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The influence of culture on real earnings management

Angel Arturo Pacheco Paredes (School of Accounting, Florida International University, Miami, Florida, USA)
Clark Wheatley (School of Accounting, Florida International University, Miami, Florida, USA)

International Journal of Emerging Markets

ISSN: 1746-8809

Article publication date: 16 January 2017

1839

Abstract

Purpose

The purpose of this paper is to extend prior literature regarding the interrelationships between national culture and accounting practices.

Design/methodology/approach

Using Hofstede’s (1980) cultural indices, the authors employ hierarchical linear modeling to examine the impact of economic growth (emerging markets), country, and culture on real earnings management (REM) for a sample of firms from 31 countries.

Findings

The results reveal a negative association between REM and Hofstede’s (1980) measures of individualism, masculinity, and uncertainty avoidance, but a positive association with power distance. These results hold even after controlling for discretionary accruals. The results further reveal that measures of investor protection are subsumed by culture.

Research limitations/implications

The findings are limited by the use of Hofstede’s (1980) data. There is, however, a significant body of research that continues to rely on and support the use of Hofstede’s model.

Practical implications

The results should be of significant importance to investors who should consider cultural characteristics when assessing firm reported performance, and should prompt auditors and regulators to apply greater scrutiny to the financial reports in cultures characterized by high levels of power distance, especially given the apparent tradeoffs between accruals and REM.

Social implications

The results reveal that status as an emerging market does not influence managers’ use of REM, and that the strength of a country’s investor protection mechanisms are subsumed by culture. Similarly, accounting systems (e.g. International Financial Reporting Standards), by themselves, do not bring about a convergence of managerial behavior. Rather, investors should consider culture when making decisions regarding capital allocation.

Originality/value

The increasing trend toward economic globalization and accounting harmonization makes the understanding of differences in accounting practices, and the possible impact of national culture on manager’s decisions, more important than ever. This research links REM to cultural values and tests for evidence that national culture, values, and structures of investor protection affect REM in the ways they affect managers’ attitudes toward the management of earnings through accruals.

Keywords

Acknowledgements

The data are available from the sources identified in the manuscript. The authors wish to thank the referees, editors Anshu Arora and Nicole Hartley, and the workshop participants at the American Accounting Association – 2014 Annual Meeting, the Academy of International Business – 2014 Southeast Section Meeting, and the American Accounting Association – 2015 International Accounting Section Meeting, for their helpful comments and suggestions on earlier versions of this paper.

Citation

Pacheco Paredes, A.A. and Wheatley, C. (2017), "The influence of culture on real earnings management", International Journal of Emerging Markets, Vol. 12 No. 1, pp. 38-57. https://doi.org/10.1108/IJoEM-12-2014-0218

Publisher

:

Emerald Publishing Limited

Copyright © 2017, Emerald Publishing Limited

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