Earnings Management in SMEs

Abstract

Although small and medium-sized enterprises (SMEs) are represented on a large scale around the world, the literature on earnings management (EM) has focused mainly on listed firms. In this sense, this chapter provides important insights on the determinants and main incentives for EM in the context of Portuguese and Spanish SMEs, over a period of 10 years, also considering two relevant macroeconomic events (financial crisis and entry into force of harmonized accounting regulations). The results obtained are similar for both countries and are intended to underline the possible positive effects of reducing these practices after the entry into force of a harmonized accounting standard with the International Accounting Standards Board (IASB) standards and also to warn against the possible negative effects of managers' opportunistic behavior during a period of financial crisis. The close association between accounting and taxation, since the calculation of the tax income depends partly on the accounting income, remains an incentive to engage in EM practices.

Impact of debt and taxes on earnings persistence of Portuguese SMEs

“…In the case of Portuguese SMEs, Pereira et al (2023) find empirical evidence that deductible temporary differences are an indicator of earnings management activities, given that earning persistence tends to be lower when deductible temporary differences increase. In the same vein, Sousa et al (2019) find that tax remains an incentive for Portuguese and Spanish SMEs to engage in earnings management practices because the calculation of taxable income is based on accounting income. Therefore, we expect a decrease in earnings persistence and we propose the following hypothesis: H2.…”