International Journal of Accounting, Auditing and Performance Evaluation (30 papers in press)
Do managers increase tax disclosure when corporate tax avoidance is high?
by Victor Barros, João Neves
Abstract: This paper aims to assess whether firms increase tax disclosure when the level of tax avoidance is higher. The paper proposes a new index based on hand-collected data from annual reports of firms listed on eight European stock exchanges, which made it possible to distinguish between mandatory and voluntary tax disclosures. The empirical results show that firms engaged in greater tax avoidance disclose more mandatory information regarding income tax, while they do not disclose voluntary tax-related information when corporate tax avoidance increases. Our results also highlight that IAS 12 does not inhibit firms from following different disclosure practices as significant variability among countries was found. Stricter lookup tables may shape the variability in tax disclosures and may also limit tax avoidance practices to influence disclosure of mandatory information regarding income tax.
Keywords: corporate tax avoidance; disclosure; voluntary disclosures; corporate transparency.
An analysis of corporate social responsibility within the Big Four accountancy firms in the UK: has there been continuous improvement?
by Emma Lister, Kieran James, Abeer Hassan
Abstract: This article explores the current Corporate Social Responsibility (CSR) strategies and disclosures by each of the Big Four accountancy firms in the UK. It investigates four main themes (diversity and equal opportunity, social impact, education, environment and wellbeing). The study introduces the new perspectives of legitimacy theory (symbolic vs substantive). Content analysis was used to categorise and analyse trends in the firms CSR programmes implemented and disclosed from 2014-2016. Information from the firms CSR activities was obtained through annual reports, transparency/impact reports, sustainability reports, and webpages collectively. The results show an improvement in disclosure for one particular area, where influencers were identified as needing legitimacy, with external events considered as a potential factor. Recommendations are made, including potential solutions to the current issues associated with CSR reporting by the four firms. Our results support the substantive form of legitimacy theory.
Keywords: accounting industry; Big Four; corporate social responsibility; CSR disclosure; disclosure policies; legitimacy theory.
A digital divide and its determinants: leaders and laggards in the digitalisation of Finnish accounting firms
by Kati Pajunen, Jani Saastamoinen, Helen Reijonen, Helena Sjögrén, Pasi Syrjä
Abstract: This study explores factors that influence the adoption of digital accounting. The literature suggests that perceived benefits, organisational readiness and external pressures promote the adoption of technical innovations. Using a mixed-methods approach, we combine interviews and a survey to test this theory. Exploratory factor analysis of a survey of Finnish accounting firms results in five factors. These are (1) attitudes and perceived benefits representing the thoughts that digitalisation improves working efficiency and opens up new business opportunities to accounting firms, (2) lack of competence indicating a perception that a firm lacks required competence, (3) investment in operations development, which relates to a firms development of new services, (4) lack of customer pressure, which indicates that customers do not demand digital accounting services, and (5) keeping up with digitalisation, which relates to a perceived importance of digitalisation.
Keywords: digital accounting; innovation; perceived benefits; organizational readiness; external pressures; attitudes.
Do financial analysts care about FCPA violations?
by Apostolos Ballas, Efthimios Demirakos
Abstract: In this paper, we examine 12,954 equity research reports for 24 firms that are subject to enforcement actions by the US Securities and Exchange Commission (SEC) for violations of the Foreign Corrupt Practices Act (FCPA). We search the text of the equity research reports for a number of FCPA-related keywords and identify 1079 reports in which an analyst considers the SEC investigation an important issue. Our multivariate empirical analysis shows that financial analysts are more likely to be interested in incidents of FCPA violations if the fines imposed on the firms by the SEC, DOJ (Department of Justice), and other US agencies represent substantial components of their revenues, operating income, and market capitalisation. We also find that the interest of financial analysts in these cases increases when the subject firms are relatively small with poor profitability. We offer illustrative examples of how financial analysts actually refer to the FCPA violations in their equity research reports. We believe that this study contributes to the relevant literature by highlighting the importance and implications of the FCPA statute for capital market participants.
Keywords: Foreign Corrupt Practices Act; Securities and Exchange Commission; bribery; financial analysts; equity research reports.
Who is responsible for developing the non-core skills of entry-level public sector trainee auditors? The case of the Auditor-General South Africa
by Fortunate Mashabela, Barry Ackers
Abstract: Within the context of rising levels of corruption, financial mismanagement, fraud, and irregular, fruitless and wasteful expenditure in the South African public sector, as well as high profile audit failures, this paper investigates the employment readiness of recent auditing graduates, with particular emphasis on their non-core skill proficiency. The observations are based on a survey of respondents involved in appointing and training aspiring chartered accountants at the Auditor-General South Africa. Aspirant auditors graduating from the South African Institute of Chartered Accountants (SAICA) accredited universities lacked the necessary non-core skills of entry-level trainee auditors at expected levels of proficiency, necessitating additional training interventions. However, universities should not be solely responsible for developing all the skills of competent public sector auditors. Instead, an integrated and collaborative effort by the key stakeholders in the auditing profession is required. These parties include universities, audit firms and professional bodies and the students themselves, as well as other parties such as regulators. Despite extant studies examining the employment readiness of auditing graduates, this is one of the first that specifically focuses on the phenomenon within the public sector.
Keywords: Auditor-General South Africa; chartered accountant; entry-level trainee auditor; non-core skills; pervasive skills; public sector.
Accrual accounting earnings around zero in Greek municipalities: the relevance of political factors
by Sandra Cohen, Ioanna Malkogianni
Abstract: This paper provides empirical evidence that Greek municipalities report small surpluses or zero earnings and that there is a statistically significant political effect related to this attitude. The analysis is based on the annual financial data of Greek municipalities for the period 2011-2017. The final sample includes 1417 annual observations. Based on the public choice theory, it is attempted to associate earnings management behaviour with political incentives and to uncover possible reasons that may induce it. By using the method of bootstrap kernel density estimation (bKDE) the hypothesis that municipalities tend to report earnings close to zero is supported. The findings suggest that core political factors, such as the oppositions strength and the mayors re-election, exert an effect on the appearance of discontinuities around zero reported earnings, contributing to the knowledge regarding earnings management. Sensitivity analysis confirms this political effect.
Keywords: bootstrap kernel density estimation; earnings management; Greek municipalities; opposition; re-elected mayors.
Disclosure of forward-looking information: does overlapping audit committee membership matter?
by Hidaya Al Lawati, Khaled Hussainey
Abstract: We examine whether overlapping audit committee (AC) membership affects the forward-looking content of the chairman reports. We use content analysis to measure levels of forward-looking disclosure (FLD) for 48 bank-year observations from eight banks listed on Muscat Securities Market in Oman for the period 2014-2019. Our regression analysis shows that overlapping AC membership positively affects FLD. The evidence from this study suggests that a consideration of AC directors attributes (e.g. overcommitted AC members) is needed to understand their role in the boardroom or in the subcommittees. An implication of the result is that the Omani corporate governance code should provide guidelines on the type and proportion of the overlapping AC membership. Furthermore, the code could encourage AC members to be overlapped across different committees as this could have a positive impact on corporate disclosure practice. Our study has demonstrated, for the first time, that overlapped AC members enhance the forward-looking content of chairman reports.
Keywords: overlapping audit committee membership; forward-looking disclosure; chairman reports; content analysis; Oman.
Changes in the value relevance of energy industries accounting information: the impact of the shale revolution
by Gee Jung Kwon
Abstract: This study investigates the value-relevant factors of companies in the global energy industry from the point of view of accounting information, and investigates how the value relevance of accounting factors is changing as a result of the shale revolution that began in 2012. The empirical analysis of this study shows that the value relevance of R&D expenditures has declined dramatically since 2012, when shale gas extraction began in the USA. It also shows that in the energy industry, operating cash flow and company size are not important value-related factors in increasing corporate value. Conversely, operating income is the most important value-relevant variable for corporate value since 2010. The results also suggest that accounting information from the energy equipment and services industry group are more useful than information about firms in the oil gas consumable fuel industry. This study shows that there is a change in the value relevance of firm value variables in the energy industry after the shale revolution. The study are expected to be useful for investors and stakeholders in making investment decisions in the global energy industry.
Keywords: shale revolution; value relevance; accounting information; energy industry.
The impact of ownership structure and corporate governance on capital structure decisions in the UAE
by Mohammed Elgammal, Basil Al-Najjar
Abstract: This paper expands the capital structure literature by investigating how ownership shareholdings and corporate governance influence the capital structure decisions within an emerging market context, namely the United Arab Emirates (UAE). Our sample includes firms listed in both Abu Dhabi and Dubai Stock Exchanges for the period from 2008 to 2019. The UAE market is interesting because of the scarcity of research on the capital structure choices within this context. We employ panel models as well as the Two Stages Least Squares (2SLS) technique. Our results show that board structure has a negative effect on capital structure decisions. We also detect a positive impact of institutional ownership and managerial ownership on capital structure, while government ownership is inversely related to capital structure. Finally, we report that profitability negatively affects capital structure. Thus, we argue that the main determinants of capital structure reported in the developed markets literature do hold in the UAE settings. Accordingly, this study contributes to previous studies in the capital structure context and adds to its puzzle by introducing new insights into the capital structure choice in a free tax environment.
Keywords: capital structure; ownership structure; corporate governance; panel data; UAE.
The challenges of implementing enterprise risk management: a study of manufacturing companies in the Tehran Stock Exchange
by Soghra Fasihi, Seyed Ali Hosseini, Nelson Waweru, Ali Rahmani
Abstract: Implementing enterprise risk management (ERM) is one of the important solutions in reducing the uncertainty and survival of companies. The ERM is very important owing to the varying conditions of Iran's business environment as well as the role of manufacturing companies in its prosperity and economic growth. Therefore, the present study aims to explore the challenges of implementing ERM in the manufacturing companies listed in the Tehran Stock Exchange. In the present study, semi-structured interviews with the experts in the field of ERM among selected Iranian manufacturing companies and other ERM experts in the pharmaceutical, automotive, and petrochemical industries are used. The identified challenges related to implementing ERM include intra-organisational and extra-organisational challenges. Intra-organisational challenges include risk governance, risk culture, enterprise risk management process, and infrastructures. Besides, extra-organisational challenges include the role of government and policymakers, political and economic conditions, international restrictions, and the lack of a competitive environment (exclusiveness).
Keywords: enterprise risk management; Iranian manufacturing companies; contingency theory; risk governance; risk culture; institutional shareholder; international restrictions.
The causes of profitability: a panel study of the Indian IT and consulting sector
by Rohit Bansal, Sanjay Kar, Saroj Mishra
Abstract: The paper uses several methods of profit to examine the factors of profitability for the Indian IT and consulting sector. This reading aims to detect the association between the activity ratio or turnover ratio and the profitability of the Indian IT and consulting sector over the seven years from April 2012 to March 2018. Profitability was used as a dependent variable characterised by Profit Margin (PM); Debtors Turnover Ratio (DTR), Working Capital Turnover (WCT) and Assets Turnover Ratio (ATR) were used as independent variables. Financial statements and income statements of all listed IT and consulting companies on the Bombay stock exchange were gathered from companies websites. The data were then analysed with a descriptive research technique of panel data regression and verified with Hausmans measurement, which is a widely used technique for selecting the panel effect. Working capital turnover was found to be statistically positively significant against the profitability of the Indian IT and consulting sector. However, assets turnover ratio and debtor turnover ratio were found statistically insignificant with the profit margin of the Indian IT and consulting sector from 2012 to 2018. The findings of this research will support companies' internal management, auditors, policy-makers, financial executives, and investors in making investment decisions.
Keywords: profitability determinants; profit margin; assets; debtor turnover; working capital; India; consulting industry; fixed effect panel; radom effect panel; panel regression.
The effectiveness of government internal auditor: evidence from Indonesia
by Sutaryo Sutaryo, Arifudin Tri Anto
Abstract: We analyse the effectiveness of the internal audit of the governments in Indonesia. As independent variables, we examine the role of professional proficiency of internal auditors, quality of audit work, organisational independence, auditor career and advancement, and support from the leaders of internal audit entity, by geography, gender, education level and functional position of auditor as control variables. This study uses a structured questionnaire, distributed to 385 functional auditors as our respondents that came from the State Development Audit Agency (BPKP). The results show that professional proficiency of internal auditors, quality of audit work, organisational independence, career path and development, and the support from the internal audit entity leadership have positive influence on governments internal audit effectiveness in Indonesia. Nevertheless, all of the variables are still possible to develop appropriate additional test results. Internal audit entity requires internal auditors who have the professional proficiency, independence, and quality of the audit work results. Internal audit entity should also implement the career policy for auditors and give full support to the implementation of the audit. The findings are discussed in terms of how they can assist in enhancing internal audit effectiveness and provide added value to the auditee.
Keywords: effectiveness of the internal audit; professional proficiency of internal auditors; organisational independence; support from internal audit entity leadership.
Government Investments Commitment to Internal Audit requirements
The case of Jordan
by Mohammad Aladwan, Omar Alhwatmeh
Abstract: The study aims to examine the commitment of government companies to international internal auditing standards. The study employs both qualitative and quantitative research methods in addressing the problem. To achieve the study objective, the researchers distributed a questionnaire to 627 employees of 156 Jordanian companies that have government contribution, 582 (92%) of the questionnaires were returned. As a mean for analysing the study data; the researchers used the mean, standard deviation, percentages, and T-test. The general findings revealed that Jordanian companies with government contributions do not apply international internal auditing standards; instead they commit to practices that are enacted by government regulations but, unfortunately, these practices are found not fully similar to international internal auditing standards. Therefore, the results showed weak commitment from the sampled companies to such necessary standards. In the light of the study results, the researchers give a number of recommendations that are necessary to achieve effective internal auditing standards.
Keywords: internal audit; internal audit standards; owned companies and government contributions; Jordan.
Social capital, external regulations and financial reporting quality: evidence from community banks
by Ziyun Yang, Xiaobo Dong, Wei-Chih Chang
Abstract: Using a large sample of US community banks, we study how social capital affects bank managers opportunistic reporting behaviour. We argue that high social capital reduces information asymmetry between managers and stakeholders and increases the cost of opportunistic reporting for managers. Supporting this argument, we find that social capital is negatively associated with discretionary loan loss provisions. We further find that the negative relation between social capital and opportunistic reporting behaviour is weaker when in banks subject to stronger regulations, which suggests that strong regulations act as a substitute for high social capital in constraining banks opportunistic reporting behaviour. Our findings provide policy implications to regulators with regard to how to counteract the effect of declining social capital on financial reporting quality.
Keywords: social capital; community banks; earnings management; financial reporting quality; discretionary loan loss provision; external regulations.
Corporate governance information disclosure on the websites
by Dhouha Khrifech, Walid Khoufi
Abstract: The purpose of this study is to explain the relationship between company-specific characteristics and the extent of enterprise government (GC) information disclosed on the websites of 91 SBF 120 companies. The empirical results show that, for the French context, the size of enterprises, profitability and board size are the most important factors influencing corporate governance disclosure through their websites.
Keywords: corporate governance disclosure; corporate websites; firm characteristics; French listed companies.
Causality of developing a balanced scorecard under sustainable development: an applied study
by Salih Ibrahim Younis
Abstract: This paper looks for a causality relationship to developing a balanced scorecard according to sustainable development requirements. In addition, suggest some indicators to achieve task. Researcher use the descriptive approach to formulate the theoretical background and analytical approach to empirical testing. The main finding is that the traditional methods are no longer enough for the performance evaluation, so a balanced scorecard was adopted. Despite its benefits, it neglects the environmental side, therefore this work will have significant implication to urge companies to consider the environmental dimension when evaluating their performance, to ensure that their activities are in line with the requirements of sustainable development. In the company under discussion, the developed balanced scorecard was able to evaluate performance in accordance with the requirements of sustainable development by using the suggested indicators. The research has been designed for one company, but it could be a road map for other companies in any country.
Keywords: balanced scorecard; sustainable development; environmental dimensions; strategy; environmental systems; performance evaluation.
Incorporating an analytics mindset into the audit curriculum
by Yan Luo
Abstract: Drawing on insights from recent academic and practitioner articles on audit data analytics (ADA), this paper explores the opportunities and resources available to auditing educators who are interested in integrating an analytics mindset into their curriculum, with the aim of improving auditing education. This study highlights the impact of ADA on the audit profession and the challenges of applying ADA to the full range of auditing tasks. It also provides a comprehensive summary of readily available educational resources that audit educators can use to update their curriculum and enhance students' analytics competency.
Keywords: analytics; audit; curriculum.
External vs. governmental auditing: insights from Spain
by Aura Nicolaescu, Francisco López-Arceiz
Abstract: We aim to determine the existence of a difference in the opinions given by external and governmental auditors in the context of public foundations. Moreover, we analyse if some organisational and environmental variables, related to return, risk and geographical location, have any influence on this difference. To answer this aim, we accessed a sample composed of 174 public foundations located in Spain during the period 2012-2017. We performed the asymptotic chi-squared test and the Fisher exact test to measure the existence of a difference of opinion and a logit regression model to examine the influence and impact of return, risk and geographical location on the above-mentioned difference. The obtained results show the existence of discrepancies between external and governmental auditors, which are influenced by the geographical location. We highlight the need for higher level of harmonisation in regional civil laws via the enforcement of a fundamental law as a regulatory instrument.
Keywords: public foundation; non-profit; government auditor; external auditing.
The role of internal control weakness in debt selection
by Bambi Hora, Edward Walker, Yinghong Zhang
Abstract: We investigate the impact of internal control weakness (ICW) on debt selection. We categorise debt structure in two ways: 1) bank debt, bonds, program debt, private placements, convertible debt, and other debts; and 2) secured, senior unsecured, and subordinated debts. We hypothesise that the existence of ICWs reduces accounting information quality and increases firm risk and default risk. Therefore, bank debt is borrowed to provide better monitoring. Additionally, the presence of ICW is also positively associated with the usage of secured debts, which are collateralised by assets. Our findings are consistent with our predictions. Our findings suggest that ICW information provides incremental value to creditors and that changes in debt selection are one economic consequence of companies reporting ICWs.
Keywords: debt structure; internal control weakness; secured debt; senior unsecured debt; subordinated debt; bank debt; bonds; program debt; private placement; convertible debt.
Does foreign ownership affect audit committee adoption? Evidence from Brazilian companies
by Daniel Vancin, Clea Macagnan, Lucas Cervo, Cristiano Costa
Abstract: The aim of this article is to verify whether the voluntary constitution of the audit committee in companies listed in the Brazilian stock market could be explained by the presence of foreign stockholders. The method used was a probit model with instrumental variables, and the results confirmed the hypothesis, indicating that there is an U-shaped relationship: the probability of adoption of the audit committee slightly decreases at low levels of foreign participation and increases after reaching a cutoff level. This result is in line with previous literature on the role of foreign investors in improving corporate governance in companies in developing countries to protect themselves from expropriation by local stockholders and managers.
Keywords: voluntary audit committee; foreign stockholders; corporate governance; monitoring; determinants.
Enterprise risk management disclosure and creative accounting practices: evidence from Nigeria
by Olayinka Erin, Paul Olojede
Abstract: This study investigates the impact of Enterprise Risk Management (ERM) disclosure on creative accounting practices of listed firms in Nigeria for the period of 2013-2018. With a sample of 120 firms in Nigeria, we drew insights from the contingency theory. The study used panel data with fixed effects regression analysis to analyse the dataset. The findings empirically revealed that ERM disclosure has a significant impact on the reduction of creative accounting practices. Our findings call for clear responsibility and a strong drive for ERM disclosure by corporate institutions in Nigeria and other emerging economies. The empirical approach used in this study emphasises the need for corporate organisations to embrace ERM practices and to integrate ERM information into their business strategies and operations. Our findings contribute to the growing literature in the area of ERM disclosure, creative accounting practices, business ethics, and corporate transparency in Nigeria and, by extension, other Sub-Saharan African countries.
Keywords: board risk committee; cash based earnings management; creative accounting practices; contingency theory; chief risk officer; enterprise risk management.
Factors inhibiting effective organisational performance management: insights from the South African public sector
by Asogan Moodley, Barry Ackers, Elza Odendaal
Abstract: Despite a quarter of a century of democracy, the South African government continues facing civil unrest relating to poor delivery of public goods and services. To address this deficiency, the South African government adopted organisational performance management (OPM), as a tool to improve strategic management and operational performance. Despite this directive, service delivery does not appear to have improved. This study therefore aims to establish the factors that inhibit the effective implementation of OPM and accordingly impair service delivery. The study, which adopts a multiphase mixed methods research approach, uses both quantitative and qualitative data collected through surveys, interview and focus groups, as well as from a content analysis of pertinent documents and records. Non-alignment between planning and budgeting, focusing on outcomes rather than impacts, the adoption of a compliance-driven orientation rather than focusing on effective organisational performance, inadequate stakeholder management, poor technical skills, and a lack of effective consequence management were amongst the factors identified as inhibiting OPM and effective service delivery.
Keywords: consequence management; governance; monitoring and evaluation; organisational performance management; performance information reporting; public sector.
Sahara: when regulators radar strikes
by Palka Chhillar
Abstract: Sahara India Parivar, an Indian conglomerate with many companies under its umbrella, had experienced phenomenal growth in the business for decades. The activities by the conglomerate to raise capital through different means were finally caught in the regulators radar resulting in years' long litigation and surrender of Sahara chief. The case provides relevant details to understand the timeline of the events, and the roles of the chairman, other company officials, and the regulator. The case draws attention to the role of regulators in the capital markets, quality of financial reporting, investor protection, financing vehicles, and corporate governance. The case study is written based on the information available in the public domain and other secondary sources.
Keywords: capital markets; regulator; India; family-owned business; corporate frauds; earning management; financial statement analysis.
Special Issue on: Earnings Management New Insights
Are Tunisian firms managing their earnings through asset sales following the 2011 uprising?
by Sarra Elleuch
Abstract: This paper aims to provide evidence of the use of asset sales tool by Tunisian managers as a way of real earnings management during the critical period following the 2011 uprising. For this purpose, we have expanded the models developed by Roychowdhury (2006) and Gunny (2010) by adding the cash holdings ratio as an explanatory variable of the model since firms tend to engage more in asset sales activities to improve their liquidity in a crisis period. Our findings reveal that following the 2011 uprising, Tunisian firms continue to manage their earnings by selling fixed assets. They are more oriented to use the investment sales tool in order to increase both earnings and cash at the same time. This study is the first that analyses the impact of the Tunisian revolution on earnings management through asset sales. The findings of our study will help investors to identify new earnings management tools that were used less frequently before the economic crisis. These findings also have important implications for regulators who need to understand the earnings management behaviour of managers before developing monitoring and supporting mechanisms during the economic crisis.
Keywords: Tunisian 2011 uprising; real earnings management; fixed asset sales; investment asset sales.
The effectiveness of board of directors and family ownership: interaction and impact on the discretionary accruals
by Anas Ghazalat
Abstract: Firms can curb managerial opportunistic behaviours through applying corporate governance mechanisms effectively. Using a sample of 114 Jordanian firms listed on ASE and operated in the service and industrial sector for the period from 2009 until 2015, this study investigates the combined effect of the board of directors and family ownership on the discretionary accruals (i.e., whether family ownership moderates the monitoring role of the board of directors). The study adopted discretionary accruals proxies using the Kothari et al. 2005 model by applying the cross-sectional method to determine model parameters for each industry in each year. The effectiveness of the board of directors computed as a bundle through creating a score of board characteristics (i.e., independence, size, meeting frequency, CEO duality, audit and nominations-compensations committees, directors financial expertise, tenures and multiple directorship). The results show that the higher effectiveness of board of directors plays higher monitoring role to minimise discretionary accruals practices as one of the opportunistic behaviours. Firms with more effective board of directors are engaged with high quality of financial reporting. Results also show that the monitoring role of the board of directors is moderated in firms with family ownership. This proves that board of directors as a bundle in firms with family ownership is unlikely to be effective. The findings indicate that the corporate governance plays a pivotal role in mitigating the opportunistic behaviours and minimises the divergence gap under the traditional agency problem while it has become as legal fiction when the central agency problem existed.
Keywords: discretionary accruals (earnings management proxy); effectiveness of board of directors; family ownership; Amman stock exchange.
The trade-off between accrual-based and real earnings management: evidence from Jordan
by Mohammad Azzam, Alaa Al Qudah, Lara Al-Haddad, Ayman Abu Haija
Abstract: This study examines the extent of accrual-based and real earnings management surrounding three important turning points in the Jordanian business environment: the issuance of new listing requirements in 2004, the promulgation of a corporate governance code in 2009, and the Arab Spring era which started in 2012. Using a sample of 1748 firm-year observations between 2002 and 2016, the results show that firms have a great tendency towards using discretionary accruals to alter their reported earnings for the whole study period compared with real manipulation. Indeed, the magnitude of accrual-based earnings manipulation is increased significantly in the aftermath of the issuance of listing requirements. No significant difference, however, is found pertaining to real earnings management. Interestingly, accrual-based and real earnings management is decreased significantly with the passage of the corporate governance code. In relation to the Arab Spring era, no clear evidence appears that firms are engaged in earnings management to embellish their financial reports. The overall results suggest that the ability of managers to exercise their discretion over earnings as well as the trade-off between accrual-based and real earnings management depends on firms attributes, such as the quality of the governance system, regulatory requirements and the surrounding business and political environment.
Keywords: accrual-based earnings management; real earnings management; corporate governance; listing requirements; Arab Spring.
Political connections, government ownership, and earnings management: evidence from Jordan
by Mohammed Alhadab, Modar Abdullatif, Ahmed H. Ahmed, Yasean Tahat, Israa Mansour
Abstract: This study examines the impact of political connections and government ownership on accrual and real earnings management. Based on a Jordanian sample of 310 firm-year observations, the study finds evidence that politically-connected firms exhibit a higher level of real earnings management, compared to non-politically-connected firms. This evidence suggests that politically-connected firms in Jordan opportunistically manipulate reported income to obtain a private gain through the use of real activities-based manipulation, at the expense of other minority shareholders. This may be caused by real earnings management activities being less subject to the risk of detection and monitoring. Further, the study finds evidence that government-connected firms engage in a lower level of accrual and real earnings management compared to non-government-connected firms, suggesting a positive effect for government ownership on the quality of financial reporting.
Keywords: accrual earnings management; real earnings management; political connections; government ownership; financial reporting quality; Jordan.
The effects of R&D expenditure and earnings management on stock options: evidence from market competition
by Yi-Mien Lin, Tzu-Wen Lee
Abstract: This paper examines the effects of R&D expenditures and earnings management on executive stock options and the effects of the competitiveness of a firm in the industry on R&D and executive stock options under controlling for managerial incentive and corporate governance. The findings are that as R&D of a firm increases, managers are more likely to manipulate earnings to enhance the firm value, thus creating a higher value for stock options. Being more competitive in the industry motivates the firm to broaden business territory, thus it will invest more in R&D to obtain a larger market share. The stronger competitiveness of a firm and the better performance are, the more stock options that will be granted to managers.
Keywords: market competition; R&D expenditures; executive stock options; corporate governance; managerial incentive.
The impact of corporate governance and accruals flexibility on the interaction between earnings management strategies
by Bubaker Khaled, Zakaria Aribi
Abstract: This study examines the impact of corporate governance mechanisms and accruals flexibility on the interaction between accruals earnings management (AEM) and real earnings management (REM) using a large sample of Indian firms for the period from 2007 to 2015. The results show a significant impact of board effectiveness, audit committee effectiveness, high auditors quality and accruals flexibility on the level of AEM, and also we find significant relations between the levels of REM and AEM, suggesting that managers may switch from AEM to REM when they find constraints on AEM. Additional analysis of firms with relatively strong earnings management incentives confirms the trade-off between AEM and REM. Our findings are also robust to the alternative measure of earnings management.
Keywords: accruals earnings management; real earning management; corporate governance mechanisms; India.
Earnings management, corporate social responsibility and governance structure: further evidence from Egypt
by Tarek Abdelfattah, Mostafa Elfeky
Abstract: This study investigates the relationship between earnings management and corporate social responsibility disclosure. In addition, it investigates whether the joint effect of corporate governance and corporate social responsibility disclosure impacts earnings management practices in an emerging capital market, Egypt. Using a sample of non-financial firms listed in the Egyptian stock exchange for the period 2012-2017, we find evidence of the opportunistic hypothesis of corporate social responsibility. Firms use corporate social responsibility reporting to mask earnings management. Our findings show a significant role of board independence in constraining earnings management. Moreover, board independence moderates the positive relationship between corporate social responsibility disclosure and earnings management. However, other governance factors do not alleviate earnings management. Furthermore, we find that institutional ownership is positively related to discretionary accruals supporting the notion of the passive role of institutional investors in developing countries.
Keywords: earnings management; corporate social responsibility; corporate governance; Egypt.