A Brief Mapping of Earnings Managements Drivers and Restraints

Abstract

Earnings management is a financial reporting phenomenon which allows managers to present their financial reports for organisational or their personal benefits. It occurs when managers use their discretion in financial reporting to meet some predetermined target. High profile scams like Enron, WorldCom, and Satyam have raised a question mark on the veracity of financial statements. The present paper describes the earnings management concept and tries to provide a comprehensive synthesis of past studies regarding the drivers of earnings management and impact of corporate governance variables on earnings management practices. Research studies around a quarter of a century commencing from the year 1991 through 2016 published in national and international journals have been revisited to shed light on the earnings management behaviour of corporate sector across the world. The review reveals that the extent and type of earnings management depend on companys specific circumstances and unique managerial drivers. Motives related to capital market, management compensation contracts, external contracts and regulatory & political costs encourage the managers to manage corporate earnings. In addition, the result shows that good corporate governance significantly reduces the level of earnings management which plays a restraining role against earnings management and enhances the reliability of financial reporting. The paper provides novice researchers a birds eye view of earnings management concept and the related issues. It also helps them to explore new ideas related to earnings management and provide insights to curb malpractices.

Keywords: Earnings Management, Earnings Management Drivers, Corporate Governance Characteristics

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