moroccan banking sector: The role of governance mechanisms

2021 ◽  
Vol 2 (2) ◽  
pp. 191-208
Author(s):  
Yousra El Mokrani ◽  
◽  
Issam El Idrissi ◽  
Youssef Alami ◽  
◽  
...  
Keyword(s):  
Earnings Management ◽  
Banking Sector ◽  
Gender Diversity ◽  
State Ownership ◽  
Governance Mechanisms ◽  
Loan Loss ◽  
Board Diversity ◽  
Loan Loss Provisions ◽  
Corporate Governance Mechanisms ◽  
The Impact

Abstract Purpose: The present paper aims to examine the impact of corporate governance mechanisms on earnings management extent in the Moroccan banking sector. Research methodology: This research investigates the relationship between listed banks' governance mechanisms and earnings management in the CSE over the period 2017-2020. This study relies on a two-step quantitative approach, which consists firstly of estimating discretionary loan loss provisions to measure EM, then presenting the association between banks’ governance mechanisms and discretionary loan loss provisions. Results: The findings indicate that board size, gender diversity, audit committee’s independence, and state ownership constraint EM practices among the Moroccan listed banks. While other governance mechanisms, such as institutional ownership and board activity, seem to have no significant effect on restraining managers’ discretionary behavior. Limitations: Many qualitative and quantitative factors could influence discretionary loan loss provisions and not only the used variables in this research. Contribution: This research reveals the need to maintain the vigilant supervision of the regulatory framework to limit these opportunistic practices in the local banking industry. Also, our study has important implications for establishing a new set of governance requirements such as board diversity in Morocco.

The impact of corporate governance mechanisms on earnings management in Islamic banks in the Middle East region

2016 ◽  
Vol 7 (4) ◽  
pp. 318-348 ◽  
Author(s):  
Hounaida Mersni ◽  
Hakim Ben Othman
Keyword(s):  
Corporate Governance ◽  
Middle East ◽  
Earnings Management ◽  
Audit Committee ◽  
Islamic Banks ◽  
Governance Mechanisms ◽  
Loan Loss ◽  
Content Type ◽  
Corporate Governance Mechanisms ◽  
The Impact

Purpose The purpose of this paper is to examine whether corporate governance mechanisms affect the reporting of loan loss provisions by managers in Islamic banks in the Middle East region. Design/methodology/approach This empirical study uses balanced panel data from 20 Islamic banks, from seven Middle East countries for the period 2007 to 2011. The regression model is estimated using random effects specifications. Findings The empirical results show that discretionary loan loss provisions (DLLP) are negatively related to board size and the existence of an audit committee. Results also report a positive relationship between sharia board size and DLLP. This indicates that small sharia supervisory boards are more effective than larger ones, which could be due to the higher costs and negative effects of large groups on decision-making. Results also highlight that the existence of scholars with accounting knowledge sitting on the sharia board reduces discretionary behavior. Additional results provide evidence that an external sharia audit committee is also found to reduce discretion in Islamic banks. The conclusions are found to be robust to endogeneity issues and potentially omitted variables. Practical implications The findings are potentially useful for regulators and shareholders. Regulators could use the findings to focus on corporate governance mechanisms that restrain earnings management practices in Islamic banks and implement regulations to strengthen them. Additionally, this study gives shareholders further insight which enables them to better monitor the actions of managers and thus increase their control over their investments. Originality/value This study provides two contributions to the literature on Islamic banking. First, to the authors’ knowledge, this study is only the second piece of research focused on the impact of corporate governance on earnings management in Islamic banks. Second, the authors have examined the effect of some new corporate governance mechanisms that have not been studied previously in the research literature.

scholarly journals The Predictive Power of K-Nearest Neighbor (KNN): The Effect of Corporate Governance Mechanisms on Earnings Management

SAGE Open ◽  
2020 ◽  
Vol 10 (3) ◽  
pp. 215824402094953
Author(s):  
Mengyun Wu ◽  
Martha Coleman ◽  
Jonas Bawuah
Keyword(s):  
Corporate Governance ◽  
Earnings Management ◽  
Management Practices ◽  
Nearest Neighbor ◽  
K Nearest Neighbor ◽  
Governance Mechanisms ◽  
Corporate Managers ◽  
Long Run ◽  
Corporate Governance Mechanisms ◽  
The Impact

This study investigates the long-run effect of corporate governance mechanisms on earnings management of listed companies in Nigeria and Ghana. The study uses Ant Colony Optimization (ACO) and K-Nearest Neighbor (KNN) in establishing a long-run effect of good corporate mechanisms in reducing earnings management practice by corporate managers. ACO selected four major corporate governance mechanisms: Board Procedure Index, Board Disclosure Index, Ownership Structure Index, and Shareholders’ Rights Index; these were the key corporate governance mechanisms that influence the reduction in earnings management activities. KNN produced a strong significant longitudinal effect of implementing good corporate governance mechanisms in decreasing the manipulating behavior of managers. Quality corporate governance mechanisms’ implementation reduces the opportunistic behavior of corporate managers in manipulating earnings. Therefore, the study alert policymakers the urgency in setting up appropriate policies to enhance the reduction in earnings management practices to provide accurate financial information for stakeholders’ financial decision-making. The use of ACO and KNN in the study is a great novelty, which presents a calibration and prediction of the impact of corporate governance mechanisms on earnings management showing the rate of reduction.

Earnings management and evolution of the banking regulation

2015 ◽  
Vol 5 (2) ◽  
pp. 150-169 ◽  
Author(s):  
Sarra Hamza Elleuch ◽  
Nelia Boulila Taktak
Keyword(s):  
Earnings Management ◽  
Management Practices ◽  
Mixed Model ◽  
Banking Regulation ◽  
Loan Loss ◽  
Content Type ◽  
Loan Loss Provisions ◽  
Qualitative Approaches ◽  
The Impact ◽  
The Imf

Purpose – The purpose of this paper is to examine the earnings management practices of Tunisian banks after the publication of the first International Monetary Fund (IMF) report (2002) over the period 1998-2007. Design/methodology/approach – The study relies on a mixed model that combines both the quantitative and qualitative approaches. First of all, we use the quantitative method to measure the discretionary loan loss provisions based on the model of Cornett et al. (2009), and then we validate the quantitative findings by using the interview approach. Findings – Since 2005, Tunisian banks have resorted less and less to accounting earnings management through the loan loss provisions, but conversely, real earnings management has been revealed instead by the sale of investment securities and the use of debt collection agencies. Despite the IMF recommendations, Tunisian banks continue to manage their earnings by changing only their strategies. Practical implications – The findings of this study show that the regulation cannot avoid earnings management. Even if the regulation limits the discretion of the manager, the latter finds new alternatives to manipulate the earnings. Originality/value – This is the first study that analyses the impact of the IMF recommendations on earnings management in an emerging economy.

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.

scholarly journals Influence of financial indicators on earnings management behavior: evidence from Vietnamese commercial banks

2020 ◽  
Vol 15 (2) ◽  
pp. 167-176
Author(s):  
Tran Quoc Thinh ◽  
Tran Ngoc Anh Thu
Keyword(s):  
Earnings Management ◽  
Commercial Banks ◽  
Firm Value ◽  
Banking Sector ◽  
Vital Role ◽  
Least Square ◽  
Financial Indicators ◽  
Loan Loss ◽  
The Impact

The quality of financial disclosures is of great importance than ever, as Vietnam’s international economic integration has been accelerating recently. This issue is currently particularly worrying for the banking sector in Vietnam, as banks play a vital role in economic development. However, there is a growing concern that managers tend to manipulate financial information using earnings management techniques to meet analyst expectations and to enhance the firm value in the short term. Such behavior can lead to inappropriateness in the decision-making process of financial statement users, as well as impair firm value in the long term. Therefore, this study examines the impact of factors related to financial indicators on earnings management of Vietnamese commercial banks to give more insight into the issue. The data of this study was collected from a sample of 30 Vietnamese commercial banks during a 5-year period from 2015 to 2019. By using the Ordinary Least Square (OLS) regression method through Eviews 10.0, the findings revealed that financial leverage and loan loss provision have a positive and significant impact on earnings management. Also, bank size and profitability were negatively associated with earnings management. Based on these findings, in the context of Vietnam, the study proposed policy suggestions to improve the quality of accounting information and to assist users of financial statements in recognizing and restricting earnings management in commercial banks.

Can corporate governance mechanisms reduce earnings-management practices in Islamic banks?

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Virasty Fitri ◽  
Dodik Siswantoro
Keyword(s):  
Corporate Governance ◽  
Earnings Management ◽  
Audit Committee ◽  
Management Practices ◽  
Stock Exchange ◽  
Islamic Banks ◽  
Governance Mechanisms ◽  
Loan Loss ◽  
Content Type ◽  
Corporate Governance Mechanisms

Purpose This study aims to provide empirical evidence on the role of corporate governance mechanisms in reducing earnings-management practices in Islamic banks in Asia. Design/methodology/approach This study used 28 Islamic banks in Asia, which were listed on the stock exchange from 2013–2017. The research method used quantitative regression with data on the characteristics of Islamic banks taken from the websites of each bank. This study used discretionary loan loss provision as a proxy for measuring earnings management. Findings The results show that only the audit committee size has a significantly negative effect on earnings management. An independent audit committee has a negative, but not significant, effect. The difference expectation signs cannot be interpreted further. Research limitations/implications Only a few components of corporate governance were tested in this study. Therefore, it is expected that future studies will include more components. Practical implications In general, the components of corporate governance that include the characteristics of the board of directors and the audit committee have a varied effect on reducing the earnings-management practices in Islamic banks, except audit committee size. In practice, audit committee size should have an important role in earning management reduces. Originality/value This may be the first paper that studies the effect of corporate governance on earnings management in Islamic banks in Asia.

Earnings management and equity incentives: evidence from the European banking industry

2019 ◽  
Vol 27 (2) ◽  
pp. 244-261 ◽  
Author(s):  
Mohammad Alhadab ◽  
Bassam Al-Own
Keyword(s):  
Earnings Management ◽  
Management Practices ◽  
Banking Industry ◽  
Future Research ◽  
Loan Loss ◽  
Content Type ◽  
Loan Loss Provisions ◽  
Equity Incentives ◽  
European Banking ◽  
European Banks

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.

scholarly journals Does the New European Banking Regulation discourage Earnings Management?

2017 ◽  
Vol 10 (10) ◽  
pp. 45 ◽  
Author(s):  
Giuseppe Di Martino ◽  
Grazia Dicuonzo ◽  
Graziana Galeone ◽  
Vittorio Dell'Atti
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Banking Sector ◽  
Banking Regulation ◽  
Regulatory Framework ◽  
Loan Loss ◽  
Minimum Capital ◽  
Loan Loss Provisions ◽  
European Banking ◽  
Single Rulebook

In the recent past, the financial crisis has shown important lacks in the EU regulation relating to the banking sector, making the introduction of a unified regulatory framework necessary. Since June 2009 the European Council has recommended a “Single Rulebook”, that is a unique and harmonizing discipline applicable to all financial institutions in the Single Market, become effective on January 2014. This prudential discipline requires much more minimum capital, liquidity and information transparency and it defines format and minimum standards of contents.The aim of this research is to investigate the relation between the new mandatory disclosure and earnings management policies in banking sector realized through Loan Loss Provisions (LLP), the component of income statement mainly subject to manipulations, especially in form of earnings smoothing. Because the new integrated regulatory framework requires a more transparent disclosure, we expected that accruals manipulation (basically LLP) could be discouraged. The empirical analysis is based on a sample of 116 listed European banks over the period prior (2011-2012-2013) and after (2014-2015-2016) the effective date of the Single Rulebook. The evidence confirm our hypothesis suggesting that this banking reform discourages earnings manipulation and improves earnings quality, making financial reporting more useful for investors. The results are important to the regulatory institutions (such as European Union and European Central Bank) supporting more stringent discipline introduced by Basel III.

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