Governance Issues on Earning Management: A Case of Manufacturing Industry

Abstract

Earnings management is a technique used by the management of an organization to intentionally manipulate a company's profits in such a way that the figures suit the agreed target and to generate financial results that provide an excessively optimistic view of the company's operation and finances. Due to poor performance, companies are using different strategies to exploit and provide a positive picture of financial and management profitability to look better in the eyes of shareholders and stakeholders, and this is generally referred to as earnings management. This study aims to examine the potential factors of pressure (financial stability and financial target), opportunity (board independence and audit committee), and arrogance (CEO duality and the CEO's picture) that cause earnings management in manufacturing companies in Malaysia. This study used organizations as the unit of analysis while manufacturing companies from the Public Listed Companies (PLCs) were chosen as the research sample. This study found that the proxies of board independence, audit committee, and CEO's picture have a positive relationship with earnings management. Adversely, the indicators of financial stability, financial target, and CEO duality have negative effects on the incidence of earnings management.

Fraud triangle and earnings management based on the modified M-score: A study on manufacturing company in Indonesia

“…Studies conducted by Refs. [ 1 , 41 , 62 , 65 ], and [ 72 ] also confirm this result, in which financial stability has a negative relationship with earnings manipulation.…”

“…In a similar vein [ 35 ], mention that companies whose growth is below the industry average will thus encourage to manipulate profits. As well as [ 62 ] which also noted that the higher the asset value – which is the higher its role to company's growth – the lower management's tendency to engage in earnings management. That is might because the financial stability of the company merely due to management efficiency instead of management manipulation to gain a good impression from stakeholders.…”

“…ROA cannot be used as a signal in detecting the condition of the company and is not correspond to signal theory. Correspondingly [ 62 ], also noted that managers do not deal with ROA as a financial target which is unfeasible to arrive at, thus it will discourage them to manipulate the earnings. In other words, it is possible that managers still assumes that the company's ROA target is considered attachable and normal, thus it does not trigger them to engage in fraudelent financial reporting.…”