The perception of earnings management motivations in Saudi public firms

Abstract

Purpose – The primary purpose of this paper is to investigate the motivations of earnings management in less-developed economy using Saudi listed companies. Design/methodology/approach – While numerous motivations for earnings management are proposed in the literature, many of these motivations have inconsistent empirical support. A number of studies report discontinuities in the distribution of earnings around benchmarks such as the zero profit level. However, the evidence regarding whether these discontinuities are associated with earnings management behaviour is still uncertain. In addition, evidence regarding the ability of various governance mechanisms to constrain earnings management is also mixed. These issues raise the necessity to investigate managers behaviour that incentivise earnings management practices through qualitative research approach. A questionnaire survey and interviews are mainly used to explore the motivations for earnings management in Saudi Arabia in order to obtain the different perceptions of respondents. Findings – The findings reveal that the four main incentives for Saudi managers to manage earnings are “to increase the amount of remuneration”, “to report a reasonable profit and avoid loss”, “to obtain a bank loan” and “to increase share price”. Research limitations/implications – Hence, agency-institutional theory may provide a sensible explanation for earnings management practices in Saudi Arabia. Practical implications – Previous findings could be helpful for external auditors and regulators and legislators in their attempts to constrain the incidence of earnings management and enhance the quality of monitoring mechanisms. Originality/value – While numerous motivations for earnings management are proposed in the literature, many of these motivations have inconsistent empirical support. A number of studies report discontinuities in the distribution of earnings around benchmarks such as the zero profit level. However, there is no evidence that these discontinuities are associated with earnings management behaviour. In addition, evidence regarding the ability of various governance mechanisms to constrain earnings management is also mixed. These issues raise the necessity to investigate managers behaviour that incentivise earnings management practices through qualitative research approach.

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