Cosmetic Earnings (Losses) and Debt Management with Emphasis on Corporate Governance Role

Document Type : Research Paper

Authors

1 Department of Accounting, Shahid Beheshti University, Faculty of Management and Accounting, Tehran, Iran

2 hesabres dakheli

Abstract

Journal of Accounting Advances, (2020) 12(1): 1-27
DOI: 10.22099/JAA.2020.35676.1959
 
 
 
 
 
Journal of Accounting Advances (JAA)
Journal homepage: www.jaa.shirazu.ac.ir/?lang=en
 
 
 
 
 
 
 
Cosmetic Earnings (Losses) and debt Management with Emphasis on Corporate Governance Role
Hamideh Asnaashari1, Mohammad Hossein Safarzadeh2,
Hossein Rezaei Namavar3
 
 
Assistant Professor of Accounting, Shahid Beheshti University, Tehran, Iran.
Assistant Professor of Accounting, Shahid Beheshti University, Tehran, Iran, hosein470@gmail.com
M.A. of Accounting, Shahid Beheshti University, Tehran, Iran.
 
 
 
 
 
 
ARTICLE INF
 
 
ABSTRACT
 
 
 
 
 
Received: 2020-10-10
Accepted: 2020-11-18
 
 
 
This study examines the Cosmetic earnings and debt management and the effect of Corporate Governance on them. Our approach to investigate the cosmetic earnings upward and debts downward is based on “Benford's Law”. To evaluate Corporate governance we used 4 variables: percentage of non-Executive managers, percentage of institutional shareholders, concentration of ownership, auditor type and an aggregate index.  With regard to this, we tested the data gathered from 145 firms listed in Tehran’s Stock Exchange (TSE) from 2009 to 2009. Normal Z test, Chi-squared distribution and Cramer V test are used to examine and compare actual distribution numbers of earnings (loss) and debts with expected distribution (Benford's). Results show that managers manipulate the second digits of earnings upward. Nonetheless, this is not the case of losses and debts. Furthermore, the findings show that corporate governance does not diminish the managers’ opportunity in manipulating the digits of earnings (losses) and debts.
 
 
 
 
 
* Corresponding author:
Mohammad Hossein Safarzadeh
 
Assistant Professor of Accounting, Shahid Beheshti University, Tehran, Iran
 
Email: hosein470@gmail.com
 
 
 
 
 
1- Introduction
Earnings management is an essential issue in accounting and auditing for financial researchers, auditors and analyzers. The phenomenon of cosmetic earnings (loss) and debt management is considered as a kind of deception and important fraudulent activity done by the managers to draw the shareholders’ attention to the initial figures of earnings (loss) and debt. Cosmetic earnings and debt management provides a relatively more suitable perspective for the users than the time when it does not happen. This type of earnings management will mislead the users in their decisions and encourages the fraudulent thinking in the company.  Previous studies showed that legal protections including corporate governance may reduce the managers’ desire for arranging the financial statements, considerably.   
 
2- Research Purpose
The goal of this study is surveying the Cosmetic earnings and debt management and the effect of Corporate Governance on them.
 
3- Methods and Results
To measure the cosmetic upward earnings and downward loss and debt management, Benford’s Law has been applied. The corporate governance system was also measured using a cumulative index and making use of board independence criteria, institutional shareholders, concentration of ownership and the type of auditor. The data were gathered from 145 firms listed on Tehran’s Stock Exchange (TSE) between 2009 and 2019. To examine and compare the actual distribution of profit (loss) and debt statement with the expected Benford’s distribution, the standard Z-test, Chi-square distribution and Cramér’s V-test were utilized. The results indicated that managers arrange the earnings figures significantly upward in order to benefit from the users’ psychological responses; while such a rule is not true about the loss and debt figures and they are not arranged by the managers. Furthermore, the findings of the study show that the company’s corporate governance will not decrease the managers’ power in arranging the earnings (loss) and debt.
 
 

Keywords

References

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History

  • Receive Date: 21 December 2019
  • Revise Date: 16 November 2020
  • Accept Date: 18 November 2020

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