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Purpose: In this chapter, the author evaluates the association between bank loan loss provisions (LLP) and the pre-provisions earnings of UK banks during the first-wave of the COVID-19 pandemic. A positive co-movement between the two variables indicates income smoothing.

Methodology: Graphical analysis, correlation analysis and regression analysis are used to assess the relationship between income smoothing and bank provisions among UK systemic banks.

Findings: The findings show that LLP have an inverted V-shaped property during the first-wave of COVID-19 pandemic. LLP reached its highest level at the peak of the pandemic in Q2 2020 and declined in the subsequent quarters. The regression results show that LLP are positively related to pre-provisions earnings during the pandemic quarters and in the pre-pandemic quarters. The relationship is stronger in the pandemic quarters and indicates higher income smoothing in the pandemic quarters. The correlation results also show a strong positive correlation between bank provisions and pre-provisions earnings in the pandemic period. In the individual bank analysis, three of the four systemic banks exhibit higher income smoothing during the pandemic quarters.

Implication: UK systemic banks engaged in earnings management as a coping mechanism to mitigate the effect of the pandemic on their profits.

Need for the study/originality: This chapter is the first to provide a preliminary analysis of income smoothing among banks during the early stages of the COVID-19 pandemic.

This paper provides evidence on the impact of regulatory environment on financial reporting quality of transitional economies. This study compares the financial reporting quality of Hong Kong firms which are cross-listed in mainland China with those of Hong Kong firms cross-listed in China using specific earnings management metrics (earnings smoothing, timely loss recognition, value relevance and managing towards earnings targets) under pre- and post-IFRS regimes.

The financial reporting quality of Chinese A-share companies and Hong Kong listed companies are examined using earnings management measures. Using 2007 as base year, the study used a cumulative of −5 and +5 years of convergence experience which provide a total of 3,000 firm-year observations. In addition to regression analyses, we used the difference-in-difference analysis to check for the impact of regulatory environments on earnings management.

Through the lens of contingency theory, our results indicate that the adoption of the new substantially IFRS-convergent accounting standards in China results in better financial reporting quality evidenced by less earning management. The empirical results further shows that accounting data are more value relevant for Hong Kong listed firms, and that firms listed in China are more likely to engage in accrual-based earnings management than in real earnings management activities. We established that different earnings management practices that are seemingly tolerable in one country may not be tolerable in another due to level of differences in the regulatory environments.

The findings show that Hong Kong listed companies’ exhibit higher level of financial reporting quality than Chinese listed companies, which implies that the financial reporting quality under IFRS can be significantly different in regions with different institutional, economic and regulatory environments. The results imply that contingent factors such as country’s institutional structures, its extent of regulation and the strength of its investor protection environments impact on financial reporting quality particularly in transitional and emerging economies. As such, these factors need to be given appropriate considerations by financial reporting regulators and policy-makers interested in controlling earnings management practices among their corporations.

This study is a high impact study considering that China plays a significant role in today’s globalised economy. This study is unique as it the first, that we are aware of, to compare real earnings activities against accrual-based earnings management in pre- and post-IFRS adoption periods within the Chinese and Hong Kong financial reporting environments, distinguishing between cross-listed and non-cross-listed firms.

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.

The purpose of the study is to present evidence on the International Financial Reporting Standards (IFRS) adoption and earnings quality relationship on an emerging country context focusing on firm characteristics.

To measure loss avoidance, the earnings distribution approach is followed. Data includes all the nonfinancial firms listed on the Borsa İstanbul (BIST) for the period covering 1998–2010. The sample is divided into subsegments according to size and leverage, considering the potential impact of different financial reporting incentives. Furthermore, mandatory and voluntary adopters are examined separately.

The results indicate lower loss aversion in the post-IFRS period. Furthermore, we found that incentives dominate accounting standards in determining financial reporting quality. The decrease in loss aversion after IFRS adoption is more significant for large firms compared to small firms, low leverage firms compared to high leverage firms, and for mandatory IFRS adopter firms compared to voluntary IFRS adopters.

Research provides inconsistent evidence on the relationship between IFRS adoption and earnings quality. Turkey represents an interesting environment to test the impact of IFRS adoption, as the Turkish accounting system has followed a historical path from a Continental European accounting system to an Anglo-Saxon accounting system. The current Turkish accounting system exhibits features of both these systems. Additionally, IFRS adoption was optional in 2003 and mandatory in 2005 in line with EU regulations, and the changes in the reporting environment are supported by the regulatory developments and institutional changes in Turkey.

This study examines the impact of FASB Interpretation No. 48 (FIN48), Accounting for Uncertainty in Income Taxes, on earnings management (EM) activity, by focusing on changes in the deferred tax asset valuation allowance (DTVA). FIN48 was adopted, in part, over concerns that firms were using the reserve for uncertain tax positions (cushion) to manage earnings. However, there are reasons to believe that the adoption of FIN48 may have impacted the extent to which firms utilize DTVA changes as a strategic accounting choice. As the provision for income taxes is one of the final accounts closed prior to an earnings announcement, income tax accounting is generally regarded as a final opportunity to strategically meet earnings goals. To the extent that FIN48 reduced cushion-based EM, firms may have increasingly used DTVA changes as a substitute. Alternatively, the attention that FIN48 brought to firms’ income tax footnotes may have curbed the strategic use of income tax accounting, in general. This study employs a sample of publicly traded US firms over the period of 2003–2010. A regression model and an analysis of the frequency of DTVA-based EM reveal no evidence of a systematic change in behavior attributable to FIN48. However, further analysis reveals that firms identified as managing earnings to meet analyst forecasts increasingly used discretionary DTVA changes relative to changes in tax cushion in the post-FIN48 period. The results have implications for existing research on income tax-based EM.

Krull (2004) finds that US multinational corporations (MNCs) increase amounts designated as permanently reinvested earnings (PRE) to maximize reported after-tax earnings and meet earnings targets. We extend this research by examining the relationship between executive equity compensation and the opportunistic use of PRE by US MNCs, and the market reaction to earnings management using PRE designations. Firms use equity compensation to incentivize executives to strive for maximum shareholder wealth. One unintended consequence is that executives may engage in earnings management activities to increase their equity compensation. In this study, we examine whether the equity incentives of management are associated with an increased use of PRE. We predict and find strong evidence that the changes in PRE are positively associated with the portion of top managers' compensation that is tied to stock performance. In addition, we find this relationship to be strongest for firms that meet or beat forecasts, but only with the use of PRE to inflate income, suggesting that equity compensation incentivizes managers to opportunistically use PRE, especially to meet analyst forecasts.

Further, we provide evidence that investors react negatively to beating analysts' forecasts with the use of PRE, suggesting that investors find this behavior opportunistic and not fully convincing. This chapter makes an important contribution to what we know about the joint effects of tax policy, generally accepted accounting principles, and incentive compensation on the earnings reporting process.

We study the events that motivate CEOs to underinvest in R&D long-term projects (CEO myopia). Based on the existing literature in earnings management and agency theory, myopia is likely to become more problematic under five circumstances: when the CEO nears retirement (the CEO horizon problem), R&D projects have very long time horizons (the project horizon problem), the firm’s financial health is deteriorating (the cover-up problem), ownership structure is heavily weighted toward insider owners (minority owner oppression problem), and when the threat of hostile takeover increases (the entrenchment problem). We setup a dynamic simulation model in which rational CEOs maximize the total value of their bonus compensation over their tenure. Our findings related to the five circumstances are consistent with the extant literature. However, we found an unexpected stable, nonlinear (inverted U-shaped) relationship between CEO tenure and R&D investment. We discuss the theoretical implications of our model and offer suggestions for future research.

Amid increasing interest in how government regulation and market competition affect the cost and financial sustainability in health care sector, it remains unclear whether health care providers behave similarly to their counterparts in other industries. The goal of this chapter is to study the degree to which health care providers manipulate accruals in periods of financial difficulties caused, in part, by the rising costs of labor.

We collected the financial information of health care providers in 43 countries from 1984 to 2013 and conducted a pooled cross-sectional study with country and year fixed-effects.

The empirical evidence shows that health care providers with higher wage costs are more likely to smooth their earnings in order to maintain financial sustainability.

The finding of this study not only informs regulators that earnings management is pervasive in health care organizations around the world, but also contributes to the studies of financial book-tax reporting alignment, given the existing empirical evidence linking earnings management to corporate tax avoidance in this very sector.

This chapter describes an in-class exercise to illustrate the implications associated with earnings management and corporate social responsibility (CSR). Student teams act as senior managers, evaluating scenarios in which they must decide whether to engage in earnings management and socially responsible actions. All decisions have the potential to change the firm's net operating income. The “auditor” reviews earnings management decisions based on accounting choices, imposing a penalty if the auditor disallows a decision. Earnings management decisions also affect the firm's earnings quality, operationalized through adjustments to the price–earnings (P/E) ratio. Several decisions affect the firm's social responsibility rating, which ultimately affects the P/E ratio (reflecting the long-term effects of CSR). The class discusses the implications of engaging in earnings management and practicing social responsibility, as well as the ethical issues associated with these decisions. Survey results indicate that this is an effective pedagogical tool, as students are highly engaged in the exercise. Data analysis also suggests that propensity to engage in accounting manipulations decreases over the course of the exercise.

Purpose – Previous studies distinguish revenue management based on discretionary accruals; the research of studies is to investigate the factors that affect the finance manager at the discretionary accrual in General financial information statement.

Design/Methodology/Approach – Literature review models used in research aimed at detecting any company that performs the company’s discretion to fulfill the accrual of interests internally. This research study also discusses the relationship between earnings and discretionary manager behavior.

Findings – The researcher wants to re-examine the hypothesis of market efficiency on Indonesia’s capital market. The current company information technology uses greatly influences worldwide investor interest to invest on Indonesian’s capital market. Emerging Indonesia Capital market status becomes very interesting to be studied.

Originality/Value – It also presented the shortcomings of current research and the trends for future study in capital market.