Earnings Management Around Zero: A motivation to local politician signalling competence

Abstract

Literature earnings management aims to determine what causes/motivates managers to disclose earnings close to zero and to use this as an instrument to influence users' decisions. However, limited research has been carried out on this subject in the public sector. Therefore, the main purpose of this paper is to evaluate whether local politicians (in Portuguese municipalities), aiming to demonstrate their high level of competence and skills, engage in earnings management in such a way as to ensure that earnings are positive but close to zero. We examined whether political competition is a determining factor of earnings management close to zero and if managers use discretionary accruals in order to do this. Results indicate that, in order to report positive net earnings close to zero, discretionary accruals are used. This study identified the overriding tendency to avoid the reporting of losses in those municipalities where political competition is greatest. Key wordsPublic accounting, agency theory, public choice theory, earnings management, municipalities, political competition 2013 Taylor & Francis Vol. 15, No. , -, http://dx

Earnings Management by Non‐profit Organisations: Evidence from UK Charities

“…To the best of our knowledge, however, there is no statutory requirement for UK charities to achieve a break-even, except for a regulation applicable to English NHS Hospital Trusts (Ballantine et al 2007). Similar cases have been explored in a non-profit context (Leone and Van Horn 2005;Ballantine et al 2007;Verbruggen and Christiaens 2012) and in the public sector (Ferreira et al 2013). On the one hand, charities may in practice face pressures to achieve an 'ideal break-even' , because if organisations operate under severe resource deficits, this not only obstructs their ability to maintain ongoing operations for the future, but also brings the risk of being forced to close down (Dodd 2014).…”

“…; Verbruggen and Christiaens ) and in the public sector (Ferreira et al. ). On the one hand, charities may in practice face pressures to achieve an ‘ideal break‐even’, because if organisations operate under severe resource deficits, this not only obstructs their ability to maintain ongoing operations for the future, but also brings the risk of being forced to close down (Dodd ).…”

An exploratory study assessing compliance among municipal controllers and the possible explanations for their degree of compliance

“…The difference between the private and the public sector is that private managers tend to report income positively, while public managers tend to report income negatively, preferably with a result close to zero. While the driving force of municipalities is not profit, but continuity, earnings management is used to present financial results of zero, to indicate the capacity of local politicians to keep the level of costs in line with income (Cohen et al, ; Ferreira, Carvalho, & Pinho, ). Research indicates that the adoption of legal provisions, for instance, IFRS, will not automatically reduce earnings management in the banking industry and the same holds probably true for municipalities (Donatella, Haraldsson, & Tagesson, ; van Oosterbosch, ).…”

Do audit firm and audit costs/fees influence earnings management in Swedish municipalities?

“…However, research also suggests that auditors influence earnings management (Walker, 2013;Francis, 2011). Whether the latter is true in a municipal context has not been fully addressed in previous studies (Stalebrink, 2007;Pilcher and Van der Zahn, 2010;Ferreira et al, 2013;Arcas and Martí, 2016;Donatella, 2016).…”