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.

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Purpose: State Owned Enterprises (SOEs) have a growing importance in the economic and social life of both developed and developing countries, being present in their key sectors such as telecommunication, electricity, transportation. The purpose of this paper is to offer a comprehensive review of the up to date literature on the relation between State Ownership and Earnings management.Design/methodology/approach: An examination of the literature was undertaken to review the quantitative studies that analyze the existence or the non-existence of a relation between State Ownership and Earnings management, comparing population and data set used, methodology applied and result achieved. To find studies relevant to the issue, we utilized Google Scholar and delimited the research to 20 top Scholarly Journals, over the interval 1996-2016.Findings: The available literature seems to offer contrasting viewpoints regarding the relationship between public ownership and earnings management, even though studies generally show a slight prevalence towards a negative relationship. This means that the quality of the earnings published in the budgets of public owned enterprises must be slightly higher than the earnings published by private companies.Research limitations/implications: Almost all studies reviewed present limitations that hinder the assumption of general rules regarding the obtained results. At the same time, the different studies do not always use the same system to measure earnings management activities.Practical implications: The paper might offer interesting implications for central and local governments, in order to influence the decisions on their intervention in the market.Originality/value: To our knowledge, this is the first study trying to attempt this emerging goal.

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