The influence of Egyptian context on the trade-off between earnings management approaches: Accounting, operational and investment

Abstract

Purpose

This paper aims at studying earnings management phenomenon in its wider social and economic context to get better understanding for the following points: whether there is “one-size-fits-all” earning management approach which can be widespread applied among nations and whether the Egyptian context affects managers’ trade-off between three different earnings management approaches: accounting, operational and investment.

Design/methodology/approach

The paper adopts interpretive approach and analyses data from official documents and 34 interviews with company executives; financial analysts; external auditors; and Stock Exchange regulators to inform our understanding of the influence of the Egyptian context on the trade-off between earnings management approaches.

Findings

The results show that there is no application for “one-size-fits-all” earning management approach; unlike the developed cultures, where R&D expenses and overproduction are extensively used for boosting profits, in Egyptian context they are not valid tools. The findings indicate that the Egyptian political and economic context remarkably affect managers trade-off earnings management approaches, leading executives to prefer operational manipulation compared with others.

Originality/value

This paper extends but adds to the literature by shedding light on the different implications of earning management theories based on the variation in the political, economic and operational contexts of firms; identifying that operational cash flows matter more to managers than accounting profits; focusing on the fact that managers differentiate and compare between three various earning management approaches: accounting techniques, investment activities and operational activities; and showing that changes in political and economic Egyptian context makes operational manipulation favorable to be adopted compared with others. It also overcomes the criticism of New Institutional Sociology Theory.

Citation

Makhaiel, N.K.B. (2019), "The influence of Egyptian context on the trade-off between earnings management approaches: Accounting, operational and investment", Journal of Financial Reporting and Accounting, Vol. 17 No. 1, pp. 133-168. https://doi.org/10.1108/JFRA-09-2017-0076