Measuring the Impact of Enterprise Resource Planning (ERP) Systems on Earnings Management

Abstract

This study examines the impact of ERP systems on earnings management. We use the absolute value of discretionary accruals as a proxy for earnings management, comparing levels for 143 firms in 32 industry groups that implemented ERP systems between 1994 and 2003 to levels for a control group. We find that over a ten-year period surrounding the implementation date, ERP implementers show a significant decrease in the absolute value of total discretionary accruals, while the control group does not. We further find that short-term discretionary accruals are driving the results, while long-term discretionary accruals show no significant change for either group.

The Effect of Enterprise Systems Implementation on the Firm Information Environment

“…However, after the implementation of ES (Table , panel B), the ES firms are actually significantly less likely to meet or just beat analysts forecast ( ES coefficient = −0.233, p ‐value = 0.071) and less likely to issue misstated financial reports ( ES coefficient = −0.247, p ‐value = 0.055). While we do not find a significant association between ES and abnormal accruals in both pre‐ and post‐ES periods, our findings are consistent with Morris and Laksamana in that we find no evidence of an increase in earnings management after ES implementations . Thus, the above results fail to support the alternative explanation concerning the impact of ES implementation on the quality of management forecast being attributable to increases in earnings management.…”

“…They acknowledge that earnings management results may be driven by the earliest waves of ES adoptions that were prone to disruptions to systems safeguards and internal controls. Consistent with this latter argument, Morris and Laksamana () find a negative association between short‐term discretionary accruals and ERP implementations between 1994 and 2003. We provide additional tests to address the potentially confounding impact of possible changes in earnings management behavior on our results in the additional analyses section.…”

“… Morris and Laksamana () focus strictly on abnormal accrual behavior after enterprise resource planning system implementations. Thus our findings complement prior literature by also extending the analysis to other earnings management indicators.…”

The Impact of Enterprise Resource Planning (ERP) Systems on the Audit Report Lag

“…Also, it is obvious that the time that auditors spend to carry out audit tasks is a critical factor that affects the level of audit fees. Thus, jointly, given the results of Morris and Laksmana (2010) and of this study, we may conjecture that ERP implementation is negatively associated with audit fees. By examining this additional hypothesis, we may be able to understand more comprehensively how advances in technology of client firms affect the environment of external audit.…”

“…Further Research Morris and Laksmana (2010) indicate that ERP implementation is negatively associated with earnings management activities. Earnings management by client firms increases the detection risk of auditors and, thus, ultimately increases the audit risk.…”