The nexus between free cash flow, audit committee characteristics, and earnings management practices

The nexus between free cash flow, audit committee characteristics, and earnings management practices
Dea'a Al-Deen Omar Al-Sraheen; Nofan Hamed Al-Olimat; Mohammad Naser Hamdan
Afro-Asian J. of Finance and Accounting, Vol. 14, No. 2 (2024) pp. 281 - 296
Research models are developed to address firstly the relationship between free cash flow, audit committee independence, audit committee meeting, and the members' expertise and earnings management. Secondly, the model is developed to examine the moderating role of audit committee effectiveness in the relationship between free cash flow and earnings management. Based on a sample of 255 firms belonging to the Amman Stock Exchange from 2016 to 2020, the results highlight the managers' opportunistic behaviour in presence of free cash flows in order to increase reported earnings. It is shown that the independence and expertise have a vital monitoring role of managers' behaviour that reduces earnings management. In addition, the moderating regression indicates also that the audit committee effectiveness affected positively the relationships between free cash flow and earnings management. Thus, the presence of such a committee restricts the managers in practising their opportunistic behaviours in presence of a free cash flow problem.

Investigating accrual and real earnings management of financially troubled Indian firms

Investigating accrual and real earnings management of financially troubled Indian firms
Sweta Tiwari; Chanchal Chatterjee
Afro-Asian J. of Finance and Accounting, Vol. 13, No. 5 (2023) pp. 592 - 611
This paper examines whether financially troubled Indian firms manage earnings (both accrual and real activity-based) in the light of newly adopted financial reporting practices (IND-AS) by considering 208 financially distressed non-financial firms from 2017 to 2021. The study uses multiple regression for analysis. The study reveals a significant linkage between financial distress and earnings management and this association varies across accounting and market-based measures of financial distress. Also, the intensity of financial distress influences the direction (upward or downward) of earnings management. Interestingly, we find a stronger association of financial distress with accrual-based earnings management than real activity-based earnings management. Results also exhibit that the earnings management of financially troubled Indian firms is higher during the COVID-19 pandemic period. The findings can help regulators and policymakers to design suitable policies to improve the quality of earnings reporting and constrain the possibility of earnings management.

Earnings management and ownership type in microfinance institutions: an international evidence

Earnings management and ownership type in microfinance institutions: an international evidence
Naima Lassoued
Afro-Asian J. of Finance and Accounting, Vol. 13, No. 4 (2023) pp. 528 - 549
The purpose of this paper is to examine whether earnings management in MFIs is motivated by opportunistic behaviour and whether ownership structure could explain this practice. This study is conducted on a sample of 581 MFIs observed over the 2007 to 2015 period. It tests the effect of discretionary provision for loan impairment on future profitability by distinguishing different types of MFIs ownership. The results show that earnings management in MFIs tends to be opportunistic rather than efficient. The type of earnings management differs depending on ownership structure. Indeed, while cooperatives tend more to choose opportunistic earnings management, privately-owned MFIs manage their earnings efficiently. Furthermore, we found inconsistent evidence about earnings management in NGOs.

Financial reporting quality of private and public banks in India

Financial reporting quality of private and public banks in India
Vijyapu Prasanna Kumar; Sujata Kar
Afro-Asian J. of Finance and Accounting, Vol. 12, No. 6 (2022) pp. 712 - 729
The present study compares the earnings management practices amongst the Indian private and public sector banks using the second digit test, one of the primary Benford law tests. The sample consists of data on five variables: interest income, other income, interest expenses, deposits, and loans and advances from 14 private and 17 public sector banks for Q1 2005-Q4 2018. Deposit turns out to be the most misreported financial figure for the private banks while public sector banks misrepresented loans and advances the most. Overall, the public sector banks seem to be more into rounding up behaviour as compared to the private banks. We also explored possible linkages between financial manipulations and a CEO's tenure approaching its completion and observed evidence in support of this argument.

The moderating effect of audit quality on the relationship between information asymmetry and earnings management: evidence from Jordan

The moderating effect of audit quality on the relationship between information asymmetry and earnings management: evidence from Jordan
Mohammed Hassan Makhlouf; Mohammed Zakaria Soda; Yazan Oroud; Abdulhadi H. Ramadan
Afro-Asian J. of Finance and Accounting, Vol. 12, No. 2 (2022) pp. 165 - 177
This study examined how the relationship between information asymmetry and earnings management was affected by audit quality as an example of emerging markets using a sample of Jordanian industrial firms listed on the Amman stock exchange from 2015 to 2019. Fixed effect model is used to examine study hypotheses. The findings indicate that information asymmetry positively affected earnings management. Moreover, the results revealed that audit quality negatively affected the relationship between information asymmetry and earnings management, meaning that audit quality can reduce the level of information asymmetry and mitigate earnings management. This study will contribute to corporate governance and auditing literature among Jordanian firms by providing beneficial information for regulators, investors and other stakeholders about how audit quality can restrict information asymmetry and reduce earnings management. This study will be of value to firms seeking to reduce earnings management and enhance financial reporting quality by decreasing information asymmetry.

Loan loss provisions, earnings management, capital management, and signalling: the case of Vietnamese banks

Loan loss provisions, earnings management, capital management, and signalling: the case of Vietnamese banks
Tu D.Q. Le; Liem T. Nguyen; Son H. Tran
Afro-Asian J. of Finance and Accounting, Vol. 11, No. 5 (2021) pp. 755 - 771
This study examines loan loss provision (LLP) behaviours of Vietnamese banks between 2006 and 2015. The findings show that earnings management is positively related to LLP regardless of the restructuring period, suggesting that LLPs can be used by Vietnamese banks as a mechanism for aggressive earnings management. There appears to be no capital management before the restructuring period. However, the findings indicate that Vietnamese banks use capital management with LLP during the restructuring period. Furthermore, the positive relation between LLP and future earnings during the restructuring period suggests that investors may view an abnormal increase in LLP as a signal of loan quality. The findings further demonstrate that LLP is positively associated with bank inefficiency, credit growth, bank size, and lending specialisation. State-owned commercial banks are found to reserve a greater level of provisions compared to privately owned commercial banks. Based on the research findings, we offer several implications for relevant stakeholders.

International financial reporting standards adoption and accounting quality: evidence from Ghanaian listed firms

International financial reporting standards adoption and accounting quality: evidence from Ghanaian listed firms
Benjamin Yeboah; Cláudio Pais
Afro-Asian J. of Finance and Accounting, Vol. 11, No. 4 (2021) pp. 490 - 517
The adoption of International Financial Reporting Standards (IFRS) by Ghanaian listed firms form the basis of higher accounting quality and reliability of accounting information from IFRS application. Existing literature suggests that the adoption affects the level of accounting quality. The aim of this paper is to examine whether the shift to IFRS minimises weaknesses in Ghana National Accounting Standards (GNAS) in measuring accounting quality. The paper employs research design metrics of discretional accruals, accrual quality, earnings smoothness, small loss avoidance and price-earnings to compute accounting quality of Ghana Stock Exchange (GSE) firms. The results suggest that accounting quality has improved after the shift to IFRS. This research fills the gap in Ghana level, given that there was no such study. Also, this study gives evidence of improvement in the information environment of GSE capital market after the shift in terms of information quality and accounting comparability.

The influence of foreign currency earnings and foreign capital on earnings management

The influence of foreign currency earnings and foreign capital on earnings management
Kameshwar Rao V.S. Modekurti; K. Lubza Nihar
Afro-Asian J. of Finance and Accounting, Vol. 11, No. 3 (2021) pp. 353 - 375
Earnings management offers scope for research due to the variety of accentuating contexts. This paper examines it in the contexts of foreign currency earnings, and foreign capital. 'Does the presence of foreign capital influence earnings management?' and 'Does the presence of foreign currency earnings influence earnings management?' are the research questions answered in this paper, taking the sample of NSE 200 companies of India, for the period 2010-2016. Evidence in this paper supports positive (negative) influence of foreign currency earnings (foreign capital), on earnings management. Results remain robust even when different measures of managed earnings, foreign earnings, and foreign capital are adopted, and also when controlled for firm level factors such as size, level of operations, and industry affiliation. This paper contributes to the meagre international literature on the theme 'international orientation and earnings management' and is the first empirical evidence on this theme from a significant emerging economy, India.

Operating performance and earnings management in Egypt

Operating performance and earnings management in Egypt
Wael Mostafa
Afro-Asian J. of Finance and Accounting, Vol. 10, No. 4 (2020) pp. 584 - 605
This research contributes to the literature addressing the phenomenon of earnings management in global markets. The research setting is Egypt, and due to data limitations in this setting, this research examines earnings management based on firm operating performance. In particular, the question of whether ineffectively performing firms engage more in earnings management strategies compared to their effectively performing counterparts is investigated. Sign change ratio analysis, correlation analysis, and regression analysis were employed to determine the extent to which the strength of the relationship between earnings and cash flows differs between ineffectively and effectively performing firms. The results show that considered against effectively performing firms, ineffectively performing firms in the emerging market of Egypt are associated with a greater level of earnings management. Overall, this finding suggests that for listed Egyptian firms, company operating performance is a significant incentive of earnings management. Furthermore, this finding encourages the argument in favour of Egyptian corporate governance reform.

The effect of audit committee characteristics on earnings management: the case of Indonesia

The effect of audit committee characteristics on earnings management: the case of Indonesia
Doddy Setiawan; Lian Kee Phua; Hong Kok Chee; Irwan Trinugroho
Afro-Asian J. of Finance and Accounting, Vol. 10, No. 4 (2020) pp. 447 - 463
We investigate the effectiveness of audit committee in mitigating earnings management in the context of Indonesia. Audit committee is expected to reduce earnings management. This study examines the effect of several audit committee characteristics: independence of audit committee members, number of audit committee members, number of meetings, expertise in finance and gender on earnings management. We study 393 Indonesian listed firms during the 2006-2010 period. Results show that female member(s) of audit committee mitigate earnings management. However, financial expertise and number of meetings have positive effect on earnings management. This result shows that both variables might not be effective to constraint earnings management. On the other hand, number of audit committee members and independence of audit committee member do not have any significant influence on earnings management. Further, this study shows that audit firms and leverage have negative effect on earnings management. However, institutional investors tend to push earnings management higher and growth has no significant effect on earnings management.