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Article
Publication date: 7 November 2019

R.P. Sitanggang, Yusuf Karbhari, Bolaji Tunde Matemilola and M. Ariff

The purpose of this paper is to investigate whether audit quality is associated with real earnings management in the UK.

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Abstract

Purpose

The purpose of this paper is to investigate whether audit quality is associated with real earnings management in the UK.

Design/methodology/approach

The authors apply the panel fixed effects method that controls for heterogeneity across firms to investigate whether audit quality is related to real earnings management for a large sample of UK manufacturing companies for the period 2010–2013. The authors utilized three proxies to measure real earnings management and two proxies to measure audit quality.

Findings

The results provide evidence that audit fees are negatively related to abnormal operating cash flows. Conversely, audit fees are positively related to abnormal discretionary expenses. Besides, audit quality proxies show insignificant relationship with abnormal production costs and real earnings management index. Overall, the study finds partial evidence of significant relationship between audit quality and real earnings management.

Research limitations/implications

These results are important subject to the adequacy of the indicators of real earnings management and audit quality. Like previous research works that mostly focus on upward earnings management, the authors do not address the question of whether and how firms take real actions to manage earnings downwards in certain contexts.

Practical implications

The findings inform monitoring bodies that the imposition of higher levels of audit quality may result in unintended consequences. Therefore, monitoring bodies, such as audit committees, should consider the implication of imposing higher quality auditing, which may drive firms to potentially value-decreasing real earnings management practices. Managers should curtail real earnings management practices, especially abnormal operating cash flow, because attempt to use higher-quality auditors to mitigate such practice may destroy firm value. Also, managers’ employment may be threatened due to the potential deterioration of firm value caused by using higher-quality auditors to mitigate managers’ real earnings management practices. Moreover, shareholders are informed of the potential detrimental effects of imposing higher levels of audit quality which may lower the value of their investments.

Originality/value

The paper extends previous research on earnings management in several ways. First, while earlier studies usually use accruals methods to measure earnings management, the authors use the real earnings management approach as managers can switch from accruals to real earnings management when facing more scrutiny from auditors and/or more constrained regulations or standards that may limit their capability to use discretionary accruals. Second, this study reports new findings, as the authors find partial evidence of a significant relationship between audit quality and real earnings management. Third, it is one of the few studies to use a real earnings management index to measure earnings management and its link to audit quality.

Details

International Journal of Managerial Finance, vol. 16 no. 2
Type: Research Article
ISSN: 1743-9132

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Article
Publication date: 8 June 2021

Belal Ali Abdulraheem Ghaleb, Hasnah Kamardin and Abdulwahid Ahmed Hashed

The main aim of this study is to examine the effect of investment in outside governance monitoring (IOGM), through non-executive directors' remuneration (NEDR) and external audit…

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Abstract

Purpose

The main aim of this study is to examine the effect of investment in outside governance monitoring (IOGM), through non-executive directors' remuneration (NEDR) and external audit fees (AFEE), on real earnings management (REM) in an emerging market in the Southeast Asia region, Malaysia.

Design/methodology/approach

The data comprises 1,056 observations from manufacturing companies listed on Bursa Malaysia for the four-year period, 2013 to 2016. The study tests IOGM individually and aggregately with REM. Feasible generalized least squares (FGLS) regression is used to test the hypotheses.

Findings

The results show that NEDR is negatively and significantly associated with REM. Likewise, AFEE is significantly associated with lower REM. Aggregate IOGM significantly mitigates REM. Additional tests conducted show consistent findings.

Research limitations/implications

This evidence supports agency theory and signaling theory, that a high level of investment in governance monitoring signals a high demand for monitoring and fewer agency problems. It justifies more investment in outside scrutiny and monitoring to limit the existence of managers' opportunistic behavior in concentrated markets. This study relies on an aggregate measure of REM and focuses on manufacturing companies in Malaysia; thus, the results may not be the same using other measurements and samples.

Originality/value

The study, to the best of the researchers' knowledge, is the first to document evidence in an emerging market suggesting that higher NEDR and AFEE are individually and aggregately associated with lower REM. Policymakers, shareholders and researchers may consider investment in these two mechanisms as a proxy of high-quality monitoring that mitigates REM.

Details

Journal of Accounting in Emerging Economies, vol. 12 no. 1
Type: Research Article
ISSN: 2042-1168

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Article
Publication date: 15 October 2024

Mohammed Ibrahimi and Fayçal El Baghdadi

This study examines the value relevance of accounting information for publicly listed Moroccan companies and analyzes how profitability affects stock market valuation…

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Abstract

Purpose

This study examines the value relevance of accounting information for publicly listed Moroccan companies and analyzes how profitability affects stock market valuation. Additionally, the study explores earnings management strategies used to avoid losses and earnings decreases.

Design/methodology/approach

Empirical tests use the Ohlson (1995) Price model to assess the extent to which accounting information explains variation in stock prices for the period 2012–2021. Moreover, the study applies the Burgstahler and Dichev (1997) approach to analyze earnings management strategies used by listed Moroccan companies.

Findings

The findings suggest a positive and significant relationship between the book value, net earnings and the market value of stocks. Additionally, profitability is identified as a crucial factor significantly influencing the relevance of accounting figures. Moreover, the analysis of the distribution of earnings reveals that listed Moroccan companies engage in earnings management to avoid losses and decreases in earnings.

Practical implications

The findings hold practical significance for investors, corporate leaders, accountants and stakeholders relying on accounting information for decisions. They also offer insights for Moroccan stock market regulators to improve accounting quality and market efficiency.

Originality/value

The study shows the extent to which stock prices reflect the accounting information from an emerging country perspective, contributing to a predominantly unexplored area of literature regarding economies in transition. Moreover, the study offers crucial insights into the influence of profitability on the market value of listed Moroccan companies and sheds light on the utilized earnings management strategies.

Details

Managerial Finance, vol. 51 no. 2
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 27 January 2025

Robert Donaldy and Dianne Massoudi

This paper provides insights into the impact of audit quality on restraining earnings management of rural and community banks (RCBs) in an emerging economy.

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Abstract

Purpose

This paper provides insights into the impact of audit quality on restraining earnings management of rural and community banks (RCBs) in an emerging economy.

Design/methodology/approach

A two-step generalised method of moments, absolute discretionary accruals using the modified Jones model, and multivariate regression are used to test 215 firm-year observations of 43 RCBs in Ghana.

Findings

The findings suggest a positive association between audit quality, proxied by audit firm ranking, in restraining earnings management. Specifically, the association is significant for B1-ranked audit firms and higher than B-ranked audit firms, whose observed discretionary accruals to total assets ratio is 36.6% higher than B1. Also, a negative statistically significant relationship is found between auditor specialization and earnings management, as RCBs that engage specialized auditors are found to have a lower ratio of discretionary accruals to total assets than RCBs that engage unspecialized auditors.

Research limitations/implications

RCB’s annual reports data for the research was from 2014 to 2018. The 2019 and beyond annual reports data could not be added because the study was conducted during 2019 first quarter, by which time the year had not ended, and that constrained the sample size.

Practical implications

Evidence from this study has policy implications for regulators and audit monitors in their efforts to improve AQ and minimise financial misreporting through the ranking of audit firms. As RCBs are encouraged by the findings to engage the services of higher-ranked audit firms, lower ranks will eventually be encouraged to improve quality performance in a bid to improve their ranking, which will consequently help in the minimisation of financial manipulations in RCBs financial reporting. The contemporary approach of ranking audit firms into A1, A, B1, B, C and D increases competition in the audit market space in improving quality audits more than the traditional approach of dividing audit firms into only big-4 and non-big-4. There is also a need for regulators to encourage RCBs to engage auditors who have specialized in the RCB sector so that their experience can be leveraged in minimizing EM.

Originality/value

To the best of the authors’ knowledge, there is no academic study that explores the impact of audit quality proxied by audit firm ranking and auditor specialisation, on earnings management using hand-collected data sets from non-listed rural banks in an emerging economy. The paper, therefore, fills a research gap in rural financial institution auditing literature.

Details

Journal of Accounting in Emerging Economies, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 2042-1168

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Article
Publication date: 10 October 2024

Auwalu Musa, Rohaida Abdul Latif and Jamaliah Abdul Majid

This study examines whether the risk management committee (RMC) mitigates earnings management (EM) in Nigeria.

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Abstract

Purpose

This study examines whether the risk management committee (RMC) mitigates earnings management (EM) in Nigeria.

Design/methodology/approach

The study used a sample of 365 firm-year observations of Nigerian-listed nonfinancial companies from 2018 to 2022. Driscoll and Kraay’s fixed-effect standard error regression model is used to test the hypotheses.

Findings

The study finds that RMC size, expertise, meeting frequency and membership overlapping with the audit committee have a negative effect on both accrual earnings management (AEM) and real earnings management (REM). While RMC independence is found to have a negative effect on REM. Moreover, additional tests reveal that RMC effectiveness is significantly associated with lower EM practices. Further analysis using the industry level finds that RMC attributes mitigate EM practices in some industries. The results remain after rigorous, robust analysis for endogeneity and alternative regressions.

Research limitations/implications

This study is limited to a sample of Nigerian-listed nonfinancial service companies for a period of five years, resulting in the non-generalizability of the findings to different contexts as the countries’ internal policies and regulations varied.

Practical implications

The findings have important implications for regulators, policymakers and investors that a stand-alone RMC can effectively help to evaluate potential risk activities and implement a proper risk management system, thereby mitigating EM practices. The result can help investors, analysts and other stakeholders across the international community in considering RMC information to evaluate potential risk and earnings management practices.

Originality/value

Following the NCCG 2018 reform in Nigeria that requires listed firms to create a standalone RMC, this study is among the earliest that examines the effect of RMC attributes on EM practices and emerging markets. As such, the findings may draw the attention of regulators and policymakers across the African market and the international community to the monitoring role of RMC attributes in mitigating EM practices.

Details

Journal of Accounting in Emerging Economies, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 2042-1168

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Article
Publication date: 27 March 2023

Ahmed Aboud, Baba Haruna and Ahmed Diab

This paper aims to examine the association between income smoothing and the cost of debt in two different countries, namely, the UK and Nigeria.

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Abstract

Purpose

This paper aims to examine the association between income smoothing and the cost of debt in two different countries, namely, the UK and Nigeria.

Design/methodology/approach

The authors used a sample from listed firms in the UK and Nigeria during 2000–2019. The study hypotheses are examined by implementing quantitative methods, including panel regression analysis, cross-sectional regression analysis and parametric independent samples t-test.

Findings

The results reveal that Nigerian companies have a substantially higher cost of debt and are more active in using income-smoothing practices. However, the relationship between income smoothing and the cost of debt is not found to be statistically significant in both countries. Besides, the results of this study show that financial leverage, profitability, company size and asset turnover are significantly associated with the cost of debt.

Originality/value

The study contributes to the existing literature by providing new insights concerning the contrast between developed and developing countries in financial and reporting issues.

Details

International Journal of Accounting & Information Management, vol. 31 no. 3
Type: Research Article
ISSN: 1834-7649

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Article
Publication date: 6 February 2017

Fan Wu, Ya-Han Hu and Ping-Rong Wang

Most academic libraries provide book recommendation services to enable readers to recommend books to the libraries. To facilitate decision-making in book acquisition, this study…

657

Abstract

Purpose

Most academic libraries provide book recommendation services to enable readers to recommend books to the libraries. To facilitate decision-making in book acquisition, this study aimed to develop a method to determine the ranking of the recommended books based on the recommender network.

Design/methodology/approach

The recommender network was conducted to establish relationships among book recommenders and their similar readers by using circulation records. Furthermore, social computing techniques were used to evaluate the degree of representativeness of the recommenders and subsequently applied as a criterion to rank the recommended books. Empirical studies were performed to demonstrate the effectiveness of the proposed ranking system. The Spearman’s correlation coefficients between the proposed ranking system and the ranking obtained using reader circulation statistics were used as performance measure.

Findings

The ranking calculated using the proposed ranking mechanism was highly and moderately correlated to the ranking obtained using reader circulation statistics. The ranking of recommended books by the librarians was moderately and poorly correlated to the ranking calculated using reader circulation statistics.

Practical implications

The book recommender can be used to improve the accuracy of book recommendations.

Originality/value

This study is the first that considers the recommender network on library book acquisition. The results also show that the proposed ranking mechanism can facilitate effective book-acquisition decisions in libraries.

Details

The Electronic Library, vol. 35 no. 1
Type: Research Article
ISSN: 0264-0473

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Article
Publication date: 19 March 2021

Syed Numan Chowdhury and Yasser Eliwa

The purpose of this paper is to examine whether audit quality influence real earnings management activities using a sample of UK listed firms that have strong incentives to manage…

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Abstract

Purpose

The purpose of this paper is to examine whether audit quality influence real earnings management activities using a sample of UK listed firms that have strong incentives to manage earnings upward through meeting past year’s earnings as a benchmark in the post-adoption period of International Financial Reporting Standards (IFRS).

Design/methodology/approach

The authors use a sample of 4,774 firm-year observations of UK listed firms during the period 2005–2018. Univariate and multivariate analyses have been conducted to test the association after controlling for firm characteristics and institutional variables.

Findings

The study reports that the presence of Big 4 auditors is significantly and positively related with greater levels of sales and discretionary expenses manipulation. Though the authors do not find any conclusive evidence on production costs manipulation, the aggregated measure of real earnings management shows a significant positive association with the presence of Big 4 auditors.

Practical implications

The study implies that managers who have incentives to manage earnings upward around the UK firms take advantage of the accounting flexibility in defining policies while reducing information asymmetry among the investors to signal better future performance. The approach to detect earnings manipulation as described in the auditing standards fails to limit the managerial use of real activities due to limited scope and unclear guidance. Thus, due to the significant impact on public policies, the results should, therefore, be of interest to the regulators and standard setters.

Originality/value

To the best of the authors’ knowledge, this is the first study that examines the association between audit quality and real earnings management for the UK all-purpose operational firms in sampled data that just meet past year’s earnings as a benchmark in the post-IFRS period.

Details

International Journal of Accounting & Information Management, vol. 29 no. 3
Type: Research Article
ISSN: 1834-7649

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Article
Publication date: 1 August 2023

Muhammad Usman, Jacinta Nwachukwu, Ernest Ezeani, Rami Ibrahim A. Salem, Bilal Bilal and Frank Obenpong Kwabi

The authors examine the impact of audit quality (AQ) on classification shifting (CS) among non-financial firms operating in the UK and Germany.

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Abstract

Purpose

The authors examine the impact of audit quality (AQ) on classification shifting (CS) among non-financial firms operating in the UK and Germany.

Design/methodology/approach

This paper used various audit committee variables (size, meetings, gender diversity and financial expertise) to measure AQ and its impact on CS. The authors used a total of 2,110 firm-year observations from 2010 to 2019.

Findings

The authors found that the presence of female members on the audit committee and audit committee financial expertise deter the UK and German managers from shifting core expenses and revenue items into special items to inflate core earnings. However, audit committee size is positively related to CS among German firms but has no impact on UK firms. The authors also document evidence that audit committee meetings restrain UK managers from engaging in CS. However, the authors found no impact on CS among German firms. The study results hold even after employing several tests.

Research limitations/implications

Overall, the study findings provide broad support in an international setting for the board to improve its auditing practices and offer essential information to investors to assess how AQ affects the financial reporting process.

Originality/value

Most CS studies used market-oriented economies such as the USA and UK and ignored bank-based economies such as Germany, France and Japan. The authors provide a comparison among bank and market-oriented economies on whether the AQ has a similar impact on CS or not among them.

Details

Journal of Applied Accounting Research, vol. 25 no. 3
Type: Research Article
ISSN: 0967-5426

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Article
Publication date: 14 November 2022

Cristian Rogério Foguesatto, Bibiana Volkmer Martins, Fabiane Aparecida Tavares da Silveira, Kadígia Faccin and Alsones Balestrin

Talented people with interpersonal skills and competencies are pivotal for creating knowledge, innovation and organizational effectiveness, contributing to local development. In…

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Abstract

Purpose

Talented people with interpersonal skills and competencies are pivotal for creating knowledge, innovation and organizational effectiveness, contributing to local development. In this regard, the quality of life is a critical factor in attracting and retaining talented people in any region. This study aims to analyze talents’ perception of the quality of life in an urban innovation ecosystem. This study considers talents to be the students from Science, Technology, Engineering and Mathematics programs.

Design/methodology/approach

This study analyzes 263 students from three of the country’s most important universities located in the city of Porto Alegre in southern Brazil. This study examines the data using principal component analysis and cluster techniques.

Findings

The results indicate five clusters. The “Love for the city” and the “Mixed” ones portray high levels of a sense of belonging to the city, but differ, for example, in their perception on city infrastructure. Conversely, both the “Worried about education” and the “Worried about commercial services” ones express low levels of a sense of belonging in the city. The “Security” cluster portrays the highest level on security issues in the city. The cluster analyses provide detailed information on the factors valued by talents in urban innovation ecosystems.

Originality/value

To date, to the best of the authors’ knowledge, this study is the first that uses cluster techniques to measure talents’ perception of the quality of life in an urban innovation ecosystem. The findings contribute to mapping talents’ perception and building profiles which may support the development of policies and programs to attract and retain qualified people in innovation ecosystems.

Details

International Journal of Innovation Science, vol. 15 no. 5
Type: Research Article
ISSN: 1757-2223

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