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Discretionary accruals are earnings quality proxies that illustrate that the greater the value of discretionary accruals, the greater the practice of earnings management and vice versa. High-quality financial reports (especially earnings quality) are expected to help investors and potential investors to make decisions. This study analyses the factors that affect earnings quality, such as pre-managed earnings, liquidity and efficiency. Furthermore, the authors identify the moderating effect of the governance mechanisms proxied by the proportion of independent commissioners in conventional commercial banks listed on the Indonesia Stock Exchange.

This study uses 226 banking data in the pre-corona crisis period 2013 until 2019. The data were analyzed using EViews 10 for hypothesis and MS Excel for a differential test.

The results show that pre-managed earnings, liquidity and efficiency affect earnings quality. The governance mechanisms can moderate liquidity and efficiency on earnings quality, while pre-managed earnings cannot be moderated. The different bank categories (BUKU) of earnings management mechanisms are shown for each BUKU (BUKU 1, 3 and 4 perform earnings management by increasing earnings, BUKU 2 lowering earnings). Another thing is information on the earnings quality between BUKU 2 with BUKU 3 and BUKU 4 because of differences in capital and bank operating coverage regulations.

Further research expects to analyze the factors affecting banking earnings quality concerning applying IFRS 9 (PSAK 71) in Indonesia. Future researchers expect to apply mixed methods to verify the financial statement data and provide comprehensive discussion and genuine insight from their study. Future research requires more samples from companies or an international scale (cross country) to obtain maximum results and be generally accepted.

This study implies that managers should have more control over pre-managed earnings and bank liquidity as manager's incentive to do earnings smoothing. Managers should also pay attention to cost-efficiency and effective implementation of governance mechanisms to maximize earnings quality. This study also implies that policymakers can encourage commercial banks to apply more prudential principles in terms of a reserve for failed loans to minimize earnings management in banking.

The significance of this study revealed in the discussion of the difference test between bank core capital categories (BUKU) and its relation to earnings quality.

This study examines the rarely investigated association between institutional ownership and income smoothing. The results support the predicted positive association between institutional ownership and the likelihood of firms smoothing earnings towards their earnings trend in general. However, this association is not systematic across all firms. The positive association is most evident among profit firms with pre‐managed earnings above their earnings trend. No significant association is found for profit firms with pre‐managed earnings below their earnings trend and loss firms in general. This study also finds that, in Australia, while institutional ownership has a non‐linear association with income increasing earnings management (Koh, 2003), such association manifests itself within the income smoothing framework. The results of this study highlight the complexities in the association between institutional ownership and earnings management strategies, and future research can benefit by explicitly examining the trade‐offs between alternative earnings management incentives and the factors that affect the relative strength of these incentive trade‐offs.

Prior research demonstrates that share prices reflect a risk premium that is associated with earnings variability. This suggests that managers can reduce the cost of capital and increase share prices by reducing earnings variability. In this study, we investigate bank managers' use of discretion in estimating loan loss provisions (LLP) to reduce earnings variability. We find that banks with relatively high pre‐managed earnings have positive discretionary LLP and banks with relatively low pre‐managed earnings have negative discretionary LLP, results that are consistent with the hypothesis of earnings management to reduce earnings variability. In addition, we find that bank managers' decisions to reduce earnings variability are related to the need for external financing and to gains and losses on the sale of securities which serve as substitutes for accomplishing their objective of earnings variability reduction.

This study analyses the engagement of Greek municipalities in earnings management activities through the manipulation of their accrual accounts. It aims at identifying whether discretionary accruals are associated with certain financial sustainability measures calculated through financial statement numbers.

To test the hypotheses, the annual financial data of Greek municipalities for the period 2011–2018 are used. The final sample corresponds to an unbalanced panel data sample that includes 1,565 yearly observations. Total accruals and discretionary accruals modelling are based both on the aggregate Jones model and the modified Jones model.

The findings provide evidence that Greek municipalities engage in earnings management practices through the manipulation of accruals. Moreover, there is corroborative evidence that financial sustainability indicators, such as indebtedness, liquidity and efficiency ratios, are related to the magnitude of earnings management, while earnings management behaviour during the year preceding the municipal elections is more intense.

The paper expands the literature in earnings management in local governments by analysing the relation of financial sustainability indicators to this behaviour.

The purpose of this paper is to examine the differential effects of institutional non‐blockholders (NONB) and active institutional blockholders (ACTB) on earnings management behavior, as measured by discretionary accruals.

This paper also proposes that the hypothesized influence of NONB and ACTB on earnings management behavior is affected by earnings pressure (EP) (i.e. the gap between target earnings and pre‐managed earnings). In particular, it believes that the stimulating effect of NONB on earnings management may not manifest when the stimulating effect of EPs is already strong and the mitigating effect of ACTB may manifest only when the stimulating effect of EP is there. The sample into three EP conditions: pressure to increase earnings, neutral pressure and pressure to decrease earnings is grouped. Consistent with the expectations, the paper finds that NONB stimulates earnings management, but only when EP is not strong and that ACTB mitigates earnings management, but only when there is pressure to increase earnings.

This paper also predicts that ACTB will need to exercise their monitoring power only when EP is strong. The results confirm this prediction, but only when there is strong pressure to increase earnings. When there is strong pressure to decrease earnings, inconclusive evidence regarding the effect of ACTB is found. This may imply that ACTB are conservative since they appear to be more likely to limit income‐increasing accruals than they are to limit income‐decreasing accruals.

This paper's contributions to the literature are twofold: the paper shows that the characteristics of institutional investors (INSTs) should be considered when examining the relationship between INSTs and earnings management; the paper shows that the direction and level of EP should be considered when evaluating the relationship between INSTs and earnings management.

The authors examine whether managers switch from artificial income smoothing using discretionary accruals to real income smoothing around corporate governance reform in Egypt.

The sample comprises 61 non-financial companies listed on the Egyptian Stock Exchange for the years 2004–2011. The authors use discretionary accruals as a proxy for artificial income smoothing and income/loss from asset sales as a proxy for real income smoothing.

The authors offer a significant contribution to accounting literature by providing new empirical evidence on the trade-off between real smoothing technique (e.g. income/loss from asset sales) and discretionary accruals around governance reform in a developing country.

This study suffers from some limitations. First, the study sample is limited to only 338 observations. However, this is due to collecting the data manually and to the small number of listed firms during the study period. Second, the study period ended in 2011 due to the unprecedented political instability after the 2011 Egyptian people revolution. Third, although this study examines the effect of corporate governance, not all the governance aspects have been examined in the study models due to the lack of data.

First, the results of the total samples reveal that managers prefer real income smoothing than accruals income smoothing. This result may confirm the literature arguments on the advantages of REM methods over AEM methods. Cohen et al. (2008) find that firms switch to manage earnings using REM methods and explain that REM methods are harder to detect because they depend on operating decisions (Schipper, 1989). REM can be undertaken anytime during the year (Gunny, 2010). Besides, REM could not be deemed a violation of accounting standards or regulations (MyVay, 2006).

The authors offer a significant contribution to accounting literature by providing new empirical evidence on the trade-off between real smoothing technique (e.g. income/loss from asset sales) and discretionary accruals around governance reform in a developing country.

The purpose of this paper is to investigate whether income smoothing helps to reduce volatility in reported earnings and which firms are more inclined to be engaged in income smoothing.

The authors used negative correlation between pre-managed earnings of a firm and its discretionary accruals (DAs) as proxy for income smoothing and the firms having more negative correlation coefficient are expected to have lower volatility in their reported earnings. The authors used Kothari et al.’s (2005) version of modified-Jones model to estimate DAs and used least squares estimations to investigate the research questions using six-year (2007-2012) sample of non-financial firms listed over Karachi Stock Exchange, Pakistan.

The authors found that firms experiencing more volatility in economic activities and smaller firms are more aggressively involved in income smoothing. Moreover, a predominant majority (72.2 per cent) of firms in the sample are involved in income smoothing through accruals manipulation. Also, the authors found that firms which are more aggressively involved in income smoothing have lesser volatility in reported earnings. Lastly, the level of DAs per se does not have any impact on income smoothing.

The proxy used for income smoothing, though the authors consider it to be better, is not the only one used in literature and the sample is limited to Pakistan.

This study adds to earnings management literature by providing evidence on extensive accrual manipulation for income smoothing in Pakistan.

This study aims to verify the circumstances under which managing the allowance for uncollectible accounts is used as a tool of earnings management.

The authors investigate whether bad debt expense, which is an income statement counterpart of allowance for uncollectible accounts, is adjusted downward when pre-managed earnings is slightly above zero earnings, prior year’s earnings or analysts’ forecasts.

The findings of this study show that firms manage bad debt expense downward to avoid losses, sustain the prior year’s earnings and meet or beat analysts’ forecasts. The authors also find that the understatement of bad debt expense to meet earnings benchmarks is pronounced for firms with high tax costs.

Standard setters and auditors can gain a better understanding in detail of the practices and methods of managing earnings via the allowance for uncollectible accounts.

This study is the first to examine earnings management via the allowance for uncollectible accounts in non-financial Korean firms. In addition, the findings provide the evidence that firms prefer to use the allowance for uncollectible accounts as a strategic tool to meet benchmarks, especially when their tax costs are high.

The purpose of this paper is to propose a new measure of earnings management flexibility based on the limits of the allowable set of accruals, prior discretionary accruals used, and the reversal rate of these accruals.

Quarterly financial data from Compustat for the period 1990‐2009 were used to construct the flexibility measure. Then the author examined how well this measure captures flexibility by investigating its effect on a firm's probability of meeting analysts' forecasts.

The results show that this flexibility measure better captures the firm‐specific flexibility than that of Barton and Simko which captures mainly the difference in flexibility across industries. Further, the positive effect of their measure on a firm's probability of meeting/beating analysts' forecasts is not observed in the extended sample period.

The flexibility measure proposed here can assist investors, analysts, or researchers to compare earnings management flexibility across firms in the same industry, which is useful in evaluating the quality of a firm's financial reports, stock picking or credit granting decisions.

This paper contributes to the earnings management literature by incorporating both the variation in flexibility used and that in flexibility limits. Second, evidence in this paper suggests that while financial benefits motivate managers to undertake earnings management, flexibility determines the extent of earnings management they can undertake. Third, this study points out that the unreversed discretionary accruals impose a constraint on the level of discretionary accruals a manager can incur in the current period, and hence have an indirect influence on current reported earnings.

The paper aims to clarify the relationship between earnings management and the sale of long‐lived assets and investments for firms listed in Taiwan. In addition, it suggests several interesting issues for further studies by proposing that positive earnings are one of the necessary conditions for the companies to issue bonds or new shares.

The paper uses archival data and regression analysis to document empirical evidence that assets sales are one of the methods to manipulate reported earnings among 12,484 firm‐years over the period of 1984‐2006.

The paper finds that approximately 54‐57 percent of firms in Taiwan with small pre‐managed earnings losses manipulate reported earnings to show small positive earnings. This is in contrast to 30‐40 percent of firms in the USA as reported by Burgstahler and Dichev.

The paper makes a good use of the unique institutional features of Taiwan. It has not produced other unique results that differ significantly from the findings of prior studies.

The paper shows that reported earnings are viewed as a primary measure of firm performance and mechanisms behind earnings management have important implications in deriving informative summary measures of firm performance.

The paper fulfils an identified need to study how companies listed in Taiwan to beat thresholds by selling long‐lived assets and investments and provides a comparison in earnings management with US companies. Moreover, it provides several suggestions for future studies.