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Survey Research on Earnings Quality: Evidence from Japan

Research on Professional Responsibility and Ethics in Accounting

ISBN: 978-1-78973-370-9, eISBN: 978-1-78973-369-3

ISSN: 1574-0765

Publication date: 30 September 2019


This study focuses on a survey of chief financial officers (CFOs) in public firms in Japan concerning the following six points: the importance of the definition earnings quality; higher quality earnings; the determinants of earnings quality; prevalence, magnitude, and motivation of earnings management; accounting that influences earnings quality; and misrepresenting of earnings. The results are following: first, Japanese CFOs define earnings quality as earnings accurately reflecting economic reality, earnings accurately reflecting the results of operations, and earnings backed by cash flows, earnings sustainability, recurring, and consistent, and earnings reflecting long-term trend importance. Second, Japanese firms consider earnings that reflect consistent reporting choices over time as higher quality. They do not consider that earnings having accruals that are eventually realized as cash flow as higher earnings quality. Third, Japanese CFOs indicate that 30% of earnings quality is impacted by firm characteristics such as firm’s business model, industry, and macroeconomic conditions. Surprisingly, the influence of the board of directors is greater than the impact of their internal controls. Fourth, as for the determinants of earnings quality, CFOs consider that more than 70% of Japanese CFOs do not allow the discretion and that accounting standards limit their ability to report higher earning quality. Fifth, Japanese CFOs consider that higher earnings are influenced by accounting principles such as policies that match expenses with revenues and policies that rely on fair value accounting as much as possible. Sixth, CFOs themselves predict that 50% of Japanese firms use discretions and that they use 20% of earnings per share (EPS). Since there is inside and outside pressure to hit earnings benchmarks, Japanese firms possess the motivation to use earnings to misrepresent economic performance, Japanese managers see a red flag when generally accepted accounting principle’s earnings do not correlate with cash flow from operations.




I am grateful to discussants Lori R. Fuller, Hong-min Chun, and Ryan C. Knight, moderator Eiko Arata, Meghann Cefaratti, Chih-Chen Lee, and David Ziebart for their precious comments and useful suggestions for my paper at the 23rd Annual Ethics Research Symposium in Washington D.C., the 77th Annual Meeting of 2018 Japanese Accounting Association at Kanagawa University in Japan, and the 10th Annual Midyear Forensic Accounting Research Conference at Westin St. Louis, in St. Louis, Missouri. I also thank the financial executives in public firms in Japan who generously took time to fill out my questionnaire. This survey research is conducted as part of “the Survey Project for Earnings Quality” chaired by Masumi Nakashima and is supported by grant-in-aid as a scientific study of the fiscal year 2016–2019 by the Ministry of Education, Culture, Sports, Science, and Technology (Representative: Masumi Nakashima 16K03997: The Impact of Governance Reform on Financial Reporting).


Nakashima, M. (2019), "Survey Research on Earnings Quality: Evidence from Japan", Baker, C.R. (Ed.) Research on Professional Responsibility and Ethics in Accounting (Research on Professional Responsibility and Ethics in Accounting, Vol. 22), Emerald Publishing Limited, Bingley, pp. 99-131.



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