Did Japanese-SOX have an impact on earnings management and earnings quality?
Abstract
Purpose
The purpose of this paper is to investigate whether Japanese Sarbanes – Oxley Act (J-SOX) impacted earnings management and earnings quality of public firms in Japan.
Design/methodology/approach
This archival study compares earnings management and earnings quality of firms that disclose at least one material weakness with a sample matched on size and industry without a material weakness.
Findings
The authors investigate whether the differences in regulations, corporate governance and regulatory environment acceptance influence earnings management and earnings management of Japanese listed firms, relative to findings in the USA. They found the Japanese results to be slightly different from the results found in previous USA studies. First, the time-series observations suggest that while accruals management and real earnings management remained unchanged for control firms, accruals management and real earnings management increased for material weaknesses disclosing firms following J-SOX. The regression analyses suggest that accruals management for both the groups is significant in the pre-and post-J-SOX periods, but that real earnings management declined for both the groups post-J-SOX. Second, while, both accruals quality and accuracy of cash flow predictions improved in the post-J-SOX period.
Research limitations/implications
The sample of Japanese firms disclosing a material weakness is small because the number of firms that disclose internal control deficiencies is decreasing in Japan. The authors have no evidence that their results are not generalizable to a larger sample and leave this for future research.
Practical implications
The authors provide evidence that J-SOX, which does not have a direct reporting system, does not constrain earnings management. Their results drive the regulator to reconsider whether the reporting system works in the Japanese business environment. Additionally, their results show that J-SOX has no effect on earnings management; thus, regulators need to reconsider the governance function of directors and internal auditors. This paper communicates to the world how J-SOX works in Japan through changes in earnings quality and management post J-SOX and the root problems.
Originality/value
This paper is the first (of which the authors are aware) to examine whether J-SOX impacted both earnings management and earnings quality in Japan. This paper discusses how the differences in regulations and corporate governance as well as the differences between USA-SOX and J-SOX may explain the results observed in Japan. This paper provides results regarding whether J-SOX improved earnings quality.
Keywords
Acknowledgements
The authors appreciate the valuable comments and useful suggestions provided by the anonymous reviewers. They also express their gratitude to Barry J. Cooper, Philomena Leung and Nonna Martinov-Bennie (Joint Editors) and Baby Foo (Editorial Assistant) for their helpful suggestions. In addition, they thank Tomomi Takada, Gil S. Bae at the 2013 Seventh Asia Pacific Interdisciplinary Research in Accounting Conference and Nan (Joanna) Golden and Chia-Hui Chen at the 2013 Annual Meeting of American Accounting Association for their feedback. They owe special thanks to Yoshio Matsushita and Motohiko Nakamura for their valuable comments on auditing practices. This research is supported by grants-in-aid for scientific research (subject number: 24530593, Representative Masumi Nakashima).
Citation
Nakashima, M. and Ziebart, D.A. (2015), "Did Japanese-SOX have an impact on earnings management and earnings quality?", Managerial Auditing Journal, Vol. 30 No. 4/5, pp. 482-510. https://doi.org/10.1108/MAJ-06-2013-0890
Publisher
:Emerald Group Publishing Limited
Copyright © 2015, Emerald Group Publishing Limited