Identifying the Roles of Accounting Accruals in Corporate Financial Reporting

Research in corporate financial reporting identifies two important roles of accounting accruals. First, accruals smooth fluctuations in operating cash flows. Second, accruals allow recognition of losses in an asymmetric timely manner. While these two roles imply different relations between individual accrual components and operating cash flow news, prior research often focuses on the properties of aggregate accruals. We investigate the role of individual accrual components and identify asymmetry in the relation of investment with operating cash flow news as a confounding factor. We show that this investment factor operates through depreciation and amortization accruals, which typically account for the bulk of aggregate accruals. Overall, our article demonstrates the importance of adopting a granular approach to identifying the different roles of individual accrual components.

Predictive value of accruals and the moderating role of company size: Empirical evidence from Jordan

The cash flow statement aids the management to ascertain the profitability and liquidity position of a company. One can understand from the cash flow statement how efficiently the company is paying its obligation in various forms of liability and expense. This study aimed to explore the ability of short-term accounting accruals to predict cash flows. The sample included 77 Jordanian companies listed between 2006–2019. Cash flows were measured by net operating cash flows, and short-term accounting accruals were expressed as: change in account receivable, change in accounts payable, change in inventories, and other accruals. The results demonstrated the ability of short-term accounting accruals to predict future cash flows. The relationship between future cash flows and the short-term accounting accruals was significant, except for its relationship to the change in accounts payable. However, the findings indicate that the size of the company has not moderated the relationship between accounting accruals and operating cash flow. The study recommends using other accounting items besides short-term accounting accruals, to improve their ability to predict future cash flows and use of control variables that can increase the predictive power of the study model, such as financial leverage and company size. AcknowledgmentsI would like to thank Amman Arab University for its great support, and for funding this study.

Financial Sustainability and Earnings Management in the Spanish Sports Federations: A Multi-Theoretical Approach

The objective of this study is to analyze, from a multi-theoretical framework, whether the managers of the Spanish National Sports Federations (NSFs) apply earnings management using accounting accruals as a measure of managerial discretion; secondly, whether these practices are associated with both the level of dependence on external resources, and the economic and financial control mechanisms exercised by the Superior Sports Council (Consejo Superior de Deportes, CSD) for the granting of public subsidies. The study provides evidence that long-term debt levels and the size of sports federations are determinants of earnings management, with a more accentuated relationship in the case of Olympic and Paralympic sports federations.

The Impact of Financial Development on Earnings Management: Evidence from Pakistani Non-Financial Firms

Besides, the corporate level governance factors and country level governance factors there is another crucial factor that affect the earnings manipulation practices, is country level Financial Development. Financial development would likely act to discipline managers, thereby minimizing their engagement in EM, therefore an effective financial development system helps to reduce the EM practices. Hence the main purpose of this research work is to investigate the impact of Financial development on accruals based earnings management by using panel data analysis taking sample of 257 non-financial firms listed in Pakistan stock exchange for the period of 2012 to 2019 through Fixed effect model.The results disclose that the financial development system of Pakistan negatively and significantly influence the EM activities of registered firm’s in Pakistan stock exchange. Hence, conclude that the strong financial system is effectively restrain the EM activities.The overall results are consistent with earlier literature that the advance FD enhance the controlling and analyzing of accounting informationby reducing the interference of management in the procedure of accounting accruals. Keywords: Earnings Management, Financial Development, Financial Development Index.

Working Capital and Earnings Management among Manufacturing Firms: A Review of Literature

This study critically reviewed literature on the relationship between working capital management and earnings management. The specific objectives of the study included determination of documented evidence on; the relationship between working capital management and earnings management, the existence of target working capital management level and target earnings management level and knowledge gaps between the two study variables. Findings on the first objective were conflicting with some researchers establishing a positive relationship, others a negative relationship whereas others were non-conclusive. Findings on the second objective were also conflicting. The divergence in findings were attributed to differences in conceptual, methodological and contextual setups with inconsistencies in operationalization of the study variables playing a pivotal role. The study revealed a biased inclination towards usage of accounting accruals as proxies for earnings management with no consideration for non-accounting accruals like real earnings managements. The study also identified lack of related studies in frontier economies as a potential research gap paving way for future related studies with expanded scope. The study further recommended future research on determination of an optimal working capital level that minimizes real earnings management.

The impact CSR Disclosure on Earnings Quality: Analytical Study on Saudi Basic Materials Sector: أثر الإفصاح عن المسؤولية الاجتماعية على جودة الأرباح دراسة تحليلية في قطاع المواد الأساسية السعودي 2015-2017م

The current study aims to gain insight on the effect of social responsibility disclosure on the quality of earnings in (42) Saudi Basic Materials companies listed in the Saudi Financial Market. The extrapolation approach has been used to achieve the goals of the study. Also, the descriptive analytical approach has been employed to analyze the content of the financial reports of the sample companies for the period (2015 – 2017) in order to determine the level of disclosure of social responsibility. The quality of earnings has been measured by using the Modified Jones Model. The most significant study findings show that 92.5% of the sample companies disclosed their social responsibility using descriptive disclosure methods. The study findings also show that there is a statistically significant relationship between disclosure of social responsibility and between the improvement of the quality of earnings in the Basic Materials sector due to the strong positive correlation between discretionary accounting accruals and disclosure of social responsibility. The study has also found that there is a statistically significant relationship between social responsibility and between the effectiveness of the accruals method in measuring the quality of earnings in the Saudi Basic Materials sector, where the accruals quality method proved to be efficient in measuring the quality of earnings. In view of the findings, the study recommends to actively promote the role of the organizations that regulate social responsibility in order to increase the level of social responsibility, and to promote the role of monitoring which will in turn improve the quality and level of earnings.

Does the Mandatory Adoption of IFRS Improve the Association between Accruals and Cash Flows? Evidence from Accounting Estimates

SYNOPSIS We investigate the effect of mandatory International Financial Reporting Standards (IFRS) adoption in the European Union on the association between accounting estimates and future cash flows, a key concept of accounting quality within the International Accounting Standard Board conceptual framework. We find that the predictive value of accounting estimates improves after IFRS adoption. This improvement is largely driven by specific types of accounting estimates, such as accounts receivable, depreciation, and amortization expense. We also find that the improvement is concentrated in countries with larger differences between pre-IFRS domestic GAAP and IFRS. Our findings suggest that IFRS allow managers to exercise their judgment to provide information about future cash flows through the more subjective/judgmental portion of accounting accruals. JEL Classifications: M16; M49; O52. Data Availability: The data used in this study are from public sources identified in the study.

Board independence and the variability of firm performance: Evidence from an exogenous regulatory shock

We use the 2003 NYSE and NASDAQ listing rules for board independence as an exogenous shock to estimate the causal relation between board independence and the variability of firm performance. Using a difference-in-difference approach, we find that non-compliant firms without a majority of independent directors observe a larger decrease in the variability of firm performance than compliant firms. In particular, board independence is negatively associated with the variability of (1) monthly stock returns, (2) ROA, (3) Tobin’s Q, (4) analyst forecast inaccuracy, (5) accounting accruals, (6) extraordinary items, (7) capital expenditures, (8) cash holdings and (9) the frequency of acquisition activities. We conclude that increased board independence weakens the CEO’s power over the board and restrains corporate risk-taking; thus, decisions made by firms with more independent boards are less extreme, resulting in less variability of firm performance.