Earnings Management in English NHS Hospital Trusts

Abstract

In this paper we review the financial reporting incentives associated with the requirement to breakeven for English NHS Trusts. We also investigate the distribution of reported income and estimate discretionary accruals thereby contributing to the limited literature on earnings management in not‐for‐profit hospitals. We find that Trust managers use discretion over accruals to report income within the target range around zero. The results are robust to recent challenges to earnings management explanations arising from the use of distributional and aggregate accruals methodologies. Our findings indicate that a precise and challenging financial breakeven target based on current cost residual income is associated with wide‐spread use of discretionary accruals to an extent that weakens the accountability of NHS Trusts.

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

“…Based on the methodology employed by Burgstahler and Dichev (1997), and apart from the above-mentioned studies by Ballantine et al (2007) and Leone and Horn (2005), the studies conducted by Ferreira et al (2008Ferreira et al ( , 2009aFerreira et al ( , 2009b are consistent with the existence of earnings management. In Portugal, municipalities are now active in more areas.…”

“…Such studies rely on the analysis of the frequency distribution of cross-sectional earnings (earnings variation) to identify earnings management. Ballantine et al (2007) and Leone and Horn (2005) researched non-profit hospitals. The analysis, in both studies, led to the conclusion that, in order to avoid costs related to reporting negative earnings, or excessive positive earnings, hospital managers manage earnings in such a way as to achieve positive earnings close to zero.…”

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

“…NPOs are also found to report small surpluses and deficits around zero (Leone and Van Horn ; Ballantine et al. ). In addition, they are involved in managing accrual accounting (Verbruggen and Christiaens ; Jegers ) and real earnings management activities (Eldenburg et al.…”

“…However, there has been relatively less scrutiny in the case of non‐profit organisations (NPOs) (Leone and Van Horn ; Ballantine et al. ; Verbruggen and Christiaens ; Jegers ). Consequently, this paper focuses on the financial accounting practices of NPOs in the UK, with specific attention given to the practice of earnings management.…”

“…In the case of the UK, a research gap exists because there has been no comprehensive study of earnings management in UK charities, and the closest relevant study (Ballantine et al. ) focuses only on quasi‐public bodies (English NHS Trusts). As in the case of several earnings management studies in other countries (Yetman ; Leone and Van Horn ), the focus is on idiosyncratic settings (such as hospitals) rather than on the broader constituency of larger NPOs that have adopted accruals‐based accounting conventions.…”