This study examines the influence of firm governance structures (board size, independence, CEO duality, director share ownership, and board meeting frequency) in relation to carbon emission disclosures by high-polluting Chinses firms. In addition, the study further examined the moderating role of earnings management on this relationship. In line with stakeholder and agency theories, our study identified that the large and independent boards exercise and demonstrate a higher degree of carbon emission disclosures. However, CEO duality and director share ownership (...) are associated with lower carbon emission disclosures. In addition, the study determined that higher earnings management results in a reduced level of carbon emission disclosures. Lastly, a firm earnings management strategy moderates the relationship between a firm governance structure and its carbon emission disclosures. The findings from the study are consistent with multiple econometric models and variables. The findings from the study contribute to the literature in the areas of firm corporate governance and carbon emission disclosures by documenting the moderating role of earnings management, which is not evident in previous studies; provide an enhanced perspective on the implications for firms, regulators, policymakers, and stakeholders who have an interest in reducing carbon emissions and advancing climate change mitigation goals in line with UN's Sustainable Development Goal (SDG) 7: climate action, and zero emissions goal by 2050. (shrink)

Earnings management behavior is a concern of standard-setters, regulators and the accounting profession. This study examines the ethics of this practice using a national sample of 763 accounting practitioners, faculty and students. Possible determinants of the ethics of this practice such as perceived role of ethics and social responsibility, and personal moral philosophies (i.e. idealism and relativism) are explored. Results indicate a positive relationship between social responsibility, focus on long-term gains, idealism, and the ethical perception of earnings (...) management and negative relationship between focus on short-term gains, relativism and the ethical perception of this practice. Implications for the accounting profession as it deals with the issue of earnings management are discussed. (shrink)

The study adopted a systematic review approach to review the existing studies on the relationship between corporate social responsibility (CSR) and Earnings Management (EM). The aim of this study is to determine whether CSR is an effective tool to promote healthy relationships with stakeholders or CSR is used as an effective strategy by firm's mangers to hide out their involvement in (EM) practices. Results revealed that prior research on the CSR‐EM relationship is limited. The majority of the studies (...) found an inverse relationship between CSR and EM. Moreover, mixed results were reported because of the lack of sufficient theoretical support, inappropriate research designs, and varying approaches to measure CSR and EM. This study also synthesizes the various consistencies and inconsistencies in the existing literature of CSR‐EM and future research agenda. Policymakers should reward organizations that pursue CSR purely for social and environmental concerns and at the same time they should be vigilant for those which use CSR for shielding their EM practices. (shrink)

Companies’ earnings are arguably their most important financial disclosure, and corporate tactics to manage earnings can be directly constrained by audit procedures. In this article, we examine whether there is a link between companies’ earnings performance and changes in the accounting firm they choose to audit their financial statements. We find that when companies’ reported earnings just miss analysts’ expectations, they are more likely to change their auditor. Consistent with an opportunistic auditor switch, we also find (...) that these companies have lower levels of earnings quality after the change. Our results concentrate on companies with more incentive or ability to act opportunistically, including those with negative market reactions to earnings, higher levels of accruals flexibility, and weaker corporate governance. Our study advances research into the public’s interest by providing evidence of suspect auditor changes that increase auditors’ ethical conflict to maintain independence and objectivity. (shrink)

This paper aims to detect the methods of earnings management in Pearl River Delta region of China. The data were selected based on the list companies of Pearl River Delta region from 2008 to 2019 and the balanced panel analysis was adopted to pursue the results. After the random effect analysis, this study reaches the conclusion that downward earnings is through total assets, the difference between sales and receivables, fixed assets, and sales and upward earnings is (...) mainly through the changes of sales by the companies in Pearl River Delta region of China. (shrink)

Prior research indicates that managers’ dark personality traits increase their tendency to engage in disruptive and unethical organizational behaviors including accounting earnings management. Other research suggests that the prevalence of dark personalities in management may represent an accidental byproduct of selecting managers with accompanying desirable attributes that fit the stereotype of a “strong leader.” Our paper posits that organizations may hire some managers who have dark personality traits because their willingness to push ethical boundaries aligns with organizational (...) objectives, particularly in the accounting context where ethical considerations are especially important. Using several validation studies and experiments, we find that experienced executives and recruiting professionals favor hiring a candidate with dark personality traits into an accounting management position over an otherwise better-qualified candidate when the hiring organization faces pressure to manage earnings. Our results help to illuminate why individuals with dark personality traits may effectively compete for high-level accounting positions. (shrink)

We examine the relationship between social insurance contributions and earnings management for publicly listed firms in China. Our empirical results show that the social insurance contributions burden significantly reduces the degree of earnings management by reducing the level of free cash flow. Additionally, the negative relation between social insurance contributions burden and earnings management is more pronounced when the internal and external social insurance pressures are high and when the firms are large non-state-owned enterprises. (...) We also discuss the heterogeneity among firms for different financing constraints, external financing environment, regional marketization, and internal and external corporate governance. Finally, we further find that under the dual collecting system, although the social security administration is a better collecting agency, the local tax bureau acting with full responsibility is more effective than the collecting system. (shrink)

Using a sample of 11,357 firm-year observations from the Chinese stock market for the period of 2001–2011, we investigate whether and how religion can mitigate earnings management. Specifically, based on geographic-proximity-based religion variables, we provide strong and robust evidence to show that religion is significantly negatively associated with the extent of earnings management, suggesting that religion can serve as a set of social norms to mitigate corporate unethical behavior such as earnings management. Our findings (...) also reveal that the negative association between religion and earnings management is less pronounced for firms with closer distance to the regulatory centers than for their counterparts, implying the substitutive effects between religion and the distance to regulators on mitigating earnings management. The above results are robust to different measures of earnings management, various religion variables, and a variety of sensitivity tests. (shrink)

Using an international sample of banks, we study how differences in religiosity across countries affect earnings management. Given that religiosity is a major source of morality and ethical behavior, it may reduce excessive risk taking and act as deterrence for earnings manipulations. Therefore, we predict lower earnings management in societies that have higher religiosity. Consistent with expectations, our cross-country analysis indicates that religiosity is negatively related to income-increasing earnings management for loss-avoidance and just-meeting-or-beating (...) prior year’s earnings. We also find that religiosity reduces income-increasing earnings management through abnormal loan loss provisions. In additional tests, we document that religiosity increases the information value of bank earnings, with both earnings persistence and cash flow predictability being enhanced by higher religiosity. For the crisis period analysis, our evidence shows that banks in countries with higher religiosity exhibit lower probability of reporting asset deterioration and lower probability of having poor performance. (shrink)

Although US and European research has documented improvement in earnings quality associated with corporate governance characteristics, the situation in Latin America is questionable, given the business environment in which firms operate, which is characterized by controlling family ownership and weak legal protection. The purpose of this study is to examine the relation between the internal mechanisms of Corporate Governance and Earnings Management measured by discretionary accrual. We use a sample of listed Latin American non-financial companies from the (...) period 2006–2009. Our results show how in the Latin American context the role of external directors is limited and that Boards which meet more frequently take a more active position in the monitoring of insiders, so showing a lower use of manipulative practices. In addition, we find a non-linear relation between insider ownership and discretionary accruals, also pointing to the fact that ownership concentration may be a manipulative practices constrictor mechanism only when the ownership of main shareholders is moderate. The findings have important policy implications since this is, to the best of our knowledge, the first study to analyze the relation between the effectiveness of the government and the earnings management behavior. As policy implications, we document how when a country implements controls aimed at reducing corruption, strengthening the rule of law or improving the effectiveness of government, this leads to a reduction in firm earnings management. (shrink)

The current study is designed to propose and test a model about the ethical reputation of a target manager who must decide whether to engage in earnings management. We employ an experimental approach to examine the potential negative reputation effects within the internal labor market of a firm that occur as a consequence of earnings management. We examine participants’ responses to a hypothetical (target) manager when both the target’s behavior and the corporate incentives were manipulated. Participants (...) assessed how ethical they believed a target manager to be, based on the target’s decision regarding earnings management and the nature of the corporate incentives. Participants also assessed the target’s managerial ability. Participants’ judgments regarding the target’s morality were significantly affected by the target’s behavior, but were not affected by the incentive structure. Ability judgments were significantly and positively related with morality assessments. Further analysis indicates that morality assessments mediate the relationships between the target’s behavior and the participants’ willingness to extend work-related opportunities to the target. Implications of these results for management control systems design and for future research are discussed. (shrink)

The current study is designed to propose and test a model about the ethical reputation of a target manager who must decide whether to engage in earnings management. We employ an experimental approach to examine the potential negative reputation effects within the internal labor market of a firm that occur as a consequence of earnings management. We examine participants’ responses to a hypothetical (target) manager when both the target’s behavior and the corporate incentives were manipulated. Participants (...) assessed how ethical they believed a target manager to be, based on the target’s decision regarding earnings management and the nature of the corporate incentives. Participants also assessed the target’s managerial ability. Participants’ judgments regarding the target’s morality were significantly affected by the target’s behavior, but were not affected by the incentive structure. Ability judgments were significantly and positively related with morality assessments. Further analysis indicates that morality assessments mediate the relationships between the target’s behavior and the participants’ willingness to extend work-related opportunities to the target. Implications of these results for management control systems design and for future research are discussed. (shrink)

This book approaches the question of the relation between financial crises and earnings management from two philosophical perspectives: positivism and critical realism. The results obtained using the positivist approach indicate that financial crises tend to have no consistent effect on earnings quality since managers’ earnings behavior does not differ from the pre-crisis to the crisis period. The author accordingly argues against the existence of a causal law based on a constant conjunction model and concludes that financial (...) crises cannot be seen as the cause of earnings management. The critical realism perspective, on the other hand, casts light on managers’ reasons for acting like an earnings manager; in conjunction with the more traditional positivist approach, it assists in refuting the idea of financial crises as a generative mechanism for earnings management. The author concludes by exploring other structures at work that might be responsible for earnings management. This book will be of interest to both academics and a wide range of professionals. (shrink)

In this paper, we investigate the link between audit committees and earnings management providing a more comprehensive simultaneous analysis of the influence of audit committee features using a sample of 485 firm-years from Singapore's publicly traded firms during the 2000 2001 calendar period. Empirical findings indicate firms with a higher proportion of independent audit committee members are more effective at constraining earnings management. Firms with audit committees that are more diligent and/or lack the presence of independent (...) directors serving simultaneously on a substantial number of boards and committees are more effective at constraining earnings management. These findings are robust to alternative income-incentives facing corporate management. Overall, our findings have implications for stakeholders, regulators, and corporate governance. For example, our findings infer policymakers may need to focus on other audit committee characteristics to strengthen the committee's ability to constrain earnings management rather than continue the present fixation with independence. (shrink)

Previous studies argue that religious firms are more ethical and thus engage less in accrual earnings management. At odds with the ethical view, we use a sample of Chinese listed firms and show that firms in religious regions use more real earnings management. We postulate that besides ethics, religion also proxies for risk aversion, which motivates firms to substitute accrual earnings management with real earnings management. Consistent with this view, we show that (...) the positive association between religiosity and real earnings management is more pronounced for firms with lower litigation risk and for firms with less reputable auditors. In addition, we use a mediation model introduced by Baron and Kenny :1173–1182, 1986) to show that religiosity affects earnings management through the channel of risk aversion. We conclude that firms choose real earnings management over accrual-based earnings management because of risk aversion, rather than ethical reasons. (shrink)

This study proposes and tests a model of the relations among corporate accountants’ perceptions of the ethical climate in their organization, the perceived importance of corporate ethics and social responsibility, and earnings management decisions. Based on a field survey of professional accountants employed by private industry in Hong Kong, we found that perceptions of the organizational ethical climate were significantly associated with belief in the importance of corporate ethics and responsibility. Belief in the importance of ethics and social (...) responsibility was also significantly associated with accountants’ ethical judgments and behavioral intentions regarding accounting and operating earnings manipulation. These findings suggest that perceptions of ethical climate, usually presumed to reflect the “tone at the top” in the organization, lead accounting professionals to rationalize earnings management decisions by adjusting their attitudes toward the importance of corporate ethics and social responsibility. This is the first study to document a relationship between organizational ethical climate and professional accountants’ support for corporate ethics and social responsibility, and also the first study to document that industry accountants’ views toward corporate ethics and social responsibility are associated with their willingness to manipulate earnings. The findings have important implications, suggesting that organizational efforts to enhance the ethical climate and emphasize the importance of corporate ethics and social responsibility could reduce the prevalence of earnings manipulation. (shrink)

Recent, well-publicized accounting scandals have shown that the penalties outsiders impose on those found culpable of earnings management can be severe. However, less is known about how colleagues within internal labor markets respond when they believe fellow managers have managed earnings. Designers of responsibility accounting systems need to understand the reputational costs managers impose on one another within internal labor markets. In an experimental study, 159 evening MBA students were asked to assume the role of a manager (...) in a company and respond to a scenario in which another manager (the target manager) has the opportunity to engage in earnings management. Participants provided causal attributions, assessed the morality of the target manager, and indicated whether they would change their judgments about the target manager's reputation. The study manipulated three between-subjects factors: (1) whether the target manager chose to engage in earnings management, (2) whether the company's budgetary control system was rigid or flexible, and (3) whether the target manager's work history was average or above average. We found that causal attributions are affected more by the budgetary systems when the target did not manage earnings than when the manager did. We also found that morality judgments were significantly associated with the target manager's behavior, but not with the budgetary system. In addition, participants' judgments about the target manager's reputation were more strongly associated with morality judgments than with causal attributions. We discuss implications of the role of reputation in management control systems design. (shrink)

The primary objective of this research is to examine the potential influence of environmental, social, and governance (ESG) disclosure on cash holdings. Additionally, the study explores the role of earnings management (EM) practices as a mediating factor in this relationship. The sample comprises 797 companies listed on financial markets across 19 European countries, and the data spans from 2013 to 2019. The outcomes indicate a significant negative correlation between ESG disclosure and cash holdings, implying that ESG performance can (...) be used by management to resolve disputes with stakeholders. The outcomes further indicate that the existence of EM practices partially mediates the link between ESG disclosure and cash holdings. Moreover, they are robust by substitute cash holdings specification, three distinct initiatives of ESG disclosure (i.e., environment, social, and governance), and a two-stage least squares assessment. Therefore, the findings document that nonfinancial reporting in the form of ESG disclosure can assist in controlling agency conflict, leading to better valuations of company performance by stakeholders. (shrink)

This paper investigates the moderating role of industry regulation on the effectiveness of audit committees in restricting earnings management. Using comprehensive panel data of S&P 1500 firms between 2003 and 2007, we find that the proportion of CEO directors on an audit committee is positively associated with earnings management in unregulated industries, while this association is significantly weaker in regulated industries. Further, the proportion of financial experts on an audit committee is negatively associated with earnings (...) management. Our results also indicate that the average board tenure of audit committee members is negatively related to earnings management in regulated industries, but positively affects earnings management in unregulated industries. Finally, audit committee members’ average directorship increases earnings management in regulated industries, but reduces earnings management in unregulated industries. Overall, our results suggest that the effectiveness of audit committees in reducing earnings management and improving financial reporting quality is influenced by industry regulation. (shrink)

There are many ways that accountants and managers can influence the reported accounting results of their organizational units. When such influence is directed at changing the amount of reported earnings, it is known as earnings management. The purpose of this paper is to present the results of surveys of undergraduate students, MBA students, and practicing accountants concerning their attitudes on the ethical acceptability of earnings management. Analysis of the survey results reveals how the attitudes of (...) the three groups differ and what variables are associated with these differences. Based on the analysis, the authors suggest changes in accounting education curriculum and ethics awareness programs in business which might increase students'' and practitioners'' sensitivity to the ethical ramifications of earnings management. (shrink)

Merchant and Rockness (1994, p. 92) characterize earnings management as "probably the most important ethical issue facing the accounting profession" and provide initial evidence of the ethical judgments of various organizational members. The current study extends their work by examining the extent to which an individual''s ethically-related judgments in response to earnings management activities are associated with the individual''s role.In an experimental study, evening MBA students read three hypothetical scenarios involving a manager engaging in earnings (...) management. The scenarios involved a gain from an operating activity, a gain from an accounting activity, and a loss from an accounting activity. Before reading the cases, however, participants were randomly assigned to one of three roles: a shareholder, another manager from the company who is unfamiliar with the manager in the case, or another manager from the company who is familiar with the manager in the case. Following each case, participants made four ethically related judgments. (shrink)

The purpose of this study is twofold. The first objective is to examine the impact of an individual’s ethical ideology and level of professional commitment on the earnings management decision. The second objective is to observe whether the presence of a personal benefit affects an individual’s ethical orientation or professional commitment within the context of an opportunity to manage earnings. Using a sample of 375 undergraduate business majors, our results suggest a significant relationship between an individual’s ethical (...) orientation and decision-making. Further, participants with higher levels of professional commitment seem to be less likely to engage in earnings management behavior and less likely to behave opportunistically. These results have the potential to add to our understanding of certain behaviors in entry-level personnel and should be of interest to managers, practitioners, academicians, and researchers. (shrink)

Despite regulatory reforms aimed at inhibiting aggressive financial reporting, earnings management persists and continues to concern practitioners, regulators, and standard setters. To provide insight into this practice and how to mitigate it, we conduct an experiment to examine the impact of two independent variables on CFOs’ discretionary expense accruals. One independent variable, incentive conflict, is manipulated at two levels —i.e., the presence or absence of a personal financial incentive that conflicts with a corporate financial incentive. The other independent (...) variable is CFOs’ earnings management ethics, measured as their assessment of the ethicalness of key earnings management motivations. We find that incentive conflict and EM-Ethics interact to determine CFOs’ discretionary accruals such that in the presence of incentive conflict, CFOs with low EM-Ethics tend to give into the personal incentive by booking higher expense accruals; and in the absence of an incentive conflict, CFOs with low EM-Ethics tend to give into the corporate incentive by booking lower expense accruals. We also find support for a mediated-moderation model in which CFOs’ level of EM-Ethics influences their moral disengagement tendencies which, in turn, differentially affect their discretionary accruals, depending on the presence or absence of incentive conflict. Theoretical and practical implications of these findings are discussed. (shrink)

The purpose of this study was to investigate whether intent, an attribute of earnings management, affected the evaluation of the level of ethical acceptability of other EM attributes reported by senior Canadian undergraduate accounting students. Extending work in the U.S. begun by Merchant and Rockness and Bruns and Merchant, 22–25, 1990), our results indicate that there were statistically significant differences in the assessments of ethical acceptability attributable to intent. There were also significant differences attributable to gender.

Previous studies argue that religious firms are more ethical and thus engage less in accrual earnings management. At odds with the ethical view, we use a sample of Chinese listed firms and show that firms in religious regions use more real earnings management. We postulate that besides ethics, religion also proxies for risk aversion, which motivates firms to substitute accrual earnings management with real earnings management. Consistent with this view, we show that (...) the positive association between religiosity and real earnings management is more pronounced for firms with lower litigation risk and for firms with less reputable auditors. In addition, we use a mediation model introduced by Baron and Kenny :1173–1182, 1986) to show that religiosity affects earnings management through the channel of risk aversion. We conclude that firms choose real earnings management over accrual-based earnings management because of risk aversion, rather than ethical reasons. (shrink)

A multiphase study tested a proposed mediated moderation model for the joint effects of ethical pressure and power distance orientation on accountants’ ethical judgments of earnings management. Results based on a sample of 354 accountants from China indicated that the relationship between ethical pressure and ethical judgments of earnings management is contingent on the accountants’ power distance orientation. That is, the relationship between ethical pressure and ethical judgments of earnings management was stronger for accountants (...) with a high power distance orientation. The results also demonstrated that ethical beliefs in support of the company serve as a mediator for the interaction effect of ethical pressure and power distance orientation on the outcome. These results are discussed in terms of viewing earnings management as a form of unethical pro-organizational behavior which can be effectively investigated within the framework of the person-situation interactionist model. (shrink)

To many, recent allegations of accounting fraud (or earnings management; EM) at Enron, coupled with similar ones at many other corporations, are a strong indication of a serious decay in business ethics. In academics, this raises the concern between EM and corporate social responsibility (CSR). Since it has neither been documented, nor globally tested whether CSR mitigates or increases the extent of EM, three kinds of EM are studied: earnings smoothing, earnings aggressiveness, and earnings losses (...) and decreases avoidance. The extents to which financial characteristics and institutional variables have an impact on the extent to which companies conduct EM are also tested. Our study investigates whether the CSR-related features of 1,653 corporations in 46 countries had a positive or negative effect on the quality of their publicly released financial information during the 1993-2002 period. There is no question that with a greater commitment to CSR, the extent of earnings smoothing is mitigated, that of earnings losses and decreases avoidance is reduced, but the extent of earnings aggressiveness is increased. (shrink)

This study examines whether the gender of the directors on fully independent audit committees affects the ability of the committees in constraining earnings management and thus their effectiveness in overseeing the financial reporting process. Using a sample of 525 firm-year observations over the period 2003 to 2005, we are unable to identify an association between the proportion of female directors on audit committees and the extent of earnings management.

Corroborating upper echelons theory, this study picks up the notion that narcissistic chief executive officers take advantage of accounting choices to enhance their firms’—and inherently their own—personal track records. Using a set of 15 indicators, reflecting the narcissistic trait of 1126 CEOs for the period 1992 to 2012, we find evidence of highly narcissistic CEOs engaging in accrual-based earnings management. In contrast to prior research, the results show evidence not only for income-increasing but also for income-decreasing ABEM. This (...) indicates that highly narcissistic CEOs not only strive to influence stakeholders’ perception of current performance. We conclude that they also assess their potential to influence perception of current and future earnings. The results imply that highly narcissistic CEOs’ accounting choices are driven by self-serving behavior rather than by the intention to provide additional information to the market. When earnings management techniques are used to derive personal advantage from the presentation of a firm’s earnings, the literature refers to this as a case of low earnings quality reflecting unethical behavior. Accordingly, this study contributes to the field of business ethics by showing that CEO narcissism is related to low earnings quality in that it is associated to discretionarily decreasing accruals. (shrink)

This paper examines the effect of corporate governance mechanisms on earnings management within the Nigerian context. The study adopted the panel generalised least square regression to analyse the data. A sample size of 49 companies was selected from the non-financial companies listed on the Nigerian Stock Exchange for six years (2012-2017). Overall, corporate governance mechanisms jointly have not restrained the possibility of earnings management in Nigeria, but the degree of impact by individual corporate mechanisms showed mixed (...) results. From the analysis, five corporate governance variables (ownership concentration, managerial ownership, board size, gender diversity, and audit committee independence) have positive relationship with earnings management. This indicates that an increase in any of these variables increases managers' latitude for using earnings management to manage the firms' earnings. This confirms ineffectiveness of all these variables in restraining earnings management. In contrast, two variables (CEO duality and board independence) contribute to the reduction of earnings management of the selected firms in Nigeria. However, CEO duality is not statistically significant. Given the findings, the study recommends stricter compliance and enforcement to the corporate governance codes and appropriate legislation. Besides, more independent directors' representation on the board should be encouraged. (shrink)

We highlight how Corporate Social Responsibility can be strategically used against the negative perception from earnings management. Using international data, we analyse the effect of CSR and EM on the cost of capital and corporate reputation. Results confirm that CSR strategy is positively valued by investors and other stakeholders. Contrary to EM, CSR has a positive effect on corporate reputation and lowers the cost of capital. In addition, we also find that the favourable effect of CSR on cost (...) of capital is consistently more intense in firms that show signs of EM indicating that the market does not identify when CSR practices are used as a strategy to mask EM. We also demonstrate how institutional factors influence the above relationship. (shrink)

We examine the unique nature of agency problems within publicly traded family firms by investigating the earnings management decision of dominant family owners relative to non-family. To do so, we draw upon literature demonstrating that family owners are loss averse with respect to the family’s socioemotional wealth, or the affective endowment derived from firm ownership and control. Our theory and findings suggest that potential reputational consequences of earnings management lead family principals to engage in less of (...) this practice relative to non-family firms, and that founder family firms are less likely than non-founder family firms to use earnings management. Moreover, the family-firm effect varies with the firm size, the degree of CEO entrenchment, and the firm’s stock structure. We provide important insights regarding differences between family and non-family principals in the use of unethical accounting practices, thereby extending agency theory and advancing an underdeveloped research area. (shrink)

This paper examines whether firms strategically legitimize large labor dismissals by performing ex-ante downward earnings management. We further assess whether the effect is larger under stakeholder pressure and whether these practices influence the external perception of firms’ behavior. As laying off employees without an economic reason is perceived as a breach of the social contract, stakeholders pressure firms to provide economic justification for LLDs. We argue that firms strategically legitimize LLDs by artificially worsening their financial performance through downward (...) earnings management. From a sample of European listed firms for the period 1998–2014, using a propensity score matching model to control for differences in observable characteristics between LLD and non-LLD firms, we find that firms manage their earnings downward in the year prior to LLDs. These results are more pronounced in the presence of high stakeholder pressure. As such, firms with stronger trade unions, higher visibility, stricter employment protection legislation, and more stakeholder-oriented legal environments have stronger incentives to manage earnings downward before LLDs. Finally, we document that downward earnings management prior to LLDs is effective at legitimizing LLDs, offsetting the negative external perceptions of firms in the aftermath of LLDs. This study contributes to the business ethics literature by identifying unintended consequences of stakeholder pressure around LLDs. It also brings important empirical insights into how ethically questionable decisions are strategically legitimized through further unethical practices. (shrink)

Our study examines whether gender-diverse engagement partners constrain unethical earnings management behavior in a French mandatory joint audit setting. The investigation of the joint audit setting, by raising concerns about audit team organization and management, provides new insights into how gender-diverse audit partners contribute to the effectiveness of audit decision-making, resulting in reduced earnings management. The need for effective collaboration and communication between joint auditors may foster a transformational leadership style on the part of audit (...) engagement partners. In this regard, we argue that better interaction between male and female lead audit partners confers a comparative advantage on gender-diverse audit partners compared to all-male audit partners. In line with our expectation, our empirical results show that gender-diverse audit partners are negatively associated with discretionary accruals of client firms. Gender-diverse audit partners are also found to constrain earnings management irrespective of whether clients hire one or two brand-name audit firms. Finally, we find that the pervasiveness of earnings management declines when client firms switch from all-male audit partners to gender-diverse audit partners. Our findings underline the importance of considering audit partner gender by policy makers in contexts where joint audits are required or in countries that are considering introducing joint audits. (shrink)

This study investigates the impact of internal corporate governance on the relation between disclosure quality and earnings management in the UK listed companies, in particular whether governance mechanisms have deterrent effect on earnings management similar to firms’ disclosure quality. Unlike prior literature, we measure a number of board and audit committee-related governance instruments, three disclosure quality proxies and the Modified Jones Model to test the hypotheses of the study on a matched-pair sample data of Investor Relation (...) Magazine Award winning and non-winning firms. Our findings in the OLS and sensitivity analyses using Heckman Procedure and 2SLS regressions consistently report a significant negative association between earnings management and disclosure quality for all proxies in restraining earnings management. In contrast, corporate governance variables are mostly insignificantly related to earnings management. This provides an emerging trend of the outperformance of disclosure quality over internal governance mechanisms in lessening earnings management. These findings warrant due attention of the policy makers, investors, corporate firms and other stakeholders in shaping a high-quality disclosure and governance regime in corporate settings to mitigate managerial manipulations of earnings across the countries in the world. (shrink)

In this article, we explore the relationship between corporate social responsibility (CSR) and earnings management (EM). Our CSR index, using KLD data, incorporates information from the following issue areas: the community, corporate governance, diversity, the product, employee relations, the environment, and human rights. Results show that more socially responsible firms have higher quality accruals and less activity-based EM, both of which impact financial reporting quality.

This paper investigates whether religious-based index membership is important in mitigating earnings management. Using a large sample of firms domiciled across 12 European countries, our empirical results show that firms included in the Shariah-compliant index, as a proxy for religious index, are more likely to engage in accruals manipulation vis-a-vis non-Shariah-compliant firms. Our results are robust using the Heckman two-stage treatment effect model, weighted least squares model, alternative earnings quality metrics and after controlling for the potential effects (...) of home-country characteristics. Furthermore, our empirical results indicate that corporate governance of Shariah-compliant firms does not constrain managerial opportunistic behaviour in misreporting earnings, and firms that with low scores of board functions, shareholder rights and vision and strategy are more likely to engage in earnings management. Further, Shariah-compliant firms domiciled in Coordinated Market Economies are more likely to manipulate earnings than those in Liberal Market Economies. Taken together, our findings suggest that the Shariah index membership does not indicate good corporate governance that can mitigate earnings management, and it may serve as a legitimacy mechanism to conform to stakeholders’ expectations. Our findings support arguments that the religious-based index membership is plausibly used as a ‘label’ and an impression management tool to attract investment. (shrink)

Archival research reports that managers often use the FIN 48 uncertain tax liability accrual to manage earnings. To assess solutions to this problem, we deconstruct the ethical and psychological reasoning that leads to FIN 48 opportunistic behavior. Hence, we employ a survey of seasoned accounting managers to assess the influences of cynicism, two measures of moral disengagement, and pressure from a CFO on the propensity to engage in FIN 48 earnings management. Specifically, we manipulate the influence of (...) the study scenario supervisory CFO as either a latent bully or a transformational leader. While the CFO bully main effect condition enhances FIN 48 earnings management, the CFO transformational leader condition interacts with less cynical accounting managers to reduce FIN 48 earnings management. We also find that both dispositional trait and situational state moral disengagement factors independently mediate the relationship between the cynicism model antecedent and FIN 48 earnings management. Collectively, study findings provide implications for both theory and practice. (shrink)

Prior research suggests that the presence of high-quality auditors constrains accrual-based earnings management, but it inadvertently leads to higher real activities manipulation. We investigate whether such trade-off exists between accrual-based and real earnings management activities in the presence of female or male auditors. We use a sample of UK firms for the period 2009 to 2016 and find that firms audited by female auditors do not resort to a higher-level real activities manipulation when their ability to (...) engage in accruals management is constrained. Overall, our results suggest that the benefits of hiring female auditors are overwhelmingly higher than the costs they might bring to the client firms. (shrink)

Gender differences in ethical evaluations may vary across types of behaviors. This controlled experiment explores gender differences in ethical evaluations, moral judgment, moral intentions, and moral intensity evaluations by surveying a group of professional accountants to elicit their views on a common earnings management technique. We find that there are no significant differences between male and female professional accountants when they make an ethical evaluation involving earnings management by shipping product early to meet a quarterly bonus. (...) Both male and female professional accountants made a similar moral judgment that this action should not be completed and indicated similar moral intentions to report this type of behavior. Further, we find that male and female professional accountants made similar moral intensity evaluations when product is shipped early to meet a quarterly bonus. (shrink)

We examine the influence of face-based judgments of CFO and CEO honesty on earnings management for the largest publicly traded companies in America. After controlling for incentives and opportunities to manage earnings, CFOs perceived to be less honest engage in higher levels of accruals earnings management and real earnings management. The beneficial impact of perceived honesty on earnings quality is most pronounced when both the CFO and the CEO are perceived to be (...) more honest. Findings are consistent with our conjecture that both the CFO and CEO contribute to a firm’s financial reporting environment. (shrink)

This study examines the influence of underwriter–auditor relationship on pre-initial public offering earnings management. Using a sample of Chinese to-be-listed firms, we find that a close UAR, as reflected in repeated collaborations between an underwriter and an audit firm in IPOs, is positively associated with pre-IPO earnings management. This association is more pronounced for firms with politically connected auditors/underwriters, firms with less reputable auditors/underwriters, firms located in provinces with weak legal environment, firms to-be-listed on boards with (...) lax listing requirements, and firms whose auditors are with low industry specialization, and legal liability exposures. We provide further evidence that UAR is associated with greater likelihood of irregular activities in post-IPO period and poorer post-IPO financial performance. To the extent that we control for alternative explanations and potential endogeneity, our results suggest that the collusion incentive is likely to drive repeated collaborations between underwriters and auditors in the Chinese IPO market. Our findings provide interesting implications for auditors, investors, and regulators seeking to understand the Chinese IPO market. (shrink)

We revisit religiosity, gender, age, ethics education and experience as drivers of ethicality, while expanding prior research from Anglo-Saxon and Asiatic/Euro-Asiatic countries to a Latin European country, Portugal. We apply the Merchant instrument of attitudes towards earnings management, in a sample of Portuguese accounting students and alumni. We find no significant evidence of a positive association between religiosity and accountants’ judgments on earnings management. However, gender, age, education and experience are significant predictors of accountants’ judgments. The (...) results are unchanged when we control for the intent of earnings management. Females, older individuals and alumni judge accounting earnings management more harshly than males, younger individuals, and students. A higher level of accounting work experience induces accountants to judge accounting earnings management as a less ethically questionable practice. This finding is theoretically relevant because it underscores the necessity of taking people’s constraints in the workplace into consideration when studying ethical behavior in business contexts. The results are also practically relevant, as they highlight the importance of a systematic ethics education throughout the accountant’s life. (shrink)