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Accrual-based earnings management in state owned companies

Journal Article


Abstract


  • Purpose – Opposition to transnational calls for the adoption of accrual-based accounting in the

    public sector may stem from arguments that it is associated with poor earnings quality. The purpose

    of this paper is to determine whether state owned enterprises (SOEs) operating under accrual-based

    accounting manage their earnings, whether it is more prevalent vis-a`-vis privately owned enterprises

    (POEs) and the conditions under which it is more likely to occur.

    Design/methodology/approach – This paper measures earnings management for a large sample

    of unlisted Italian SOEs and POEs using a framework developed by Stubben (2010). The authors use

    regression analysis to estimate the variables which predict abnormal accruals including firm size,

    leverage and profitability.

    Findings – The authors find no evidence that the level of state ownership (SO) is positively correlated

    with accrual-based earnings management. The authors also provide evidence that earnings

    management by SOEs decreases with firm size and increases with profitability.

    Research limitations/implications – While the study is the first to examine earnings management

    in a public sector accrual accounting environment for a sample of European firms, namely Italian

    firms, the authors call for more research into this issue examining public entities in other European

    Union (EU) member states or public entities other than SOEs.

    Practical implications – The EU recently introduced a new transnational accounting directive in

    which it prescribes the preparation of financial statements based on accrual accounting for all

    European public sector entities, arguing that it reduces the window dressing that is allowed by cash

    accounting. Since Italian SOEs already prepare their accounts on an accruals-basis, by analysing their

    accounting behaviour the authors are able to determine the variables which predict when earning

    management is more likely to occur in a public sector accrual accounting environment, and therefore

    the authors provide guidance which may be useful in shaping the transition process from cash

    accounting to accrual accounting by identifying the types of entities whose accounts should be subject

    to greater regulatory scrutiny. A better understanding of the relation between SO and earnings

    management will provide insight into public sector corporate governance and aid in the acceptance of

    transnational regulation that would otherwise significantly alter current accounting practices and

    possibly be opposed at a national level.

UOW Authors


  •   Capalbo, Francesco (external author)
  •   Frino, Alessandro
  •   Mollica, Vito (external author)
  •   Palumbo, Riccardo (external author)

Publication Date


  • 2014

Citation


  • Capalbo, F., Frino, A., Mollica, V. & Palumbo, R. (2014). Accrual-based earnings management in state owned companies. Accounting Auditing & Accountability Journal, 27 (6), 1026-1040.

Scopus Eid


  • 2-s2.0-84938055368

Ro Metadata Url


  • http://ro.uow.edu.au/buspapers/1329

Number Of Pages


  • 14

Start Page


  • 1026

End Page


  • 1040

Volume


  • 27

Issue


  • 6

Place Of Publication


  • United Kingdom

Abstract


  • Purpose – Opposition to transnational calls for the adoption of accrual-based accounting in the

    public sector may stem from arguments that it is associated with poor earnings quality. The purpose

    of this paper is to determine whether state owned enterprises (SOEs) operating under accrual-based

    accounting manage their earnings, whether it is more prevalent vis-a`-vis privately owned enterprises

    (POEs) and the conditions under which it is more likely to occur.

    Design/methodology/approach – This paper measures earnings management for a large sample

    of unlisted Italian SOEs and POEs using a framework developed by Stubben (2010). The authors use

    regression analysis to estimate the variables which predict abnormal accruals including firm size,

    leverage and profitability.

    Findings – The authors find no evidence that the level of state ownership (SO) is positively correlated

    with accrual-based earnings management. The authors also provide evidence that earnings

    management by SOEs decreases with firm size and increases with profitability.

    Research limitations/implications – While the study is the first to examine earnings management

    in a public sector accrual accounting environment for a sample of European firms, namely Italian

    firms, the authors call for more research into this issue examining public entities in other European

    Union (EU) member states or public entities other than SOEs.

    Practical implications – The EU recently introduced a new transnational accounting directive in

    which it prescribes the preparation of financial statements based on accrual accounting for all

    European public sector entities, arguing that it reduces the window dressing that is allowed by cash

    accounting. Since Italian SOEs already prepare their accounts on an accruals-basis, by analysing their

    accounting behaviour the authors are able to determine the variables which predict when earning

    management is more likely to occur in a public sector accrual accounting environment, and therefore

    the authors provide guidance which may be useful in shaping the transition process from cash

    accounting to accrual accounting by identifying the types of entities whose accounts should be subject

    to greater regulatory scrutiny. A better understanding of the relation between SO and earnings

    management will provide insight into public sector corporate governance and aid in the acceptance of

    transnational regulation that would otherwise significantly alter current accounting practices and

    possibly be opposed at a national level.

UOW Authors


  •   Capalbo, Francesco (external author)
  •   Frino, Alessandro
  •   Mollica, Vito (external author)
  •   Palumbo, Riccardo (external author)

Publication Date


  • 2014

Citation


  • Capalbo, F., Frino, A., Mollica, V. & Palumbo, R. (2014). Accrual-based earnings management in state owned companies. Accounting Auditing & Accountability Journal, 27 (6), 1026-1040.

Scopus Eid


  • 2-s2.0-84938055368

Ro Metadata Url


  • http://ro.uow.edu.au/buspapers/1329

Number Of Pages


  • 14

Start Page


  • 1026

End Page


  • 1040

Volume


  • 27

Issue


  • 6

Place Of Publication


  • United Kingdom