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This study examines the relation between internal control material weakness (ICMW) under Section 404 of the Sarbanes-Oxley Act (SOX) and real earnings management. Our measures of real earnings management are abnormal cash flow from operations (ABCFOs), abnormal discretionary expenses (ABDISEXP), and abnormal production cost (ABPROD). We use a sample of 1,824 manufacturing firms over the period 2004–2011 to run regressions of ABCFO, ABDISEXP, and ABPROD on ICMW and other independent variables. We find that ICMW is negatively associated with ABCFOs. Another result that emerges from this study is a positive relation between ICMW and ABPROD. Our results imply that manufacturing firms with materially weak internal controls predominantly use overproduction and excessive price discounts to manage operational activities to achieve earnings targets. As SOX Section 404 is designed to reduce the instances of firms having ICMW, our finding that ICMW firms engage in real earnings management suggests that the use of real earnings management could be reduced as SOX Section 404 succeeds in reducing ICMW.

Purpose: This paper aims to study the impact of adoption eXtensible Business Reporting Language (XBRL) on earnings management.

Design/methodology/approach: This study uses a sample of all firms listed on the Indonesian stock exchange, except for finance and real-estate sectors from 2012 to 2019, with a total of 2,560 firms–years with panel data analysis.

Findings: Four findings in this study are listed as follow. First, the surprising result is that accrual earnings management increase after the adoption of XBRL. Second, after the adoption of XBRL, there was an increase in real earnings management. Third, the results of the study prove that the use of Big 4 auditors will weaken the increase in real earnings management after the adoption of XBRL. Finally, this study shows that after the adoption of XBRL, it turns out that both accrual and real earnings management experienced an increase.

Originality/value: This study contributes to providing an evaluation note to IDX regulators that the goals they want to achieve have not been achieved. This study provides empirical evidence for the debate over whether the adoption of XBRL is beneficial.

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 aims to examine the influence of related party transactions (RPTs), political connection (POLCON), board of directors (BOD), institutional ownership (IO), information asymmetry, audit quality (AQ), and leverage (LEV) on real earnings management (REM). The company used in this research is manufacturing companies listed on the Indonesian Stock Exchange from 2017 to 2019. The number of research samples is 192 firm years data. This study shows that RPTs, POLCON, IA, and LEV affect REM. In contrast, the BOD, IO, and AQ do not affect REM.

This study aims to analyze the effect of top management team (TMT) expertise on real earnings management (REM) and accrual earnings management (AEM) activities in companies in Indonesia by examining a hand-collected secondary data from non-financial publicly listed companies in Indonesia in 2016 and 2017. The expertise of TMT members is measured by possession of a master’s degree, understanding and experience of managed core functional areas, and possession of accounting certifications such as CA or CPA. The results of the study show that the expertise of the members of the TMT has no influence on the activity of AEM in companies in Indonesia. Meanwhile, understanding and experience on the managed core functional areas have a positive influence on REM activities through abnormal cash flows. Possession of accounting certification has a positive influence on REM activities in companies that are in accordance with managerial entrenchment effects, as well as a negative influence on REM activities in companies through abnormal discretionary expenses that are in line with incentive-reduction effects.

A long-time ethical issue in financial accounting is earnings management. Two popular ways that earnings are managed include use of accruals (Kothari et al., 2016) and real activities management (RM). This study examines the association between RM and short selling and an association between short sellers and RM behavior related to earnings management. Instead of using accruals, RM is accomplished by timing investment or financing decisions and thereby alter reported earnings. Our results show that short sellers avoid targeting firms with a high level of RM, but this only holds for those firms that just meet analysts’ forecasts. This result suggests that short sellers interpret RM as a signal used by companies to convey their “good news” and confidence in their future performance. On the other hand, the authors document that heavily shorted firms engage in a lower amount of RM, which is consistent with the notion that short selling plays an external disciplinary role in constraining firms’ RM behavior for earnings management. This chapter would be of interest to anyone concerned with earnings management, such as financial market analysts, investors, academic researchers, and, in particular, regulators, who are involved in setting rules on short selling.

This study examines associations between accrual earnings management (AEM) and real earnings management (REM), and earnings quality between countries considered under insider economics and outsider economics clusters. Countries included in the outsider economics cluster are Singapore, Malaysia, and Hong Kong. Meanwhile, countries included in the insider economics cluster are Indonesia, the Philippines, and South Korea. Earnings management practices have changed from AEM to REM since the publication of the Sarbanes Oxley Act and DFA 954 implementation of the Claws back provision policy in the United States.

Research data were obtained from the Bloomberg database, 2010–2016. Regression analysis and t-test were utilized. This study compared AEM and REM to determine which is stronger based on country clusters, as well as the association between AEM or REM and earnings quality.

The results of this study indicate that AEM and REM are associated with the quality of earnings in the insider economics cluster. However, AEM and REM are not associated with earnings quality in the outsider economics cluster. Furthermore, associations between AEM and earnings quality are stronger than associations between REM and earnings quality in insider economics cluster.

This study investigates whether exposure to a previous client’s earnings management behavior will impact experienced auditors’ judgments of the risk that a current client’s financial statements are materially misstated. Contrast theory predicts the context of previous information can have a priming effect on a current judgment scenario, where the information for the current judgment is contrasted with the previous information. Guided by contrast theory, we exposed auditors to either positive or negative client ethical earnings management behavior. We found the existence of contrast effects, with the positive (negative) context of the previous client resulting in auditors judging a higher (lower) likelihood of material misstatement in the current client’s financial statements. The results have implications for the effectiveness and efficiency of auditors’ judgments as well as provide insight into auditor training efforts.

The practice of real earnings management (REM) or earnings manipulation through the company’s real activities is increasingly widespread. Companies that want to achieve profit targets have switched from accrual-based to REM, especially in the firm family owner, who is an active manager. Our study aims to determine whether family ownership in a company will be a factor in the existence of greater REM practices. The authors collected 2,613 observational data from non-financial companies on the Indonesia Stock Exchange (IDX) during 2013–2018 using a purposive sampling method and then analyzed using panel random effect (RE) regression. The results show that family ownership significantly negatively affects abnormal operating cash flow which means that family firms are more likely to reduce operating cash flow to report higher income than non-family firms. Thus, it can be concluded that family firms in Indonesia are more likely to be involved in REM than non-family firms.

This study investigates the impact of business strategy on earnings management practices for financial and non-financial firms in Oman. To assess the research objective, 430 firm-year observations from 2015 to 2019 were employed in the study. Using regression analysis, the findings suggest that differentiation strategy positively affects earnings management in financial sector firms. In addition, cost leadership strategy positively affects earnings management in non-financial sector firms. This indicates that business strategy is associated with company leaders managing their earnings while they are trying to survive through competition. These findings are useful for regulators, as they can introduce mechanisms to curb earnings management practices and instil more faith in investors.