Article2020

Religiosity at the top: does it interact with accounting expertise to limit real earnings management?

Saeed Rabea Baatwah · Adel Ali Al‐Qadasi · Abood Mohammad Al‐Ebel

29 citations0/0 files storedManagerial Auditing Journal

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Auditing, Earnings Management, Governance Accounting and Organizational Management Corporate Governance and Financial Management

Abstract

Purpose Research investigating the association between religiosity and earnings management has concentrated on accruals-based earnings management, relying heavily on society’s religiosity, but it has neglected the interaction between religiosity and formal monitoring mechanisms. This study aims to examine how the religiosity and accounting expertise traits of top leaders are associated with real earnings management (REM) and how they interact to eliminate these practices. Design/methodology/approach Using a sample of 943 year-observations from more religious settings, this paper collects data for four measures of REM, and for religiosity and accounting expertise of audit committee (AC) chair and chief executive officer (CEO). Multivariate regression is used to test the study hypotheses. Findings The findings are consistent with the predictions that religious top leaders are not associated with lower REM, while top leaders with accounting expertise, in some cases, are associated with lower REM. This paper also finds that a leader with religious belief and accounting expertise dramatically lowers REM. These findings are robust under a battery of sensitive analyzes. In an additional analysis, this paper observes the interaction effect between these two traits is strengthened if the board chair is religious, and persists even for larger firms or those with a highly concentrated ownership structure. Originality/value The paper provides evidence that may serve a variety of decision-makers. It is the first to show that the interaction between religiosity and expertise is crucial in curbing REM. It also provides the first evidence for the role of the AC chair in relation to REM.

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References

1984Upper Echelons: The Organization as a Reflection of Its Top Managers 2001Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature 2005Performance matched discretionary accrual measures 2005The economic implications of corporate financial reporting 1981Auditor size and audit quality 2003Earnings Management through Real Activities Manipulation 1999A Review of the Earnings Management Literature and Its Implications for Standard Setting 2002Audit committee, board of director characteristics, and earnings management

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2022Audit committee financial expertise, accrual, and real earnings management 2022The impacts of audit committee expertise on real earnings management: Evidence from Hong Kong 2022The financial reporting systems quality (FRSQ) and institutional investors: The case of an emerging market

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