Earnings management: A new paradigm of corporate social responsibility

Abstract

The study adopted a systematic review approach to review the existing studies on the relationship between corporate social responsibility (CSR) and Earnings Management (EM). The aim of this study is to determine whether CSR is an effective tool to promote healthy relationships with stakeholders or CSR is used as an effective strategy by firm's mangers to hide out their involvement in (EM) practices. Results revealed that prior research on the CSR-EM relationship is limited. The majority of the studies found an inverse relationship between CSR and EM. Moreover, mixed results were reported because of the lack of sufficient theoretical support, inappropriate research designs, and varying approaches to measure CSR and EM. This study also synthesizes the various consistencies and inconsistencies in the existing literature of CSR-EM and future research agenda. Policymakers should reward organizations that pursue CSR purely for social and environmental concerns and at the same time they should be vigilant for those which use CSR for shielding their EM practices. K E Y W O R D S corporate social responsibility, earnings' management, systematic review 350 | EHSAN Et Al. 1 | INTRODUCTION After the twentieth century's corporate scandals (Xerox, Enron, Toshiba, Satyam Computer Servives etc.), accounting earnings have attracted the attention of researchers, regulators, investors, shareholders, and other constituents of firms, making it one of the most frequently investigated areas of firms' performance statistics. The information asymmetry between a firm's insiders and outsiders, the imperfect system of auditing, and the varying nature of accounting principles in treating firms' accruals allows managers to manage their reported earnings to gain personal benefits or signal private information to stakeholders (Healy & Wahlen, 1999) and that is called Earnings management (EM). 1 However, EM can have severe consequences because these short-term tactics, undertaken to achieve short-term benefits, are often harmful to firms' long-term sustainability. One of the far-reaching consequences of EM is the loss of credibility of a firm's financial reports, resulting an increase in the activism and vigilance of the firm's internal and external stakeholders and a decrease in their support (Choi, Lee, & Park, 2013). A firm's transparency and accountability in disclosing financial information are critical to its ability to gain the support of its stakeholders and to maintain long-term relationships. From this perspective, accurate financial reporting is closely related to corporate social responsibility (CSR), as CSR encourages the firm to integrate social, ethical, and moral considerations into its goals and to make decisions that protect the interests of a wide range of stakeholders, including employees, customers, suppliers, investors, communities, the environment, and regulators, to foster long-term relationships (Koehn & Ueng, 2010). Thus, financial transparency and reliability are increasingly considered to be key elements in a firm's C...

Corporate social responsibility, board gender diversity and real earnings management: The case of Jordan

“…Two opposing views explain the relationship between CSR and EM practices: the ethical perspective and managerial opportunism (Ehsan et al, 2020;Grougiou et al, 2014;S. H. Kim et al, 2019).…”

“…Several recent studies have examined the direct association between the two practices, CSR and EM (Buertey et al, 2020;Habbash & Haddad, 2019;Kumala & Siregar, 2020;Mohmed et al, 2019), although the results remain bidirectional. Despite previous studies have examined the moderating effect of countryspecific (i.e., industry differences and political and regulatory pressure) and firm-specific factors (i.e., board size, Big4 audit firms, ownership structure, and corporate governance quality) on the CSR-EM relationship, many other features such as managerial attributes and managers' social orientation are still under-examined (Ehsan et al, 2020).…”

Corporate social responsibility and earnings management in the EU: a panel data analysis approach

“…The ability of firms to gain support from their stakeholders and even built long-term relationships is dependent on their decision to report transparent and reliable financial information. According to Ehsan et al (2020), the disclosure of accurate and reliable financial statements is closely associated with the corporate social responsibility (CSR) behaviour of firms because as CSR behaviour is aiming to satisfy the needs and interests of various stakeholders (employees, creditors, lenders, shareholders, etc. ), financial transparency and reliability are also crucial to stakeholders, as they can assist them to reach into informed business decisions, which contributes to enhanced resource allocation within the economy.…”

Are Corporate Social Responsibility Active Firms Less Involved in Earnings Management? Empirical Evidence From China

“…Therefore, the managers who pursue their private rewards through distorting earnings information have incentives to be CSR active to protect their entrenchment (Choi et al, 2013). Thus, according to the managerial opportunism hypothesis CSR engagement is utilized as an efficacious strategy by a firm's managers to cover up their involvement in earning management (EM) practices (Choi et al, 2013;Ehsan et al, 2020).…”

“…Earning management is used by us following previous studies as a litmus test in determining the firms' devotion to the CSR as EM is seen as an agency cost because managers pursue their own interest to the detriment of stakeholders (Scholtens & Kang, 2013). Given that accounting earnings figures are one of the most often cited performance statistics and that the executives have some leeway in calculating earnings without violating accounting standards principles, EM is best suited to ascertain the genuineness of manager's stance towards stakeholders and their objectives (Ehsan et al, 2020;Prior et al, 2008). Accruals are generally specified as the difference between the reported income and the cash flow (Mendes et al, 2012).…”