Earnings management and voluntary disclosure of management's responsibility for the financial reports

Abstract

Purpose – The purpose of this paper is to investigate the relationship between voluntary disclosure of a statement of management's responsibility for the financial reports (MRF) and earnings management, both accrual and real earnings management, in firms listed on the Stock Exchange of Thailand (SET). Design/methodology/approach – The samples in this study are selected from listed companies on the SET in the year 2009. The multiple regression are used to test hypotheses. Findings – The results show that the inclusion of a MRF has no association with both discretionary accrual and real earnings management activities (i.e. sales manipulation, a decrease in discretionary expenditures, and overproduction). The findings from the study reveal that firms with or without the MRF manipulate their earnings in a similar manner. Research limitations/implications – The sample for the study includes Thai listed firms in the year 2009 only. The small sample size may limit the validity of generalizations from these conclusions. Practical implications – Based on the results, the regulators will know that the voluntary disclosure of management responsibilities on the financial reports is an ineffective tool to control earnings management. Social implications – Like Sarbanes-Oxley Act 2002, a disclosure of management responsibilities on the financial reports should be required by the Securities and Exchange Commission of Thailand. Originality/value – Investors will know that firms with or without the MRF manipulate their earnings in a similar manner. The voluntary disclosure of an MRF in Thailand does not guarantee earnings quality.

Intellectual Capital Disclosures and Audit Components in Non-Discretionary Income

“…Hypothesis 1c is accepted as the regression shows there is significant relationship between RCD and NDNI. This result is consistent with the previous study done by Kiattikulwattana (2014) that mentions there is positive relationship between RCD and the firm performance regarding the income that can be generated by corporation. Relational capital are discussing about how a corporation maintains their relationship with several parties that help the business core activities, specifically maintaining relationship with suppliers and customers that can help corporation obtain income and one of the component is from the sales generation.…”

“…Peng and Luo (2000) also agree that maintaining relationship with the customer and supplier can help in the bargaining power that can lead corporation to have lower cost of production. Kiattikulwattana (2014) result shows that there is a positive relationship between RCD and CFO which is also same with the hypothesis 1d. The reason behind the positive relationship might be because of the sales quantity and the performance of the corporation regarding its core business.…”

“…Hypothesis 1d is accepted as the regression shows positive and significant relationship between NDNI and CFO. (Kiattikulwattana, 2014) in which the study uttered the relationship between the relational capital especially in the relationship between customers and suppliers in supporting corporation to obtain legitimacy from the society by improving the bargain power of the corporation and also decreasing the opportunistic behavior by the customers and suppliers. Peng and Luo (2000) also agree that maintaining relationship with the customer and supplier can help in the bargaining power that can lead corporation to have lower cost of production.…”

Disclosure Quality and its Impact on Financial Reporting Quality, Audit Quality, and Investors’ Perceptions of the Quality of Financial Reporting: A Literature Review

“…A study by Kiattikulwattana (2014) examined the connection between the disclosure of the management's responsibility for the financial reports (MFR) and the management of both accrual and real earnings in the publicly held companies of Thailand. The collected data showed that MFR disclosure is not in any way connected to activities related to discretionary accrual and real earnings management and that it does not stop firms from manipulating their earnings.…”

“…CEOs and CFOs are also responsible for reviewing reports in order to ensure that they include all necessary information and that they do not include any false statements of material facts, thereby ensuring the transparency of statements. Further, it is mandatory that CEOs and CFOs ensure that the financial statements and reports present information in an unbiased and objective manner (Kiattikulwattana, 2014). Hence, the SOX regulations include a mandatory list of disclosure requirements to be implemented by publicly held companies in the aim of enhancing the quality of financial reporting.…”