Earnings management (EM) practices by bank managers can prove to be very precarious in smooth running of the financial system of a country. The failure of financial system shocks the entire economy. The present paper aims to assess the quality of earnings in the Indian banking industry. EM is estimated by employing a bank-specific model that measures EM through loan loss provision (LLP) and realized security gains and losses (RSGL). The findings exhibit that public banks practice income increasing and private banks practice income decreasing EM, whereas, combined result reinforces the practice of income decreasing EM. The results indicate that public sector banks use both LLP and RSGL to manage earnings whereas private sector banks increasingly rely on RSGL. Further, direction of EM is gauged by classifying EM on the basis of quartiles. This study has implication for regulators, investor and depositors. Regulators should be stricter regarding policies of LLP. Apart from earnings, investor and depositors should be considered other measures of stability of banks like capital adequacy ratio because earnings may be manipulated.
Purpose This study aims to investigate the role of corporate governance practices in restraining earnings management in Indian commercial banks. Design/methodology/approach Estimation of earnings management is based on discretionary loan loss provision and discretionary realised security gains and losses using Beatty et al. (2002) model. The effect of corporate governance on earnings management is examined by performing two-way least square dummy variable regression. Data for a period of five years (2016–2020) is collected from the Centre for Monitoring Indian Economy ProwessIQ database, Reserve Bank of India website, annual report of banks, National Stock Exchange and bank’s website. Findings Regression results exhibit that number of board committees, size and independence of audit committee and joint audit are significantly effective in curbing earnings management. Other board-related variables (size, independence, meetings and diligence) and audit committee variables (meetings and diligence) are not effective in restraining earnings management in Indian banks. Practical implications The findings may prove to be helpful to regulators, board of directors and investors. It shows the weak area of corporate governance in India that is lack of autonomy to independent directors, which needs regulators attention and it also suggests that the number of independent auditors should be adequate for audit purposes. The board of directors must ensure the formulation of an adequate number of committees, which perform their own super specialised functions. This study brings an alarm to investors not to rely on reported earnings alone as they may be manipulated. Originality/value This paper substantiates the scant literature on the role of corporate governance practices in restraining earnings management in banks of emerging markets and to the best of the authors’ knowledge impact of joint audits on earnings management is previously unexplored in Indian banks, which are examined in this study.
This article assesses the impact of earnings management on bank’s current and future financial performance. A bank-specific model, invented by Beatty et al. (2002, Accounting Review, vol. 77, pp. 547–570) and modified by Mangala and Singla (2021; Vision: The Journal of Business Perspective, vol. 25, pp. 159–167), is applied to measure earnings management. Cross-sectional regression is applied to analyse the impact of earnings management on the financial performance of banks for a time period of 7 years (from 2012–2013 to 2018–2019.). The results exhibit that Indian banks actively manage earnings. Earnings management reduces current year’s return on equity, return on assets and net interest margin. Current year’s earnings management also negatively influences following 2 years’ return on equity and net interest margin. Thus, earnings management has major negative implications on banks’ financial performance, not only in the year of earnings management but also in the years to come. In order to curtail earnings management, while examining the financial statements, auditors should be vigilant, and the Reserve Bank of India (the apex regulator) should take punitive actions against such malpractices.
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